How does an irrational market respond to deteriorating fundamentals? We sifted through dozens of pages of Canadian real estate price forecasts to find out. All forecasts recognized this is the largest employment shock the country has ever seen. However, the impact on real estate prices ranged from “it’s bullish”, to “how do prices rise when 1 in 5 people can’t pay their mortgage?” Here’s the most notable highlights.
General Observations
One thing that becomes immediately clear is consumer facing companies are more bullish. That is, reports designed for consumers are more optimistic about prices. These tend to provide the least amount of rationale for their forecasts. Reports that target institutions and wealthier clients, tend to be less optimistic. In fact, the more expensive, and less likely the public is to see them, the worse the outlook forecasted. These forecasts, like Moody’s, tend to defend their rationale with pages of research.
Despite the wide range in forecasts, all of the economists used similar language. That is, they all recognized markets were becoming softer, the employment outlook is worsening, and I’m pretty sure everyone used “unprecedented” and “uncertainty.” Some economists think this is the “worst job market ever,” so prices can only rise by 10%. Others think “the worst job market ever,” means difficulty paying bills and saving for a downpayment. That said, let’s dive into some of the more notable forecasts.
TD: Canadian Real Estate Prices Rise 12%
TD Canada Trust, a.k.a. the green bank, was optimistic on Canadian home prices. The bank forecasted Canadian home prices will rise 6.1% this year. In 2021, they expect prices to rise another 5.8%, so they see prices 12.25% higher over the next two years. Optimistic numbers didn’t translate into optimistic words in the outlook though.
The bank noted an “extremely high degree of uncertainty” and a hard time for buyers. They see a U-shaped recovery, which is similar to a V-shaped one, but much longer. Also noting the collapse in equity markets likely eroded down payments. You know, typical things that send prices higher at 8 times the rate of inflation.
Scotiabank: Canadian Real Estate Prices Rise 11%
Scotiabank isn’t too concerned about home prices, but its forecast was mid-range. The bank sees prices falling 4% this year, before bouncing 11% higher next year. Overall, this would mean an increase of 6.56% over the next two years. They note “concerns of a significant adjustment in housing markets appear overblown.” But then go on to say “the dramatic rise in the number of unemployed Canadians is sure to have a downward impact on demand.” An unprecedented drop to demand, but higher prices apparently.
RBC: Canadian Real Estate Prices Rise 4.9%
Royal Bank noted “generational lows” for home sales, but it apparently will have little impact. The bank is forecasting home prices will fall 0.2% across Canada this year. They also believe prices will bounce 4.9% higher next year, as things recover. The firm’s economists noted a “sharp price decline is low near term.”
BMO: What Price Drop?
BMO didn’t give a forecasted price movement, but doesn’t think prices will fall. The firm noted “deterioration in prices should be contained for now.” Then added this is the “new normal,” an accidentally interesting choice of words. The phrase was famous last words during the Great Recession, and became an important part of subsequent research on pricing dynamics for quantitative research.
Royal LePage: Canadian Real Estate Prices Drop 3%
Royal LePage, the Canadian real estate brokerage, sees a minor impact to prices. The firm is forecasting a national price decline of 3% at year end. Considering the brokerage is known for its optimistic price growth forecasts, this is the real estate equivalent of falling off a cliff.
CIBC: Canadian Real Estate Prices Drop 5-10%
CIBC sees the pain mostly contained to expensive high-rise condo apartments. The bank expects prices to fall 5-10% from 2019 levels. They note “high cost,” high-rise units will see the most significant impact. Analysts also note “forced sales will add to supply, and probably outweigh the offsetting impact of reduced supply of new units.” This is the only bank report that mentioned a higher level of forced sales, but this was a common theme in institutional reports.
DBRS: Canadian Real Estate Prices Drop 10-15%
DBRS doesn’t expect overvaluation to resolve, but does see prices falling. In their modest downturn scenario, they see prices falling until 2023, dropping 10% in total. In the adverse scenario, they see prices falling 15%, and bottoming in 2023. The firm notes the overvaluation gap is large in both scenarios, but doesn’t believe prices will correct to fundamentals near-term.
