Canada

Canadian Real Estate Prices Are Dropping. How Bad Do Banks Think It Can Get?

Canadian real estate prices are doing the unthinkable — they’ve stopped going up. After making a sudden drop last month, everyone is now wondering how much prices can fall. We’re hooking it up by assembling the downside scenario forecasts from the Big Six banks. Here’s the worst Canada’s biggest lenders see happening to home prices.

Canada’s Biggest Banks See Real Estate Prices Dropping As Much As 30% In A Crash

Let’s start with Canada’s biggest bank, RBC. In their worst case scenario, they see home prices front-loading losses. The bank’s adverse scenario has forecast a drop of 30% over the 12 months ending in April 2023. That would shave off a cool $264,700 from the benchmark price of a typical home. 

RBC has also forecast the following year would see home prices bounce 4.2% higher in this scenario. That works out to a composite benchmark price of $643,600 in about two years. We’ve covered this before, and a surprising number of math-challenged folks said this means prices recover in 4 years, which isn’t a big deal. 

I guess they’re adding the sum of the percentage points instead of applying it as compound annual growth? That’s not how math traditionally works, but try explaining real estate to someone that just made an average of over $200k over the past year by just paying their mortgage.

Up next is BMO, Canada’s oldest bank. Their management has openly stated they would be “surprised” if home prices didn’t make a double-digit drop — but it will be a slow boil, apparently. Their adverse scenario sees home prices falling 9.4% over the 12 months ending in April 2023. That would shave off about $82,900 from the benchmark price at the time of forecast. It would be followed by an 18% decline, bringing the benchmark price down to $655,600 — right around the same level as RBC’s adverse scenario. This might be BMO’s adverse scenario, but they’ve been very vocal about expecting home prices to drop as higher rates “de-froth” the bubble. 

CIBC expects prices to fall in their worst case scenario, but not by much. Their adverse scenario has forecast prices falling 0.5% over the 12 months ending in April 2023. It would be followed by another 1.4% decline the following year, which would take the composite benchmark price down to ~$865,700. The CREA benchmark price fell 2.0% from April to May 2022, so prices would need to climb from here to get to their worst case scenario. It seems like they took the exercise very seriously.

National Bank of Canada sees only a slight price decline followed by meager growth in their worst case scenario. Their adverse forecast has home prices dropping 1.9% in the 12 months ending April 2023. It would be followed by 1.2% growth, which works out to a typical home in Canada falling to ~$876,000. Once again, with the 2.0 point drop in May, prices would have to climb to get to this worst case scenario. At least they were realistic enough to see prices falling, unlike some banks.

Some Canadian Banks Don’t See Real Estate Prices Falling At All

Surprisingly, the worst case some banks are prepared for involves no decline — with TD even forecasting  double-digit increases. Their adverse scenario has forecast home prices would RISE 11.1% over the 12 months ending April 2023. A year later, the downside is another 2.2% increase on top of that, bringing the price of a typical home to about $1,001,900. With prices already on the slide, they must see a strange catalyst that reverses course. 

Scotiabank has forecast the worst case is also aligned with team unicorn, seeing price growth slow to just under double-digit growth. Home prices are expected to rise 9.8% over the 12 months ending April 2023. The following year things are seen moderating a little further, with prices falling 0.5%, bringing the benchmark to about $964,031. They see the price of a typical home rising just $81,600 over two years in a bear market. Oh, the humanity. These bears are too extreme. 

The takeaway is very mixed. On the one hand, such a wide variance of opinion would usually indicate market uncertainty. Wider forecast ranges tend to result from more unknown variables. This is why longer forecasts tend to have a wider range. A worst-case scenario ranging from prices dropping 30% over the next year to rising 11% would certainly be a wide range. 

On the other hand, some of these forecasts reveal how deep the bubble mindset goes in Canada’s economy. Remember, this is the worst case scenario — recession, war, food shortages, Shonda Rhimes stops making TV. In this case, prices rise double-digits? That might be more of a bubble sign than an ambitious best case scenario forecast. Moral hazard has built up to the point where some banks see a negative shock as a boom — a mindset that didn’t exist before 2020. 

6 Comments

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  • Reply
    JB 5 days ago

    ScotiaBank has been one of the more aggressive lenders over the last few years, yes?

    It’s like when you stay in a cult because you’ve invested so much already that leaving no longer feels like a viable option–the loss would be too great. The Canadian Real Estate industry is a cult. *shrug*

    • Reply
      Rob Turner 4 mins ago

      What’s interesting is during the Toronto mini-crash the CEO was full on panic-shouting from the rooftop about how the market is going to crash and sold his home.

      Now he’s completely absent from discussion.

  • Reply
    J 5 days ago

    It goes to show how out of touch these banks are to the common woes of the everyday Canadian.
    We’re just account numbers to them to be milked for fees and profits. Banks were suppose to help build communities, not siphon the lifeblood out of them. This crash (entire generation in the making) will in the end make the country better for people still unborn (we hope). Whatever reserves they’ve got better be enough to cover their bad bets.

  • Reply
    Michelle R. 5 days ago

    Hmmm. What is the logic behind thinking the reductions would end in April 2023? Seems to me like that’s when inventory would really start to pile up.

    • Reply
      Whiskey Foxtrot 6 mins ago

      I think it’s actually just the forecast range required. They don’t need to tell the specifics of long-term planning beyond that to shareholders in detail, just the direction.

  • Reply
    Scott 4 days ago

    A house nearby just dropped its asking price from 3.5 to 3.0. It was on the market for one week.
    A couple in the GTA “won” a bidding war in March for 920k. By the time it was appraised it was worth 870k and at closing it was 810k. Seller gladly renegotiated. Ouch…

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