Canada’s Largest Bank Says It’s Putting “Greater Weight” On Home Price Declines

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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  • straw walker 3 years ago

    House prices are in direction relationship to the Bank rate
    What is going to cause the bank rate to go higher….inflation
    Inflation is coming..Check out the rising prices of lumber, copper iron ore and steel..
    These raw products all are rising from increased demand , lack of supply and a falling US dollar.
    The US dollar is being shorted by FX and the Chinese Yuan is in a long position..
    The US dollar is in a serious long term fall.
    Too much Money supply in the US, eventually causes inflation.. don’t doubt it. It’s coming

    Thar means higher interest rates, and rising mortgages, which equates to lower house prices..

  • jim 3 years ago

    Just “crying wolf” to convince government to step in as a preventative measure, which they are eager to do, to quote the PM and Macklem: “We have your back”.

  • Jay 3 years ago

    Loss provision increases will be good to watch. Going to eat profits into the future.

  • Kal 3 years ago

    Sounds to me like RBC is attempting to justify their use of higher mortgage rates on the premise that there is greater risk of price decline. Actually the banks are reporting enormous profits precisely because they use such excuses to increase their rates relative to prime thereby generating larger profits. Bottom line, they are ripping us off

    • Ethan Wu 3 years ago

      That’s not how this works. When they make a material statement of an expected downturn, it means they need to take cash that would normally be considered profits and dedicate it to loan loss provisions. This is them demonstrating prudence.

      RBC doesn’t set their mortgage rate. The Big Six sets mortgage rates through competition. They can’t just decide to tell people they’re looking at more losses, then jack the rate assuming people are too dumb to look at other banks.

    • G 3 years ago

      It’s doesn’t work this way. Rates are tied to the bond markets and pricing is tied to competition.

  • Jon 3 years ago

    Overpriced houses prices
    Living in a bubble . Just waiting to burst

  • fred 3 years ago

    It is long time that real inflation is over %10 , they make the number the way shows low inflation
    The Bank of Canada bring interest rate to 0, then to negative to pump housing market for another
    %20 in 2021 , Remember the policy maker and government which get paid by people (tax), but they work for banks and top %5 of people who make over 200,000 not for average people.

    • question guy 3 years ago

      dude… the top 5% of people DO NOT make over $200K a year. That’s top 1%

  • G 3 years ago

    I think the mistake that many housing bears make is they assume that traditional economic principles and logic apply to housing. In fact this market has defied logic many times in the last 10 years; not including government intervention. What we have today is what Greenspan coined as irrational exuberance. In other words, people have become drunk on real estate and just don’t give a F$%&K.

    • Liam 3 years ago

      Housing bears like the biggest bank in Canada? Bulls are so delusional, everyone is just a conspiracy to hurt your only investment, even the people that make the most money from real estate saying they expect to make less money.

      RBC must like scaring away investors, cause they’re jealous of your condo.

      Don’t forget high home prices drives labor costs, which shrinks margins. It’s generally a toxic mix for GDP growth.

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