Canadian Real Estate’s Worst Case Is A 30% Price Drop, Still Down By 2027: RBC

Canada’s largest bank is bullish on the economy but not on home prices. RBC regulatory filings reveal they see home prices making a modest decline by next year. That’s if the economy encounters no unexpected hiccups. However, the bank warns they’ve placed more weight to the downside as the outlook darkens. In the downside scenario, home prices contract as much as 30% — rolling back almost all gains since 2020. Almost.

Macroeconomic Risk Scenarios

Financial organizations must produce forecasts to help plan how much preparation is needed. They’re broken down into 3 scenarios: a base case, which is what would happen if things hum along without a hitch. Then there are at least two alternative scenarios, including a downside and upside. Forecasts are a snapshot of the economy at that time, not responsive to changes. These are used to communicate management expectations if the economy deviates off course.

Macroeconomic forecasts like these play a big role, especially in terms of profit. Too bearish? Companies risk underexposure and underperform their peers. Too bullish? Lenders could be too exposed to risk, which can mean suffering big losses. To put it bluntly, these organizations put their money where their mouth is.

RBC’s Outlook For Canadian Real Estate Is Slanted To The Downside

Canada’s largest bank expects prices to fall in their base case scenario, but bounce back. A CREA benchmark composite home would show an annual drop of 3.6% by April 2023. Home prices are then forecast to show compound annual growth of 4.3% for the following 4 years. Over the 5-years ending in April 2027, home prices would be 14.1% higher. Only a minor correction followed by an increase in-line with long-term growth.

If you don’t measure your kid’s birthday by fiscal quarters, that might be a little too abstract. Using the benchmark price, a home would fall to $850,600 (-$31,800) by April 2023. The benchmark is then forecast to hit $1,006,700 (+$124,300) by April 2027. It’s still huge growth but might not seem like that to people who assumed there will be 30% increases forever. Still, a contraction in the base case scenario is something to watch.

“While our base case still calls for positive economic growth, we have increased both the severity and likelihood of our downside scenarios,” said Graeme Hepworth, RBC’s Chief Risk Officer, in an analyst Q&A on the day of the filings.

The “Worst Case” For Canadian Real Estate Is A 30% Price Drop

RBC’s downside scenario shows a big contraction similar to the 90s, and a long correction. A benchmark home would see prices make a 12-month drop of 30% by April 2023. Compound annual growth averages 4.2% the following 4 years. Over the 5 years ending in April 2027, prices would be 15.8% lower.

In dollars, the benchmark falls to $617,700 (-$264,700) by April 2023 and $728,200 (-$154,200) by April 2027. Hard to believe home prices would fall by that much but also hard to believe they’d increase as much as they did. It was also hard to see a 30-year high for inflation and bond yields bucking the 15-year trend.

Not recovering over 5 years might sound bad but it’s not necessarily. After the 90s crash, home prices failed to re-inflate in real terms for about 20 years. During that period, Canada became one of the best performing economies in the world. Capital sought more productive growth increasing national wealth in a more equitable way. 

A “Best Case” Scenario Is Another Run Like The Past 5 Years

RBC’s upside scenario would see home prices boom and higher rates have no impact. Home prices are forecast to rise 10.9% in April 2023, when compared to the previous year. Compound annual growth then averages 9.5% for the following 4 years. Those numbers might sound small but home prices would have climbed 61.7% higher over 5 years. That’s a similar performance to the last 5 years, the distribution is just different.

In this scenario, the benchmark home costs $978,600 (+$96,200) in April 2023. It’s also a mind-numbing $1,406,900 (+$524,469) by April 2027. Homes across Canada would be roughly the cost of a home in Vancouver today. Of course, incomes will have increased, helping to mitigate some of the pressure. Hard to see this scenario since the upside would also mean higher interest rates provided no drag. 

Anything’s possible but consider even the bank’s risk department sees a downside bias. They aren’t dismissing the recent run happening again, but it was problematic. Recent growth was driven by the same factors that created destabilizing inflation. The upside was also not mentioned once during the call, indicating it might not be on their mind.

One thing to note: RBC has been outspoken about the impact of higher home prices on the economy. The bank has presented significant downside scenarios a few times. What’s different this time is the bank placing significant weight on the downside. 

RBC hasn’t addressed why their downsides are frequently so large. However, experts like Hilliard Macbeth and Oxford Economics have shed some light on downside forecasts with their own research. Just because home prices should correct, doesn’t mean policy won’t be used to try and prevent it. However, it’s not a tool that can be used forever.

Every time the trend is extended, the market gets closer to a financial crisis instead of just a price drop.

18 Comments

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  • Ike 6 months ago

    Sure. But by then price of everything else would have increased so much that you’d still be behind

    • Omar 6 months ago

      Only in the upside scenario. Inflationary recessions don’t last long since the government that sends people on one is sent packing and never elected. I find it hard to see Trudeau being that tone deaf but they’ve done nuttier things.

