Canadian Real Estate Prices To See The Sharpest Drop In Global Downturn: Goldman

Canadian Real Estate Prices To See The Sharpest Drop In Global Downturn: Goldman

A global real estate correction has kicked off and Canada is expected to lead lower. That was the message from Goldman Sachs (GS) Research’s latest client note on rising rates. Excessively low rates stimulated record home sales and a multi-decade high for inflation. Now that rates are rising to cool that inflation, it’s removing home buyer stimulus. This is expected to produce home price declines across most advanced economies. However, Canada is seen making the sharpest drops due to its extreme price boom.

From Toronto To Auckland, Real Estate Markets Are Slowing

Advanced economies left interest rates too low for too long, and are now trying to make up for lost time. Fast-rising rates is slowing the inflation they created, but also the global economy. This will have a big impact on interest-sensitive areas like real estate, first to see the impact. “The pandemic-induced housing boom appears to be cooling off,” notes GS.

“From Toronto to Auckland, a slowdown in the housing market is underway as interest rates in developed economies are set to climb rapidly.” 

Rising mortgage rates in the US, Canada, the UK, and New Zealand have begun to cool home sales already. The US has seen a whopping 40% drop, according to the financial firm’s research team. Higher rates are in the pipeline and that’s expected to slow housing even further. 

A Global Real Estate Downturn Is “A Real Risk,” Canada To Lead Downturn

Falling home sales tend to result in falling home prices, but not all places have received the memo. Home prices are still rising in the US, Germany, and the UK. The researchers expect prices to start falling in the not-so-distant future. A study conducted by the bank found a 10% drop or more for US home sales, resulting in falling prices 6-months later. If home sales fall much faster than inventory, this problem can be even worse.

They also mention home prices have already begun to fall in Canada, Australia, New Zealand, and Sweden. “In Canada, house prices have fallen the most in areas that had the most growth early in the pandemic,” notes the bank to investors. 

They expect a modest peak-to-trough drop for home prices over the next couple of years. Canada is forecast to see the biggest drop with real home prices falling 12%. France follows with a 9% drop, and the US just 3%. These are national prices, so inflated markets are seen making bigger declines. “The slowdown will be sharpest in Canada due to weak recent momentum, low affordability and rapid policy hikes by the Bank of Canada,” said the bank. 

Global economic growth is forecast to slow over the next few quarters, with home sales reinforcing the outlook. “And while a tight housing market may be enough to avoid a slump, the rapid deterioration in affordability and large drops in home sales suggest that a housing downturn is a real risk.” 

Canada Has The Worst Housing Affordability of Advanced Economies

A lack of affordability is what’s going to prevent buyers from jumping in until home prices decline. The GS Housing Affordability Index (HAI) looks at household mortgage credit servicing capacity. We can see a brief surge in affordability at the start of the pandemic, as rates were initially cut. Affordability then erodes rapidly as the market adjusts to absorb the increased credit capacity. This is a problem the Bank of Canada mentioned, warning low rates don’t improve affordability.

Affordability Near Historical Lows In Canada and New Zealand

Shortly after rates rose, affordability eroded even further — a typical but temporary phenomenon. Just as low rates worked to stimulate demand and raise prices, higher rates do the opposite. By slowing demand, prices can cool to more reasonable levels, but it takes a few months to adjust. Once again, the US hasn’t seen this yet but is expected to in the coming months. 

GS isn’t the only one that sees inflated home prices correcting after rate normalization. The Bank of International Settlements (BIS) recently warned low rates produced housing bubbles in advanced economies. While they argue it is a global phenomenon, they say it’s due to monetary policy errors repeated across multiple advanced economies. They suggest higher rates can be painful, but not tackling this problem can make it worse. If the trend isn’t correct, the BIS warns the fallout will be beyond the housing market.

22 Comments

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  • Omar 1 month ago

    12 point real is 12 + 8, so 20% drop. About the same as everyone else is forecasting which is nice.

  • Dave Armstrong 1 month ago

    Haven’t some parts of Toronto already seen a 12% decline in home prices?

    • Trader Jim 1 month ago

      Oakville (suburb) down -9% from peak over 3 months already. That’s using the board’s funny, manipulated stats too.

      • Mark Bayly 4 weeks ago

        Mortgages are going to double and house prices will only drop by 12 per cent More spin from real estate agents and banks I presume.

