Canada Is Heading For A Hard Landing, Real Estate Prices To Drop 30%: Oxford Econ

Canadians, buckle your seat belt and prepare for a little turbulence in the coming months. Oxford Economics warned investors to prepare for a hard landing for Canada’s economy. The research firm attributes the coming shock to high debt loads, elevated inflation, and rising rates. The resulting shock is forecast to lower home prices around 30% from the peak.

Canadians Should Prepare For A Hard Landing 

A hard landing is a recession that happens after a rate adjustment, when trying to calm inflation. This is in contrast to a soft landing, where rates rise but the economy only slows — no recession. Tony Stillo, a director at Oxford Econ, expects a moderate recession to kick off in Q4 2022. He attributes rate hikes, high inflation, and weak global demand for the forecast. 

Currently they see a moderate recession within the next six-months. The firm’s models show a contraction of 1.8% peak-to-trough, from Q4 2022 to Q2 2023. A recession of this size would be considered moderate, so we’re past the point of a soft landing or mild rough patch.

Canada’s Supersized Debt To Weigh On The Recovery

Canadian households are too highly indebted to mount a flexible response. Due to supersized debt loads, small increases in interest will add up to a big diversion of income. The firm is forecasting 8.2% of disposable income will be used to carry mortgage payments in Q2 2023, up from 6.5% this year. It’s higher than the 2018-2019 debt cycle, consuming the biggest share of income since 2009. 

“Canada’s historically high household debt and housing prices make the economy much more sensitive to interest rates,” said Stillo. “Sharply higher interest rates will cause debt service costs to jump and the significant housing correction already underway to deepen. Additionally, reduced real income due to stubbornly elevated inflation will further squeeze households and prompt cuts to discretionary spending and a period of deleveraging.”

The firm’s calculations show a typical mortgage will rise by an average of $162 (+11.3%) to $1,590/month in Q2 2023. It’s a sharp increase, but the total is lower than the average rent for a 1-bedroom due to inflation. It’s going to be hard for homeowners to get sympathy.

Canadian Real Estate Prices Fell Over 30% From Last Year

Canadian real estate prices are forecast for a steep correction in housing. However, it won’t return home prices back to the pre-2020 prices. “Our forecast for a 30% housing correction returns the benchmark home price to its late-2020 level since it only partially erases the 50% pandemic surge,” Stillo explains. 

In this scenario, the benchmark home price would remain 7% higher than pre-COVID levels. “… potential losses in housing wealth should be contained to recent homebuyers and largely unrealized for longer-term homeowners,” he said.  

Depressed home values don’t necessarily lead to defaults and realized losses. Most homeowners tend to pay their mortgage through a downturn, since they still need a place to live. Liquidity is a bigger concern for investors, since the buyer pool will be much smaller. A 30% price drop with a recession isn’t likely to bounce back to all-time highs very fast.

33 Comments

COMMENT POLICY:

We encourage you to have a civil discussion. Note that reads "civil," which means don't act like jerks to each other. Still unclear? No name-calling, racism, or hate speech. Seriously, you're adults – act like it.

Any comments that violates these simple rules, will be removed promptly – along with your full comment history. Oh yeah, you'll also lose further commenting privileges. So if your comments disappear, it's not because the illuminati is screening you because they hate the truth, it's because you violated our simple rules.

  • Reply
    dave frazer 7 days ago

    30 % off might be optimistic could be more a lot more possibly. But this forecast will shock people and accellerate the sell off .Some owners seeing this forecast will be trying deperately to offload properties as soon as possible. I note, every few days every bank or economist is revising their opinions downward of what the fall will be. As usual they are just pulling numbers out of a hat and making it look as if they are doing competent calculations. No one really knows what the market will do in a period of rapid change.

  • Reply
    Gen Z 7 days ago

    To be honest, let it drop. We have a homeless crisis, tent cities and Canadians are suffering from a high cost of living.
    After witnessing how Toronto Police kicked the homeless while they laid helpless in their broken down tents, I’m beginning to have less sympathy for the NIMBY and speculator class.
    They want the working poor class and unhoused class to just disappear. If that doesn’t work, they send the Toronto Police to do the dirty work. Inequality at its finest.

    • Reply
      Pete 7 days ago

      Well said.We,as society,should frown upon , punish and criminilize predatory speculators and greedy realtors, not reward them and treat our homes like Casino chips.
      We should not let municipal governments’ incompetence run rampant, and stop electing garbage politicians that are more and more indifferent to their populace.
      Perhaps it’s already too late .

    • Reply
      Art 5 days ago

      I sympathise with the homeless but let’s be honest, Homeless problem would not be solved even with a 60 % drop in house prices. Most homeless suffer from substance addiction and that is what needs to be fixed.
      Satisticly speaking, most peole end up homeless due to drugs and not from lack of a place to sleep.