      • Ike 6 months ago

        Are you saying Doug Ford for PM 2027?

      • Sam 6 months ago

        You have to be completely out of touch with monetary policy trends to say home prices will drop long term. They cannot go down on a nominal basis long term because every fiat currency in the history of mankind has been devalued in the long term.

        • Travis Hunter 6 months ago

          I’m glad people that skipped the basics of finance to explain more advanced topics.

          Is it fair to say you don’t realize real long-term growth is 3%, so your statement is technically correct, but at the current rate the next 17 years of home price growth has already been priced in?

          Did you even know these are real home prices used, so the change is in addition to inflation as opposed to the nominal prices which decay?

  • Sarah 6 months ago

    Most people think the hardest part of being an analyst is collecting data but it’s really explaining to people the best educated guess doesn’t mean people won’t try to jump in front of your forecast and try to derail it, sometimes making things much, much worse.

    When even Morneau is calling out the reckless direction the government is heading, you know things are getting really bad.

  • Trader Jim 6 months ago

    Cue the geniuses saying prices rolling back to October 2020 is impossible but prices rising 30% per year is fundamentals. If you’re a homeowner that understands how ridiculous this is, just enjoy the show while people battle it out over how much we’re willing to exploit young people to repay all of the fancy stuff we bought as a country and likely have no idea where it went. LOL

  • RW 6 months ago

    30% over 2-3 years maybe but even a 30% drop in a year is less surprising than the number of people who see home prices rising 30% and think it’s normal.

    No idea where prices go but I think it’s easy to agree the exuberance of people who have limited experience investing getting it 100% right on the way up is an absurd proposition. It’s my favorite when you hear them say, “we don’t think of it as an investment” shortly followed by “if it rises 10% per year I’ll never be able to afford it.”

    Just buying it because they think it’ll outperform every advanced economy’s investment options with 3x usual home price growth, but it doesn’t matter.

  • Mortgage Guy 6 months ago

    Noticing more and more mortgage brokers had Gen X investors not Boomers this time, unlike in 2017 when it was just Boomers. This can be an important indicator on how tolerant Canada can be of a price correction since Gen X still has years for their equity to recover and won’t be forced out of investments.

    • David T. 6 months ago

      Tolerant on higher rates! Boomers and Gen X will need room to increase earnings, otherwise it’s the sacrifice.

  • Ron Bruce 6 months ago

    A CREA benchmark composite home would show an annual drop of 3.6% by April 2023. Home prices are then forecast to show compound annual growth of 4.3% for the following four years. The Canadian Real Estate Agency is biased by who they support – Real Estate Agents with fees. Realtors will assist in money laundering just to make a commission. A registered home inspector provided by Banks before a sale is complete might be the only honest opinion in the chain. At least the inspector can be sued for giving a false report – Fraudulent Misrepresentation – Criminal Code 361 (1). Then there are those aiding and abetting the closure.

  • Rene Albert 6 months ago

    Personally, I think a 50% price drop in housing is more realistic!

    • Kim 6 months ago

      It’s almost laughable that the brokers and the banks don’t want to admit reality.
      This is a normal fluctuating market and I expect the prices to drop by a minimum of 40%.
      I have 35 years experience as a real estate agent, and I’ve seen this several times before.
      I would think it would take at least two years before we get close to the bottom of the prices and then I think we’ll stagnate there and go sideways could be for 2 years could be for 10 years.

  • Alex Lapukhin 6 months ago

    I would have taken these forecasts with a whole lot less skepticism had they been able to predict past price increases with any degree of accuracy. Saying the same thing over and over again for close to two decades and hoping that it may eventually happen does not forecasting make.

  • Jul 6 months ago

    Canada’s gross domestic product is the same as New York’s. But property prices in Toronto are about 7 percent higher than in Manhattan, and property prices around Toronto are four times higher than in the suburbs of New York. In my opinion, you should expect a drop of at least 30 percent, and in the event of a balloon crash, maybe more

  • J 6 months ago

    Certain neighbourhoods in Toronto has already seen a 30% decline after 0.5% hike. Stock up on the pop corn cause it’s gonna get ugly when the latest 0.5% hits with another hike coming July 13th. GGNORE.

  • dave frazer 6 months ago

    Your probably on the ball. A 30 % fall in the next 12 months is quite possible. Buyers almost totally avoid purchasing when prices are falling more than 1% per month. They just wait for the bottom and most will still not buy at the bottom. They will wait a few months to make sure prices are rising again. Where the bottom is no one knows but we are already hitting 20 % in some areas and its just started. I dont know who the idiots are that are still making competing offers on a property but boy are thay going to be in shock shortly.

  • Poopse 6 months ago

    I hope you GTA and Vancouver Vancouver property investors filled your pockets full . We’re all going to pay for it across Canada for a looooooong time. Greed

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