    • Zaheer Jilani 1 month ago

      The unfortunate part of this dirty business is that our children of baby boomers are in trouble and regardless of their professional degrees from universities they are dreaming to buy homes and I hope ——hope and pray ——pray for them to get any positive opportunity to get a better living without getting into any trap of this bad humanly system.

  • Sach Tap 1 month ago

    Even the bankers aren’t confident this bubble is going to keep going. Now THAT is bearish.

  • Trader Jim 1 month ago

    It’s unfortunate that the government put Millennials working as professionals in this situation to cheer on a housing crash, but I can’t think of one situation where the government or central bank said they were worried about rising prices or even acted on it.

    At one point if I’m not mistaken, Tiff actually said this bubble was needed. LOL

    • M 1 month ago

      And that’s why we cheer. We cheer because we see how deep the hole they have dug themselves in is, and we hope they reap what they sow.

    • AG 1 month ago

      He did say that. That was in the early phases of Corona where he subtly hinted that the Canadian economy is not an OIL economy anymore. Instead, it’s a housing economy where Canada’s economic output is closely tied with house prices and RE activity. That was really sad given that Central Banker was acknowledging it.

      This bubble was fuelled relentlessly by free flow immigration started by Liberals in 2015 and never looked back. Check the price graph and you would find anomalies post 2015. Abnormal slope with historic average, steep rise in 2017 Mar, and then fall and greater inconsistent graph till 2020. After 2020, price graph went bonkers AND now liberals/central bankers are going to blame everything on WAR/INFLATION/CORONA. For me this is just the scapegoat.

  • ned 1 month ago

    So a small house in TO might be 1.8M instead of 2M, finally regular folks will be able to buy! (sarcasm)

    • George 1 month ago

      Distribution is a hard concept to understand.

  • bubblepop 1 month ago

    I am so happy to see such news articles finally.
    Time to pay for the bubble. Yet, this is just a beginning and the real stuff has not even started.

  • Chris 1 month ago

    Watching asking prices in KW coming down by 100s of 1000s.

    • Imperil Donnington 1 month ago

      I sold in Waterloo for 1.47 during the last week of March, and my old neighbor was just interviewing Realtors to list and was pretty disappointed that 1.21-1.24 was the target now. They have the exact same sqft but a finished basement (so 4+1), pergola, patio, concrete driveway, etc. It likely puts the value of the one I sold under 1.2. Also another 4 bedroom 8 houses down from mine went for 1.1, albeit it was 250sqft smaller.

      • Desai 4 weeks ago

        Is this your achievement by making people fools? How long you will play this bizarre game.

  • Chris Brzozowski 1 month ago

    Canada NEEDS increasing house prices to fuel it’s economic miracle.
    The Bank of Canada is PANICKING now and is like a lost goat in a field.

  • Abdul 1 month ago

    For 20+years market kedot in going up I am not sure tet of it is going to come down ,it defied all theories.

    • Olivia 1 month ago

      It didn’t though. Toronto real home prices in 1989 were the same in 2010. Sure, if you buy at the exact bottom of the market it always goes up for 20 years. Get caught at the top and you’re in for two decades of real stagnation.

  • hahahaha 1 month ago

    whoever bought because of FOMO is an idiot and deserves to suffer . hahaha

  • Norm Dill 1 month ago

    Before you get to upset about this prediction, which may or may not materialize to the extent indicated here, get a look at what the forecaster had been saying about Canadian railways over the last 14 years following the 2008 crisis. At that time most of the world real estate declined substantially. In Canada, that did not happen. However, forecasters have been predicting the decline in Canada every year since.

    Of this or anything like it happens for other than a brief pullback, watch them all day I told you so. That will, at best, be a misleading distortion of the truth.

    • Ed Tomlinson 1 month ago

      Canada did all it could in 2008 to avoid the woes that America and other were going through. We’re attached to the states by the hip whether we like it or not. They were suffering and to mitigate our own, we began 15 years of historic low interest, 40-year amortization (for a while), etc. anything we could; kicking the can down the road.

      Pay the piper.

  • Desai 4 weeks ago

    A week ago, JT was blaming Russia (LP) for the inflation by hoarding Gas, Grain, and other critical resources; the same way you and your party owns multiple homes and investment properties across Canada leaving Canadians in a tent city.

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