Canadian Real Estate Prices Have Little Upside Potential But Can Drop 30%: Moody’s

Canada’s epic real estate run is forecast to end as surging mortgage rates pinch demand. Moody’s, one of the big three credit rating agencies, has forecast a decade high for mortgage rates. The firm’s risk models now show home prices stalling if the economy is able to maintain this steam. There’s only a minimal chance of prices rising further, with the risk slanted to the downside. In a worst case scenario, home prices would lose up to 30% of their peak value. 

Canadian Real Estate Prices Forecast To Stall In An Ideal Scenario

Canadian real estate prices won’t move much if the booming economy continues. That’s Moody’s call, with prices declining just 3% if the market looks like it did during the last tightening cycle. “I think the best way to summarize our current housing forecast is that the boom-stall cycle of 2016 to 2019 is going to repeat itself,” said Brendan Lacerda, a senior economist for Moody’s. 

The firm cited immigration, strong labor markets, and low inventories as market supports. “As long as households keep having income coming in, they can adjust their spending on discretionary spending,” he says.

This take would technically ignore some external issues. The income diverted to pay for shelter would be removed from another part of the economy. Reducing firm revenues typically leads to less spending, and reduces labor market health. It’s a similar issue to high inflation diverting capital from productivity. An eroding labor market is also one of the triggers for the firm’s negative scenarios. 

As for low inventory, this is a sticky situation. BMO has addressed this several times, literally begging people to understand excess demand. Potential sellers are often not letting go of their old home and leveraging up instead. Rapid price appreciation is something that’s hard to walk away from. When prices begin to slow, or potentially fall, they expect higher inventory.

Canadian Real Estate Prices Have Little Upside Potential

Moody’s warns (or reassures?) there isn’t much upside to this market. In their alternative S1 scenario, the firm expects prices to rise 10% over the forecast period. They explain there’s only a 10% chance of this happening, and a 90% chance it won’t.

“There really isn’t a lot of upside to this market. All of the pressures are weighted to the downside,” he said. 

The Downside Potential For Canadian Real Estate Is “Significant”

Canadian home prices have significant downside risk, but it wouldn’t reverse all gains. In a worst-case scenario, Moody’s sees annual home price growth falling 22% at the low. Total losses from peak to trough are expected to total 30% if this happens. “There’s a significant downside risk that looms large over this housing market,” warns Lacerda.

For a downside scenario like this to occur, negative economic issues would have to pile up. Most notable would be a decline in labor markets while high inflation persists. If labor deteriorates while the Bank of Canada (BoC) is forced to raise rates to control inflation, housing might be one of the smaller concerns.

12 Comments

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  • Michael Westen 6 months ago

    Little upside? Just like it did for the past 20 years, right?

    • alex 6 months ago

      Cardinal rule of investible assets: Past performance is not indicative of future results.

      • Michael Westen 6 months ago

        Yes, I’m sure the government will allow this to change. Not like they’ve been doing for the past 20 years.

        Try to keep up, won’t you? The home prices certainly are.

    • JEFF13 6 months ago

      You can stretch an elastic quite a lot, but at some point, you will ends up breaking it.

  • Raheem Boho 6 months ago

    Am I right to assume that the sudden increase in prices after yesterday’s BoC increase especially in markets like Ottawa is to serve as a cushion for this potential price drop.

    A townhouse I was exploring in Ottawa was listed as $759k last week and increased to $900k this morning. With this potential 30% price drop we will be look at a list price of $630k (for the $900k) as opposed to $531k (for the $759k).

    Interesting times when we begin to have buyers expressing Fear of Over Paying (FOOP) in the coming months.

  • Anthony 6 months ago

    If interest rates start hating five 6%, the downside will be much worse than 30% the Moody’s always has a positive bias on most news that it outputs

    • Anthony 6 months ago

      Sorry if interest rates go as high as five or six percent

    • JEFF13 6 months ago

      With the amount of debt we have in the western world, I am not sure it will go past 1,5% this time.

    • Yoroshiku 6 months ago

      A good friend is a bank executive at RBC. He told us recently that it’s not uncommon for people in the GTA to have a mortgage that eats up 60-65% of their gross income. When I bought my first condo, the rule of thumb to aim for was 28%.

      A 30% drop doesn’t seem particularly huge since house prices went up 30% in 2021.

  • Chris 5 months ago

    This does not seem to factor that discretionary spending is already being eroded by higher inflation in other parts of the economy. It’s like the house of cards is crumbling yet Moody’s is only talking about one card being a bit out of place.

  • Old Greg 5 months ago

    This is where money dies!

  • MidwestBob 5 months ago

    It is so easy to be delusional about this, but there is no way the price will keep going up, nor will it stay where it is now…It will go down, no doubt!

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