Moody’s: Canadian Real Estate Prices Drop 8-30%
Moody’s economists forecasted a range that sees declines in all scenarios. In a modest scenario, the firm sees prices falling 8% over the next year. In more severe unemployment scenarios, the firm sees prices falling upwards of 30%. Using the same model, with the Federal government’s forecasted macro-economic variables, the decline works out to 24%.
Canadian Real Estate Price Forecasts
The forecasted range of price movement over the next two years. Exceptions are DBRS and Moody’s. DBRS forecast is over 3 years, using their moderate scenario. Moody’s forecast is over 3 years using their S3 (moderate) impact scenario.
Source: TD, Scotiabank, RBC, BMO, Royal Lepage, CIBC, DBRS, Moody’s, Better Dwelling.
CMHC: Won’t Recover Until 2022 At The Earliest
Canada’s national housing agency didn’t give a forecasted drop, but they don’t think mortgage deferrals are bullish. During its analyst call to discuss its annual report, they said they don’t expect prices to reach pre-recession levels until the end of 2022, at the earliest. They also mentioned it’s difficult to forecast in this type of scenario, but the situation is turning worse than anticipated. The organization added ~10% of insured mortgages had payment deferrals.
CREA: Leave Us Out of This
The Canadian Real Estate Association (CREA) is opting out of its quarterly forecast. The national organization representing Realtors said it “cannot credibly update its quarterly forecast at this time.” CREA’s mum must have told them if they can’t say anything nice, don’t say anything at all.
One thing that is clear in these forecasts is, economists consider their audience. More technical and wealthier audiences, received detailed explanations of why prices would fall. Organizations between consumers and institutions, like the CMHC, wouldn’t give detailed price forecasts. However, they did express why they have concerns of short-term risks, and opted for a more neutral recovery timeline. Organizations bullish on prices, rationalized it as only a shortage of supply. Failing to include any reasoning as to why they believed immigration and incomes are not impacted, despite recognizing the state of employment.
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Surprised Royal LePage didn’t just write “2 da moon”
The immigration “industry” meanwhile is still claiming there is a “shortage of labour” with unemployment at 15% and underemployment of skilled professionals far higher.
Insane.
Hoards of Canadians will be having a tough time on the job market and they want to keep flooding the market with labor. To what country can Canadian workers turn for employment ? None.
The entire immigration program is a racket by banks and real estate builders to keep bringjng in more suckers to indenture into debt slavery. Worse yet, when these sub-prime mortgages default, the loss is dumped on taxpayers via CMHC which insured that garbage for banks at below market rates that did not reflect the enormous risk to taxpayers. $150 billion of such mortgages just got dumped on taxpayers in March.
Either that or the mortgage defaults and other losses are passed on to savers, wage earners and pensioners through money printing aka debt monetization aka inflation.
Okay, so here’s the question. If TD thinks prices rise 6.1% in a depression, what were they predicting when they thought the economy was hitting a new paradigm in December? 50%? 100%? A million percent?
Well said. Who would even bother paying any attention to someone who has a vested interest in real estate prices staying high?
The canadian big banks are trying to put a positive spin while all of them are in a bear market in a big way while RBC is the only one that is the least, and before long that too will hit the skids. Remember the Big Short guy Steve Eisman, he started shorting the Canadian big banks since early 2019 or earlier, and BNN pundits were frowning at him. I don’t think he has covered his shorts yet. Let’s wait and see . You are aware that they are cutting staff in a big way and their next move after will their dividends. Then they will be in huge trouble.
How long has it been mandatory for TD employees to do forecasts while on drugs? Scotiabank needs to hook up with TD’s dealer, as whatever they’re smoking clearly isn’t as good.
I kind of respect the CREA for not saying anything. Canadian housing makes no sense normally, we’re literally the largest country on earth, yet pay ridiculous prices for land. It takes a wise person to admit “we don’t know” professionally.
Sorry, second largest country on earth, coffee hadn’t kicked in yet and I forgot Russia .
