Canada’s largest bank believes the end of the real estate correction is within sight. That was the message in RBC’s latest housing brief, though that doesn’t mean price declines are over. The bank believes home prices are halfway to the bottom, and doesn’t anticipate a bounce until next year. However, they expect the market to pick up after inflation moderates in 2024, and interest rates begin falling.
Canada’s Real Estate Correction Is Half Over
The Canadian real estate correction is half over, according to RBC. The bank had forecast a 15% decline from peak-to-trough for the national RPS Index. We’re about halfway, with the bank reiterating they see another 8% price decline still in the pipeline.
It’s important to note they’re using the RPS Index, and not the CREA HPI that you’re used to seeing. As previously mentioned, RBC sees this being the largest home price correction in history. Movements in the CREA HPI are roughly 2-3x the size of the RPS Index, so it sounds smaller than other organizations are forecasting.
Canadian Real Estate Bulls Will Be Disappointed
The correction is half over, but that doesn’t mean there’s a boom waiting around the corner. “What happens next will disappoint the housing bulls,” warns the bank.
They see the recovery beginning later this year, but affordability and the economy will limit the recovery. Affordability has eroded sharply since 2021, and it won’t be easy to unwind those issues. They see falling home prices helping, but don’t anticipate significant improvements in the near term.
Canada’s economy hasn’t seen the hiccup that economists have been calling for, but they still expect it. The remainder of this year (ffs, it’s only March) is seen as relatively slow due to elevated interest rates. It won’t be until 2024 that inflation is expected to be back to target, and interest rates can begin to pull back to help with growth.
Bank of Canada Expected To Hold Rates At This Level
The last rate hike was in January, according to RBC. While the market is pricing in at least one more hike, they firmly hold the belief the Bank of Canada (BoC) pause will actually be a pause. They don’t anticipate any rate cuts this year, but they believe bond yields will “drift lower” throughout the year.
The take on yields is somewhat contrary to reality, which has headed in the opposite direction. Despite this forecast being released this week, it appears the math was done prior to the recent surge in yields, which we’ve annotated in red on their chart.
RBC Forecast For Longer-Term Interest Rates To “Drift Lower” At Odds With Reality
RBC forecast for the 5-year Government of Canada bond yield, and the Bank of Canada overnight rate. The 5-year yield as of this morning is annotated in red.
Source: Bank of Canada; RBC Economics; Better Dwelling.
In any case, RBC doesn’t anticipate an easy credit market in the coming months. Despite their call of easing conditions, they still see credit to be generally restrictive until 2024. That’s when most have forecast the BoC will begin to cut interest rates.