Canadian Real Estate To Fall Double-Digits, Or “I Would Be Shocked”: BMO Director

Canadian real estate got a shout out in a discussion between two prominent figures on Bay Street. Benjamin Reitzes, BMO’s managing director of macro strategy, and host of Views From The North podcast, mentioned double-digit drops for home prices in the not-so-distant future. Along with guest Joel Prussky, the two discussed how the past 15 years have been unusual for rates. More recent moves and higher inflation might be scary, but it marks the return to a healthier market. Here are the most important takeaways from the chat between the two. 

“Shocked” If Canadian Real Estate Prices Don’t Fall Double-Digits

The interview largely focused on fixed income and touched on Canadian debt levels. Canadians are more indebted than Americans and thus are more sensitive to rate hikes. The more sensitive households are to rate hikes, the more their consumption slows as a result. Rates haven’t even hit January 2020 levels but we can already see the impact on real estate. 

Home prices and sales are cooling following rising rates, abruptly ending an unsustainable run. “Things have come off [highs] very quickly and will probably continue to do so,” said Reitzes.

Adding, “I mean, I’ll be shocked if home prices don’t fall double digits in relatively short order. Getting them back to trend is something like 20 plus percent decline in home prices. Every pocket of the country’s a little bit different, but it’s probably going to be a challenging period.”

Rising Rates Aren’t Unusual, The Past 15 Years of Policy Have Been

Most people think of the decade ending in 2020 as a new normal, but it was far from it. After the Global Financial Crisis, central banks provided liquidity to help a recovery. Being a liquidity provider of last resort, that made sense — for a while.

The issue is it was done for too long, creating a moral hazard for the public. There’s no shortage of articles in the media claiming rates at these levels are punitive. However, interest rates are lower than January 2020. Canada and the US also happen to have tight labor markets and soaring inflation.

The low rate crowd is clamoring for the central bank to ditch its last resort position. Instead, they want the central bank to mitigate any excessive risk they’ve taken.

Prussky, managing director at BMO Capital Markets, told Reitzes this might be over. “I like to think of the last 15 years as an abnormal period in history of interest rates of the world, not what is going to be the future,” he said.

He adds, “I think when we are above 3% we were resetting to a more reasonable level of rates, but I think you have to see where inflation settles into, and where overnight settles into before you make that call.”

Markets Have Forgotten The Price of Risk

Traditionally, interest costs rise to slow demand when inflation or risks are rising. Rates are cut to stimulate demand when inflation or risks are falling. It’s typical business cycle stuff, but it’s become less accepted by central bankers. The business cycle is being suppressed more frequently with “unconventional” monetary policy tools. Consequently, it’s created a moral hazard where few understand the cost of risk.

Prussky argues, “… we’ve had since ’08 all this QT and balance sheet explosion, we don’t really know the true price of money. All I read every day is how Treasury liquidity is terrible. I mean, we’ve experienced that in Canada for years, but of course it’s terrible. The Fed’s been buying too many bonds for too long and we forgot how to find the clearing price for risk. We don’t know it”.

@betterdwelling

Canada’s oldest bank doesn’t sound bullish on real estate. What do you think? 🧸🐂🤔 #canadianrealestate #fintok #realestate #realestateinvesting #investing #realestate #toronto #vancouver

♬ original sound – Better Dwelling

In other words, getting back to where the markets were in the 2010s won’t get us back to normal. That was largely a low rate experiment that helped to create moral hazard. As rates and inflation resume to more traditional numbers, markets may return to seeing a healthy level of risk.

23 Comments

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  • Trader Jim 5 months ago

    Already down double-digits. He means he’ll be shocked if the board stats don’t report it properly. haha

  • GTA Landlord 5 months ago

    Markets like Calgary are seeing prices rise with rates so this isn’t entirely a due to rising rates. It’s the shift in mindset for buyers that the market isn’t always there to facilitate higher home prices.

    • Van YIMBY 5 months ago

      Calgary runs with oil. Once the recession kicks, home prices will correct like the always do.

    • Matt 5 months ago

      Untrue. if you’ve been checking CREB (Calgary Real Estate Board), it appears prices have been going down compared to previous months. Currently CREB indicates that the median sale price in May was $480,000, while the medial sale price in April was $491,000. It also indicates the average sale price in May was $517,738, while the average sale price in April was $532,391. The signs point to Alberta prices going down along with the rest of the country.

      Since it’s only the 31st today, they haven’t released May’s benchmark prices yet, but I expect they will have dropped as well from the $544,300 that they were in April.

    • TheRealBulldog 5 months ago

      A lot of people from BC are selling their outrageously overpriced homes and moving to Calgary…where they can be mortgage free and still have money in the bank

  • Millenial survivalist 5 months ago

    I purchased my home in 2020 and I am totally ok with my property going down in price , because I bought my property to live in , not sell.

    The price I paid was under 500k w 20% down , the other ppl that walked in on 700k plus mortgages, good luck. The government and banks basically lured ppl in with low interests rate just to raise it when the time comes pretending they care about the common Canadian and affordable housing.

