Canada’s largest bank sees a bottom to sales, but thinks there’s more pain for home prices—at least near-term. That’s the take from RBC, that feels home prices are stabilizing but will fall further. Don’t expect a quick recovery either, with affordability challenges weighing down future sales.
Canadian Real Estate Sales May Have Found A Floor
Canadian residential real estate sales might be approaching a floor, after plummeting. RBC points to a 25% drop in home sales in 2022, reversing the gains made since 2020. Sharper drops were seen in British Columbia (-35%), and Ontario (-32%). More affordable provinces like Alberta (-1.8%) fared better, partially due to the energy boom. It’s hard to see a further decline in home sales, especially without a dent in employment data.
RBC argues this means markets are leveling off, especially local regions. Victoria, Vancouver, Calgary, Edmonton, Toronto, and even Atlantic Canada are stabilizing. Only a handful of cities in the Prairies and Quebec continue to see the market erode.
It’s important to emphasize that RBC means no further declines are seen by leveling off. The volume of existing home sales is still weaker than normal. In the past decade, we haven’t seen such weak sales outside of the first few months of the pandemic. Even then, December sales were stronger than they were recently reported. Keep this point in mind, because we’ll circle back to it with their price forecast.
Canadian Real Estate Prices Are Forecast To Continue Falling
At this point, everyone in Canada is aware of home prices falling in most markets. The bank reminds us that the MLS composite benchmark, or typical home, is down 13% from the peak. Prices dropped over 20% in Ontario markets, with Toronto (-14%) not far behind.
“Calgary is among the very few markets that have bucked the trend. St. John’s is another exception,” said Robert Hogue, assistant chief economist at RBC.
Stabilizing home sales and already steep price cuts aren’t enough to prevent further declines, suggests Hogue. “We expect prices to depreciate further in the near term. While the bottom for activity may be reached soon, buyers will continue to contend with poor affordability for some time,” he said.
The bank also sees the overnight rate climbing once more this month. Hogue expects that will make it “more challenging,” as households see reduced leverage.
“Still, we think the pace of price declines will continue to ease gradually thanks to stable demand-supply conditions. These have in fact tightened slightly in December following a 6% m/m drop in new listings.”
The Worst Is Almost Over, But Don’t Expect Prices To Rip Higher Again
Just a few months and then we’ll be back to booming home prices again, right? It’s a popular narrative from real estate professionals on social media. The finance industry doesn’t see it that way. “We expect the upcoming recovery to be a largely muted affair at first,” said Hogue.
Adding, “Higher interest rates and stretched affordability will continue to be huge issues for buyers throughout 2023—and possibly beyond. This is poised to keep activity quiet and limit any price gains.”
Similar outlooks for a tame recovery are being shared across the banking industry. Just a few weeks ago, BMO Capital Markets explained they don’t see an immediate return to growth. Oxford Economics shared a similar outlook within the past few months.
Hogue hints that population growth can “heat things up.” Though it’s worth remembering the early 90s crash was also accompanied by a population boom. It continued, but the market wasn’t reignited as moral hazard was significantly reduced. It wasn’t until two decades later that that high for home prices was retaken in real terms.