Could agree more with KWO, RE has been the only game in town. All the different agencies, banks, organized realestate boards and their members which include CMHC and BoC pandits, economists and talking heads on TV only know one thing. To talk the housing market up with a narrative of instilling FOMO in the unsuspecting consumer.
The vast amount of the local population had no savings to last even one month without a paycheque.
How can house prices keep rising when unemployment is over 10% and a large number of home owners are under water in only one month of loosing their incomes.
These forecasters only are looking at the domestic economy. They have only seen the market rising since 2003. They don’t have a clue of what has just happened to the economy of the ENTIRE WORLD (shutdown) is unprecedented in history.
I know there is a narrative out there about only low income earners who weren’t in the market anyways losing their jobs, but I know (anecdotal evidence from many people) that this simply isn’t true. Plenty of white collar job losses, pay cuts, and bonuses being withheld out there. No doubt this will impact the purchasing ability of “high income earners” who are expected to prop up the current market prices.
Income cuts are clearly going to manifest as a demand issue, and IMO the only way prices go up/remain stable is if the government gives buyers cash to buy homes (or some other similar program). Otherwise I’m not sure where the money will be coming from with salaries being cut and jobs being lost.
So true! I work as a product designer for an established canadian company, yet I was laid off along with over half of the rest of my colleagues. All of these jobs are white collar. I’m shocked that so many believe that the majority of jobs lost are low wage and unskilled. They are not. Out of all my friends and family at least one person in every household is out of work. Multiply this by the world’s population and we have a serious problem……
They are all using similar traditional data sets. The main issues are 1. they are not considering non-traditional data related to COVID-19 like social and behavior shocks and their economic impacts, and 2. they are not selecting the right economic drivers for each property type in each neighborhood. For example, the main factors impacting price for a detached house in one neighborhood in Toronto can be different for a one-bedroom apartment in the same neighborhood in Toronto or a similar detached house in another neighborhood but in Vancouver. When you select the right drivers and calculate the right valuations for all sub-markets then you need to apply and model other factors like COVID-19 infection rates and government announcements and their impacts on the unemployment rate for example and then forecast the entire market with more confidence. Something they are all missing is the second and third waves!
Prolonged unemployment/income loss obviously isn’t good for house prices.
Perhaps the bigger thing will be if the employment situation influences immigration, by far the biggest price-driver in Canadian real estate.
Right now immigration is stalled due to the virus. If it becomes politically expedient to keep it that way then look out.
A second wave of infection and us entering a new normal (Higher unemployment / more credit defaults) will clarify where the market is heading. I find the bullish analysis to be getting weaker. I guess you choose the data that supports your personal interests.
I ONLY pay attention to CMHC stats!!! (OREA realtor 1980-98.)
Real estate is an asset class which doesn’t exist in a bubble. It just has a real emotional attachment to it. It’s not very liquid and fair value will catch up to economic reality. The RE industry hides and distorts their stats at the expense of the consumer. 🤷♂️ Just saying (I know we’re all scratching out a living)
There is a lot of pent-up demand. If the current owners of homes are unable to fulfill their obligations and are foreclosed on, the people who have been on the sidelines for years saving even more cash for down payments will step up to buy. This will keep prices fairly stable or may allow them to rise just a bit. Most present homeowners don’t have to sell. They sell to reap gains and move to cheaper areas or to care facilities. Almost no homeowner in TO who has owned for 10 years or more is desperate to sell. TO is not Chornobyl or Three Mile Island in Pennsylvania.
You don’t need a condo in a monolithic highrise downtown when you can work from home anywhere you want.
Any buildings with elevators are now essentially worthless. Let that one sink in.
So let me get this right
1. Layoff the likes of which the country has never seen before (2 million +)
2. Oil going negative
3. Interest rates going negative
4. 220,000 false CERB claims which need to be returned.
5. Business going bankrupt
6. The small business gave massive loan subsidies to survive
7. Foreign investment going to a near-zero
But… The real estate is going up… Who is paying this premium price when all you have to do is wait to get a bargain price?