Canada’s largest bank doubled down on their real estate forecast this week. Royal Bank of Canada (RBC) held its quarterly earnings call, and the bank shared how they are prepared for the next few quarters. On the call, the bank’s chief risk officer (CRO) reiterated their forecast on real estate prices. Some may think we’re now in the clear with the hot pandemic market. However, RBC has always stated the issue will begin as things return to normal. The risk officer said they are now placing an even “greater weight” on falling home prices.
What Forecast Are They Talking About?
Earlier this year, Canada’s largest bank revised their forecasts for real estate prices. They stated they expect real estate prices to fall around 7 percent at the national level, from peak. This was almost double the decline they had expected at the beginning of the pandemic. This would vary by market, with the most overvalued likely to see the sharpest drops.
They also previously stated a somewhat unusual trend for leading markets. They believe Ottawa, Montreal, Toronto, and Halifax are likely to lag this trend. Typically these markets are trend leaders, but the pandemic boost is believed to provide a cushion. RBC’s forecast is in-line with downturns from other major risk agencies, and non-lender forecasts.
RBC Puts A “Greater Weight” On Canadian Real Estate Prices Falling
RBC’s CRO said they’re putting “greater weight” on that forecast, as the picture becomes more clear. He sees, “house prices declining by 8 percent and remaining depressed until late 2023.” Further adding they also see the “unemployment rate at about 9 percent until March 2023.” This implies a second wave of unemployment, or a post-pandemic increase, likely due to normalization.
Canadian Mortgage Delinquencies Will Rise Next Year
The bank also stated with this scenario brewing, higher delinquencies are coming. Earlier this year RBC said they expect the rate of delinquencies to rise up to 2.3%. The rate is forecasted to peak sometime next year, at 4x higher than the peak seen in Canada over the past 30 years. It’s not all entirely due to people defaulting in a short period though. Loans that would default in the best market, currently aren’t. This is because the pandemic has frozen the economy. Once things start to return to normal, the pent-up default demand may begin to release.
Most of these details aren’t new, but placing further weight on the scenario might be surprising to some. Real estate markets have been on fire recently, with very few exceptions across the country. Unemployment is improving faster than many previously expected. However, people are forgetting most forecasts never saw declines and higher delinquencies during the pandemic. They see these occurring once the economy returns to normal, and the consequences of bad loans need to be dealt with.
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