Canada’s largest bank sees the country’s real estate bubble popping like no other. Last week we explained RBC is getting ready to revise its forecast lower, and they made it official today. The bank explained to investors the correction will be larger than previously expected. They’re now forecasting the largest downturn in history for both sales and price. No reason to panic though, the bank says this should be “welcome” after the past two years.
Canadian Real Estate Is Facing Much Bigger Headwinds Than Previously Thought
Canadian real estate is facing significant headwinds due to inflation driving rates higher. Rising rates are expected to accelerate the cooling of the market near-term. By October, RBC is forecasting the overnight rate will climb to 3.25% — a rate not seen in well over a decade. That should close the gap between fixed and variable rates, eliminating cheap money.
Canadian Real Estate Is In The Middle of A “Historic Correction”
A “historic correction” is underway, warned the bank as it revised its forecast lower. Home sales dropped 13% from last year, and they’re calling another 17% lower by early next year. Overall, they estimate a 42% drop in home sales from peak-to-trough by early 2023. This would exceed the peak-to-trough decline during any other historic period.
Previous Canadian Home Sale Corrections:
- 1981-1982: -33%
- 1989-1990: -33%
- 2008-2009: -38%
- 2016-2018: -20%
Canadian Real Estate To See The Largest Price Correction Ever
Falling home sales are expected to trigger a price correction — an epic one. Higher inventories are starting to appear while the number of home sales are falling. “With demand weakening significantly and affordability exceptionally stressed in parts of the country, we believe prices will have to give,” said Robert Hogue, RBC’s assistant chief economist.
The bank used the RPS/Royal LePage aggregate HPI to measure and forecast the price of a typical home. They see home prices falling by 12.4% by next year, a huge swing from the 4% growth they were forecasting in Q1. It might not sound like much, but that drop would be the biggest in history at the national scale.
The more common CREA MLS HPI didn’t exist prior to 2005, so making a comparison is a little tough. During the 2017-2018 correction, the RPS HPI fell 1.1%, but the CREA HPI fell 3.6% over the same period. A little further back, during the 2008-2009 correction, the RPS fell 3.7% while the MLS HPI fell 9.0% lower. The CREA HPI is roughly 3x the RPS, if you’re looking for context.
BC and Ontario real estate are expected to feel the majority of the blunt force. RBC is forecasting a 14% drop in the provinces’ respective RPS HPI aggregates. “The magnitude of the downturn would rival that of the early-1990s in Ontario, though come well short of the early 1980s’ episode in British Columbia,” said Hogue.
A Canadian Real Estate Downturn Should Be “Welcome”
The bank wants to emphasize this is a correction and not a crash, and would actually lead to a healthier economy. “…we’d argue the unfolding downturn should be seen as a welcome cooldown following a two year-long frenzy that put a huge financial burden on many new homeowners and made ownership dreams harder to achieve,” he said.
Adding, “while a more severe or prolonged slump cannot be ruled out, we expect the correction to be over sometime in the first half of 2023—lasting approximately a year—with some markets likely stabilizing faster than others.”
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That’s a conservative forecast. I suppose they don’t want to alarm more than it already is. No leader of a bank can say “We’re Fk’ed in the ass” during a public call. I visited a friend in Frankfurt during the pandemic. He paid 1.4million Euros for a flat (a really nice flat) and their housing “exuberance” is half of ours.
The show is on, and it’s gonna be shit… shitting it right into our living rooms, grocery stores, hospitals, schools, streets, highways, subways (in certain major population centres 😉 yay for oil lobby vs public transit). Add in cottages – oh yeah [Koolaid Jug rams through your walls].
Ohhh, Canada indeed.
So does the correction let people off the hook who already paid exuberant prices. Nooo.
I still have to wonder what were people thinking?
I was trying to grapple with who the hell is buying these houses, it was utter insanity.
Organized crime rings – Canada is the world’s #1 turn key money laundromat. Ever wonder how Russia is okay even after all the sanctions? We’re responsible on some degree as a country. And before you begin calling me a conspiracy nut, just ask the question. Are the good money laundering operations going to be easy to catch? Not with our laws.
“Welcome news” says RBC. It is sort of like a doctor telling you that is has to amputate your feet but – welcome news; the guy in the next bed wants to buy your slippers! Also after being wrong for twenty years they want us to believe it will all be over in a year, unless, as they state, it is not! Forest Gump could do better forecasting. Stupid is as stupid says!
They were thinking there was no reality it would ever fall as there was no evidence in any Canadian market that bucked the trend, so mortgage up and gets you some house, no matter what it costs you, just like every other good Canadian adult. Plus renting is a truly dehumanizing experience unless you have landlords who are the nicest people in the world.
Reality sneaks up on everyone at some point. This time it may sneak up on an entire damn country.
It’s funny it’s actually easier to believe that,
then it was normal Canadians trying to buy their first house.
I’m a normal Canadian immigrant. Came at 6 yrs old and am now 40 yrs old and still saving up for a place that’s out of reach. I make 65K + 10-20K performance bonus in the SW Ontario Auto Manufacturing Sector. With my partner’s income, we cross ~100-120K before taxes (Not every fiscal year = performance bonsus in the Auto Sector /sadface). The most we can qualify for is 500K. So we’re above “median” according to stats Canada – that’s the clue for me that there are some shady shenanigans going on. Teach kids about fiscal responsibility – apparently schools aren’t doing that anymore and the “professionals” that suppose to serve the public are somewhat morally corrupt. Greed be greedy. Laws need to be changed and new ones implemented if we expect to be competitive and a G7 Nation in the coming years. PS… invest in Water Rights.
They were thinking sink money into an asset that the government has been known to backstop instead of losing purchasing power of cash…. take advantage of deeply negative borrowing rates that the government intervened in the market to create. .. and plus the central banks essentially eliminated bonds by suppessing returns, further driving capital into asset markets.. people were following the governments intervention… in my market in BC there was a massive influx of investors from surrey and Vancouver. Not trying to be racist but there was literally a lineup of Indian Canadians at every detached house for sale during covid. I would rough guess 1 out of every 2 sold houses went to an Indian investor. In my neighborhood roughly 25% of houses are currently sitting empty with 3 foot tall grass.
It’seems that when interest rates goes up real estate prices fall and when iinterest rates goes down real estate prices goes up. Remember when mortgages were 21 percent?
Great article, informative and timely.
Please explain the abbreviations like HPI etc, at first usage to improve our overall comprehension .
yay !! the moment we’ve all been waiting for. let it crash!
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