      • Reply
        George 4 days ago

        Everything is connected to each other and it goes back in circle. The addiction comes from not being able to pay your bills, to enjoy life, to buy food. People are working like crazy and at the end of the month they realize that their money don’t have value and their pockets are empty. The cost of living in Canada is absurd. Most people can’t afford to go in a vacation because one night at a normal hotel is 300$. People than start to enjoy them selfs with drugs because their are less expensive than a normal life. The Canadian and North American sistem is not right. What we are living now is the fault of the government. The problem is that it will get worse.

        • Reply
          George 4 days ago

          I would like to add one more cent to what I said before. The government made the drugs legal and accessible to Canadians because they new that like this people will not rise up against them in the streets. Drugged people are week and they don’t care about what’s happening. The government instead of working at the quality of life they preferred to pervert our society with drugs and make the week ones busy with the drugs. If people would be sober I am 100% that they would go on the streets and conquer the government in order to change the corruption and the politicians who are not working for the people.

    • Reply
      A-A-Ron 2 days ago

      Real estate prices have little to do with homelessness as they aren’t homeowners to begin with. Rent control, which is something both Vancouver and Toronto desperately need, is how homelessness is eased. Furthermore, many who are homeless choose this lifestyle due to many factors. While housing prices factor into it, to believe that it’s the main driver is an overly simplistic view of homelessness in Canada.

  • Reply
    Prairieboy 7 days ago

    Historically Canada housing price has been approximately 5-10% less than American real estate values. We are witnessing a normalization towards 6-8% interest rates. Expect > 40%+ correction. Canada has a $2 Trillion economy, America has $20Trillion. Which country is worth more?? Pain is coming. Stamp it.

  • Reply
    Jim 7 days ago

    I’s been a saying for many years: “house rich and cash poor.” With multiple rate drops and excessive monies injected into the economy, we new this wasn’t going to end well.

  • Reply
    Jim 7 days ago

    Gen Z…what does that have to do with dropping home prices? Send in the Police? Tent City?

  • Reply
    Ian 7 days ago

    What is described is hardly a big deal. The truth is much uglier. Rent or mortgage and car payment and inflated food and high gas and clothing costs all come into a perfect storm. I expect we will see a drop in Christmas spending and little dining out and no vacations while people deal with overladen debt. And if hours of work are reduced well then like all past real recessions there is blood on the track. And I happen to think this time it will be very challenging. This article is sugar coated and not realistic of present reality.

  • Reply
    Lior 7 days ago

    Even if house prices will go down, they will resume back to even higher prices. Especially in GTA and Vancouver. Affordable they won’t be.

  • Reply
    Ike 6 days ago

    Evolution of life is based on inequality. If everybody was equal, we’d still be a bunch of identical monkeys

    • Reply
      THE VISIONARY 6 days ago

      That’s like comparing twigs to log cabins. Don’t be so monetarily ignorant to the fact that the entire market fluctuation was induced by foreign investors…. not normal action and not cool! The standards of living and the state of the world is atrocious sir!!

  • Reply
    Bill 6 days ago

    Every economist is almost always wrong in their predictions on the downside. Eiconomics is sometimes referred to as the dismal science because of economists terrible history of getting anything right. A very accurate way of predicting what will happen is at least double whatever they say. Mild recession with 30% decline in housing prices? Make it a severe recession with over 60% decline in real estate prices.

  • Reply
    K Shah 6 days ago

    @betterdwelling a good analysis and this is a writing on the wall that residential prices are sloping downwards. But my question is that for how long real estate prices will keep falling as inflation rate has started showing some improvement month over month in Canada after regular interest rate hikes.

  • Reply
    ak 6 days ago

    I am curious, I know this is an average but prices in my Southern Ontario city are already down almost 30% from peak with no indication of slowing down.

    • Reply
      JM 6 days ago

      May I know which city is yours?

    • Reply
      J 6 days ago

      The bottom will depend on how much of the new inventory is leveraged by investors and speculators. A family friend had an entire condo building under their brokage for sale at the height of the 1990’s bubble. Unlucky for him, it popped and he lost it all.

      This may or may not happen today – as some have pointed out, 30 years is a long time for money to flow into housing. So it is different in many ways, however, overvaluation is overvaluation. The correction will bring asset prices back to affordable levels *or NOT.

      Just like the rush to the boom, people will have life time memories of being stuck with their house for a generation or worse lose their house and become homeless.

      For example, studios/1br in DT Toronto for 400-500k. Probably 2x-3x priced at what people are willing to pay. Whoever suckered in these “investors” promised big payouts for holding onto them as empty units (low carrying cost, high appreciation). Now that the market has inverted (higher carrying cost, high depreciation), many will sell / rent at market rates (dropping pants until one of these conditions is satisfied). This is a negative feedback loop until something breaks or rates get lowered to allow for more speculation. On and on it goes.

