Canada’s largest bank is calling the top for real estate prices in the near term. RBC economists took a dive through the latest Canadian real estate sales for May 2020. In addition to noting prices have stalled, they believe the bounce in sales is overstated. Combine this with an observation on supply outpacing demand, and their forecast is beginning to look like the CMHC’s forecast.
Canadian Real Estate Prices “Likely” Peaked, Forecasts Lowered
Canada’s largest bank thinks we just saw the highest prices we’ll see for a while. The bank stated prices “likely crested,” which is a fancy way of saying peaked. Economists also called out the flat movement compared to April, and expects “further broad-based weakening in the period ahead.” In other words, you know when Wile E. Coyote runs over the edge of a cliff, and doesn’t realize until he looks down? That’s what they’re describing, but with prices.
Canadian Real Estate Prices
The benchmark price of a home across Canada, in Canadian dollars.
Source: CREA, Better Dwelling.
In terms of future prices, they see prices dropping until the middle of next year. The bank forecasts the national index will bottom 7% lower by mid-2021. They note Ottawa, Montreal, Toronto, and Halifax had “strong starting points.” This will provide them with a temporary buffer before prices start to move lower. This is a revision from the 4.69% increase mentioned a few weeks ago. If you’re wondering where this revision puts it, it’s right under the CMHC’s forecast. RBC’s forecast is now close to the best case scenario from major risk agencies.
Canadian Real Estate Sales Rebound Overstated
Most media outlets led with a “rebound” of sales, and a parade of Realtors discussing the market being “back.” RBC’s economists aren’t buying it. They note “the percentage change is impressive, but overstate May’s rebound.” Few people realize this sentiment was also expressed by the Canadian Real Estate Association.
Canadian Real Estate Sales Change
The annual percent chage of sales for all home types, as reported through the Canadian MLS.
Source: CREA, Better Dwelling.
Sale volumes are still 40% to 50% below last year’s levels in major markets. In Toronto and Vancouver, May’s sales increase made up just a fifth of the drop in March and April. They expect slower immigration will be a dampening factor, “keeping housing demand soft.” Further adding “transactions will recover only gradually and unevenly.”
Canadian Real Estate Supply and Demand Is Decoupling
Price declines will be the result of supply and demand shifts, and early signs are appearing. The bank notes “new listings surged 69% in May from April’s low point,” helping to ease supply constraints. Most important, was an observation from Montreal. After lifting its lockdown – new listings tripled, but buyers did not. A similar scenario can happen in other major markets, as mortgage deferrals expire and investors become squeezed.
RBC is seeing prices peak, more inventory, and sales that sound more impressive than they are. The latest forecast now more closely resembles some of the more “bearish” forecasts, like the one from Canada’s national housing agency. The 11 point swing lower on the price forecast, demonstrates how rapidly this market is changing.
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