In Canada, it only goes up. Well, when it comes to real estate prices, anyway. Fitch Ratings‘ sent its latest global real estate forecast to clients this week. The credit rating giant sees Canadian home price growth slowing but still firm. At the same time, this isn’t driven by lower rates or higher incomes. They actually see rates rising and disposable incomes falling in the country. In the Canadian real estate bubble, home prices don’t need income growth, apparently.
Canadian Real Estate Prices Forecast To See Growth Slow
Canadian home price growth is expected to slow, but slower than this is still fast. The agency’s forecast shows 5 to 7% growth in 2022, less than half they had forecast last year. In 2023, the rate is seen as falling further, as home prices weigh on themselves. A lack of affordability is expected to drag demand and prices.
Home price growth is accelerating now, so why do they see growth slowing? High interest rates and inflation are expected to turn into a drag on growth. Rising rates are higher, but still too low to prevent demand from falling enough to slow prices.
Canadian Disposable Household Incomes Are Forecast To Fall
Canadian real estate prices are one of the few things expected to always go up. Incomes aren’t so lucky. The forecast shows disposable incomes falling about 5% over the same period. It might be surprising if you haven’t followed this situation, but it’s very clear why it is happening. Disposable income has seen a temporary boost over the past couple of years.
Part of the rise in disposable income was due to government assistance. Support programs had initially replaced every $1 of income lost with $2 in assistance. Falling was inevitable as aid tapered, most of it gone by last month. Some economists think incomes will “grow into” the elevated levels reported, like a soft landing for earnings. Fitch isn’t sold on that narrative, seeing it just straight up falling. The honesty is refreshing.
Affordability Will Deteriorate At A Similar Rate Seen This Past Year
Let’s put it together. Canadian real estate prices are forecast to rise while incomes fall. Obviously, this creates a worse situation for aspiring homebuyers, but that’s what many forecasts see. As you can see in the chart below, the gap between home prices and income should widen by about 10 points.
Canadian Home Prices and Affordability
Graph shows the mid-point of the forecast ranges.
Source: Fitch Ratings, Haver Analytics, Statistics Canada, Teranet/National Bank of Canada
The jump is HUGE. The next two years are forecast to worsen affordability at a similar pace to 2016/2017 and 2020/2021, respectively. Only one big difference — the deterioration in affordability was due to surging home price growth in those periods. Rising home prices and falling incomes are combined to create a similar effect going forward.
The Fitch Ratings forecast happens to capture the Canadian real estate bubble perfectly. Home prices are forecast to rise, even as household incomes fall. Real estate is seen as a stronger earner in this economy than the people that occupy the space… and no one thinks it’s weird.