The outlook for Canadian real estate, and the economy in general, is looking a little less bright. Oxford Economics warned clients this week, that we’re already seeing the early stages of a recession. Higher rates to cool inflation are pushing home prices much lower and prolonging the downturn. High inflation also means a stimulus windfall is unlikely, since it would be counter-productive to cooling measures.
Canadian Real Estate Prices To Fall 30%, Most Gains To Be Wiped Out
Canadian real estate prices are forecast to fall further, but pandemic-era gains won’t be wiped out—though it will be close. The firm sees prices falling 30% from peak-to-trough, after rising more than 54% since March 2020. For those without a calculator handy, that would leave March buyers with roughly 2.3% compound annual growth rate (CAGR). Not exactly the windfall many believed they were blessed with, especially when soaring inflation is considered.
Residential investment, the share of gross domestic product (GDP) from new real estate, is also seen falling. The segment dropped 10% from Q1 to Q3 this year, as interest rates increased. The firm sees a further 8% decline in the coming year, which isn’t too hard to see with slowing new construction sales.
Canada’s Recession Will Be Longer But More Shallow Than Normal
Early signs of a recession have already appeared, and this coming recession is expected to be longer than usual. Falling residential investment and already skeptical businesses are seen limiting their investment in this downturn. The firm is forecasting a 2% decline in real GDP from Q4 2022 to Q3 2023. The impact won’t be equal, as you might have guessed.
“This is slightly longer but shallower than the average recession since 1970,” explained Tony Stillo, director of economics at the firm. “Canada’s highly indebted households and still overvalued housing will likely be hardest hit.”
Major Stimulus Unlikely & Counterproductive
Expecting this recession to be a stimulus windfall? Don’t count on it, suggests Stillo. The recession won’t be particularly bad, and pre-planned infrastructure projects will help cushion the downturn. However, high inflation has become a limiting factor.
“To avoid undermining the Bank of Canada’s efforts to tame inflation, major new fiscal stimulus is unlikely unless the recession is severe,” said Stillo.