      Ofcourse, the levels of government COULD step in and put up some new laws to stop people from speculating on real estate. For example: Spain had a HUGE housing bubble that pretty much crippled them for a long time. They now have a law that allows for homeless people to occupy empty properties so they can live and maintain said properties (FOR FREE, up to seven years at a time). After seven years, the property owner can file for the person to vacate. It’s extreme, but it prevents crumbling houses for a country so dependant on tourism.

      In Canada – we don’t have that many tourists aside from our neightbours to the South. So the only destinations for them are the big cities or landmarks like Niagara Falls, Rockies, and nature… loads of nature.

      No one is providing any solid forecast to the bottom simply because, they don’t know or they don’t want to share.

      Imho, the bottom should be somewhere around 2025-2026 (do your own research). And take advice from realtors/brokers with a cup of salt. They have every incentive to get you to buy a house with little oversight on ethical behaviour.

    • Reply
      Aaron 2 days ago

      The 30% is a national average and unfortunately some communities are more inflated than others. Every article I’ve read states that BC and ON are in for the sharpest corrections. Some communities, perhaps yours, are in for an even greater decline in home prices. It’s unfortunate that rates didn’t begin to rise when the housing frenzy was happening. It’s funny that economists can predict these corrections but stood by and did nothing while people were offering up to $100K over sticker for houses. It’s frustrating

  • Reply
    questions guy 6 days ago

    no chance prices maintain 2020 levels… not with mortgages over 6%

    this forecast is way too optimistic, and drops always overshoot the mean

  • Reply
    Bill Becskereki 6 days ago

    I don’t know but is a recession better than inflation ? The Bank of Canada predicted a soft landing and there is nothing soft about these rate increases. I hear we will still have three more rate adjustments in October. A little much don’t you think ?

  • Reply
    Dr. D 6 days ago

    Haha drop in price to be scooped up by people from ok there countries or landlords.

    Good luck getting prices to drop when there will always be money and a lack of new developments.

  • Reply
    James 5 days ago

    I’m sorry but every time I read a article from better dwelling it seems to make everything ok to be catastrophic. Will home prices go down ? Ofcourse they already have but Oxford has been wrong many times before .

  • Reply
    Gordon 5 days ago

    The cost of houses won’t stay down for long Not with the cost of new buildings being so high

  • Reply
    David Pestes 5 days ago

    Imported products and local items that are priced on the world market wont be driven down in price by interest rate hikes. Canada is not a large enough market to affect world prices by punishing the average Canadian with higher interest rates. We still need food and shelter.

  • Reply
    Millie 5 days ago

    Current example, 70 x 210 Vacant Lot for sale in my area near Collingwood, Ontario just listed this week for $1.2 Million. In around June of 2019 just prior to pandemic the same 70 x 210 Lot on same street was sold, after about 3-4 months listed, for $1.15 Million; HOWEVER, it came with a brand new 4500 sq ft Custom built 2 story home with all the bells and whistles.
    Either we still have a looooong way to go down or Real Estate Agents don’t read the news!!!

  • Reply
    Frank Lyman 5 days ago

    I know this article is written to fearmonger/ for clicks, but the prediction of a “moderate” recession and that prices will “only” drop 30% is downright optimistic compared to what is being seen on the ground in some markets across Canada.

    Higher rates will lead to lower home prices in the short term, but given rampant inflation and a shocking lack of supply of homes, my bet is that the prices we saw during COVID will be a joke compared to what we can expect in 2030.

  • Reply
    Anand Jain 5 days ago

    I sometime wonder what is better a reasonable inflation or recession. I am 78 years old and have been seeing average inflation of 3 to 4% as usual except for last 5 years or so with 2% or less inflation. Central Bank fast jump in interest rate will bring shock to economic system to create recession.

  • Reply
    Andy Sebry 5 days ago

    I wish you would report on the majority of homes outside the big Toronto and Vancouver areas , these areas are due for big price drops. I live in a 100,000 plus city in Alberta. These prices drops you report on will never happen to majority of Canadian homes. Media loves to make it sound so bad. That’s the only coverage we get news on is the big cities where only a fraction of the Canadians live.

    • Reply
      Mortgage Guy 4 days ago

      40% of home sales are in Montreal, Toronto, and Vancouver.

      A market with low volume isn’t really a market, it’s whatever someone feels like paying that day.

  • Reply
    RWZed 3 days ago

    If prices don’t go below what they were in 2020, and rates will have tripled, then real costs will have increased continually for 25 years and there has never been any bubble of any sort.

    • Reply
      J 3 seconds ago

      The bubble is the disconnect of $ / sqft vs $ / person (Income).

      You can list $5,000 Lease all you want – there are only so many people with that much income to occupy such a property. Eventually, the bleeding will trigger a sell off. The lucky ones exited pre 2022. Everyone else is stuck with a dodo disguised as a golden goose.

Leave a Reply

Your email address will not be published.