    Take note if the property taxes fall down with the price decreases, if they do not then its clear as day what they are doing.

    This might be old info to a lot of you but you would be surpised how many ppl are clueless.

  • C.Rose 5 months ago

    The central bank is totally responsible for the mess that is coming- they kept rates artificially low and they financed the federal governments reckless spending. Pierre Poilievre is right… Macklem should be fired! Have they ever studied history to see what happens when you create money out of thin air- I guess not.

    • Old Greg 5 months ago

      Tiff is essentially Mr Garrison from South park.. Mmmm Kayy

    • strong solution 5 months ago

      PP has no expertise except living on the government teat… no experience in the real world, no real job, never had to look for work, has a staff paid for by our taxes and has no legislation to promote.

      PP is a fool as are his supporters

      • Terry 5 months ago

        Up against two guys that don’t even have his qualifications. That says more about Canadians than it does about PP.

  • Ron Bruce 5 months ago

    According to CISC, in the previous article, “Canadian real estate is an excellent tool for money laundering. The Canadian intelligence agency published a report on how organized crime launders money. They found organized crime engaged in housing in many ways, including document fraud and flipping. Using homes to launder money creates excess demand and distorts values, ultimately raising prices”.

    Tell me that the BMO hasn’t participated in this activity like every other Commercial Bank. The Banks don’t adequately analyze or do due diligence on who is funding the property. The Canadian intelligence agency should investigate the Banks as FINTRAC and the CRA are busy chasing honest taxpayers.

  • Old Greg 5 months ago

    This is going to be fun, rates up = anyone who just bought is underwater… Now the fear will set in and listing will sky rocket especially as inflation is not so “transitory”… Get out while you can and hedge your positions in commodities… I plan on buying the hell out of this bust!

    • Rob Turner 5 months ago

      Sure. In 4 years since price drops destroy enough investor capital that they’re no longer interested in housing investment.

      A third of investors are repeat investors. Once they lose their powder it takes a long time to replenish.

      • LV 5 months ago

        I think some people just want to be able to afford a home to live in. Investors can take their money elsewhere or when the market goes back to normal maybe the shitty 30 year old house and the fairly new house down the street from each other won’t be the same price and investors can go back to flipping houses instead of buying and sitting on them and waiting a year to sell without even adding a dollar of value.

  • Yoroshiku 5 months ago

    My neighbours bought a new bungalow in Collingwood in late 2019 for $679,000. A month ago, an almost identical bungalow on their street sold for $2.5 million. My neighbours are now rushing to put their bungalow on the market but a realtor told them they’d be lucky to get $2M at this point. (Still a tidy profit for them.) The person who just paid $2.5M must be bummed.

  • Alex Lapukhin 5 months ago

    These dire prediction stories penned by countess “experts” have been circulating since at least early 2000s. Unlike other forms of investing homes have an intrinsic value of delivering roof over one’s head. Given annual influx of 400k of new residents, an appetite for home ownership amoung the Canadian public, and a burgeoning investor base in places like India and China, among other places, no crash will ever materialize regardless of what any of these “experts” may say. April 2020 CMHC housing pricing forecast anyone?

  • James McIlwaine 5 months ago

    why does no one understand that when you increase the population by immigration by about 400,000 a year, most of whom want Vancouver, Toronto or other majors, that housing demand increases as do prices….solution, decrease immigration drastically. Gee, might also help to ease environmental strains on our planet.

    • Ethan Wu 5 months ago

      Why does no one understand that home prices are falling while immigration is still high, all they had to do was stop providing credit subsidies to borrow more money than the market would support?

  • Noah 5 months ago

    As long as we are going to keep the large number of the new comers to the country
    we cannot Absorb them smoothly in the economy , housing prices and rent will stay high and very expensive. We are taking 3 times of immigrants US is taking in ratio to the population in both countries. This is the main issue now, beside many others obstacles, to have affordable housings to the new generation in Canada.

    • Gary 5 months ago

      Nah. Immigration was really elevated in the early 90s and it didn’t stop Toronto from falling. Higher rates force capital to become more efficient.

  • Anonymous 5 months ago

    Indeed and well, well, well, it (housing bubble bursting) is finally happening. This time it’s not ‘crying wolf’ anymore, why? because I believe the perfect storm is already here that did not exist before or was brewing / lurking in the dark, like high inflation rate, Covid in China affecting supply chain, war in Ukraine, government flooded the country with stimulus money, cost of borrowing, everything is costing more, people losing purchasing power, household debt at 186% (BOC), and higher interest rate. Simple basic economics that might cost Canadians big time just because inflation was not tamed in time and now BOC is rushing to control it but I think it’s too late. Good luck folks, we will all need it.

  • Rose Lio 5 months ago

    Living in downtown Toronto, people are still buying even with the rates increasing. There is still bidding and still selling and buying.

    • Lou Chao 5 months ago

      You know the majority of readers here also read the articles with the actual statistics that show that’s not true, right?

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