Canada

Most Canadian Real Estate Gains Will Be Wiped Out Starting This Year: Oxford Econ

Canadian real estate prices have already begun to see growth slow, but this is just the beginning. Oxford Economics is reiterating its forecast as factors line up to return affordability. They see home prices falling by 24%, wiping out most of the gains made since the start of 2020. The declines are expected to begin this year and go right into 2024 — a slow but sustainable process.

Canadian Real Estate Price Are Forecast To Fall by 24%

Canadian real estate prices are expected to begin their sharp decline this year. Rising rates, record un-affordability, and policies to curb demand and boost supply all contribute. As mentioned before, the firm previously forecast a 24% decline in home prices. So far the forecast sticks, as the economic environment returns to efficiency.

“After cresting in late summer 50% above their pre-pandemic level, we forecast home prices will decline 24% by mid-2024,” said Tony Stillo, the firm’s Director of Economics.

The forecast calls for a significant drop but not enough to wipe out all gains since 2020. Home prices increased roughly 50% since the start of the pandemic. Math-challenged folks may think that’s just half of the increase made. However, the rate of decline applies to a much larger number. A 24% price drop by 2024 would leave a gain of ~14 points since 2020.

That’s roughly 3.3% compound annual growth (CAGR) over the period. Not a bad increase by any means, but not the kind of growth many investors expect. Even with the price drop, affordability won’t be restored in any capacity, yet. We’ll circle back to this point, but first — why not intervene to prevent a market drop?

Canadian Real Estate Prices Can Fall Up To 40% If Delayed

No doubt policymakers are already being pressured to prevent any price drops. A wealth effect is when people spend more money because they feel rich. Rising home prices are believed to have boosted spending this way. Concerns that falling home prices may reduce consumption are valid. However, Capital Economics doesn’t see it being as significant as many assume.

“Lower house prices will likely have a modest negative effect on consumption, but we don’t expect it will result in a recession or undue stress on the financial system,” explained Stillio. “…should the price boom continue unabated, risks grow of a larger crash with dire economic consequences.”

In addition, market inefficiency is more likely to reduce consumption more than a reduced wealth effect. High inflation erodes consumption by forcing consumers to pay more for less goods. Younger, prime consumers, are also dedicating more of their income to shelter. This diverts from consumption and reallocates capital to those less likely to spend. It’s sort of a reverse Robin Hood scenario.

Longer economic inefficiencies also require much greater corrections to return to efficiency. They reiterated a warning that if home prices continue to rise, the fallout will be much worse. A drop of 40% and the risk of a financial crisis is what they previously stated the outcome would be. Falling home prices sound bad, but pushing a market to its absolute failure is even worse. The sooner a market corrects, the more quickly it becomes efficient. 

Canada Won’t Be Economically Devastated By A Real Estate Crash

It’s unlikely the Canadian economy would be devastated if home prices fall. Strong economic growth, a tight labor market, and (ideally) stable inflation, will help. Higher interest rates will cost high debt consumers more but savings will help.

“… we think the nearly $245bn (9.4% of GDP) in excess savings built up by households during the pandemic, along with significant pent-up demand, will continue to support strong consumer spending growth of 5.9% in 2022.”

Housing Affordability Index (HAI): Canada

Index (0.9 to 1.1 affordable range)

Source: Oxford Economics/Haver Analytics.

Canadian real estate prices still won’t be affordable with a 24% drop, but it’ll be a start. Price declines tend to drive speculators away and supply creation will help. Low home price growth will allow wages to catch up over time and affordability will catch up over time as well. This is otherwise known as a soft landing, and if you look at the above chart, you can see how ideal (and rare) it looks.

There are a lot of concerns about home prices falling but the risk of them not falling is much worse. The further concentrated an economy becomes on housing, the less flexible its response in a downturn. This leads to a greater chance of absolute failure that won’t respond to policy.

12 Comments

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  • Reply
    Anthony 4 days ago

    I have to disagree with the point that a drop of close to 40% won’t have an effect on the Canadian economy it’ll have a massive effect

    • Reply
      JEFF13 4 days ago

      Agree, these economists are funny…cannot connect the dots on how real estate has become our economy (or at least a very large part of it).

  • Reply
    RainCityRyan 4 days ago

    I love how smooth and perfect that graph looks going into the future. The past is all jagged and all over the place but the future is a nice soft glide for the next 20yrs.
    No lost decade, no over-selling, no bear/bull traps, no sir! We here in Canada like things smooth and predictable. /s

  • Reply
    Agent bob 3 days ago

    Property values went up by 25% in most areas of Ontario in the first 3 months of 2022 so prices will likely fall more than 24 % over the next year or so. Most buyers will hold back on purchases cuasing the market to fall further.

    Some areas like Cambridge ,as mentioned in another better dweling post, have already dropped by 40%.
    These drops will mostly affect investors and some unfortunate people that bought this year, however they have qualified for these mortgages so they can hold on. Most buyers over the lat 4 years have had to qualify at 5.25 % so even if mortgages do go up to that level they will be able to afford the increase in a few years.

    People may not have as much money from lines of credit to throw around but they can pay their mortgages based on the 30% of income standard.
    People may go on less trips abroad and spend their money here in Canada, which is a good thing.
    As stated another good thing is that investors may stop buying.

  • Reply
    Agent bob 3 days ago

    Property values went up by 25% in most areas of Ontario in the first 3 months of 2022 so prices will likely fall more than 24 % over the next year or so. Most buyers will hold back on purchases causing the market to fall further.

    Some areas like Cambridge ,as mentioned in another better dweling post, have already dropped by 40%.
    These drops will mostly affect investors and some unfortunate people that bought this year, however they have qualified for these mortgages so they can hold on. Most buyers over the lat 4 years have had to qualify at 5.25 % so even if mortgages do go up to that level they will be able to afford the increase in a few years.

    People may not have as much money from lines of credit to throw around but they can pay their mortgages based on the 30% of income standard.
    People may go on less trips abroad and spend their money here in Canada, which is a good thing.

  • Reply
    Agent bob 3 days ago

    Let the prices fall! It is best for most current and future Canadians.
    Most people will be able to afford mortgages up to 5.25% in a few years because that is what they qualified for.
    Two out of 5 new immigrants are considering leaving the country because it is unaffordable.
    We need some sanity brought back to the market.

  • Reply
    Hopeful1 2 days ago

    You’re making their point for them. Real estate is a false economy that draws investment away from real GDP wealth builders like exports and manufacturing. If its too much of an economy it hampers the growth of the real economy and we all fail long term. You can’t build a country’s wealth internally especially when out of control government debt guarantees increasing inflation and devaluing of our dollar.

  • Reply
    Rene Albert 2 days ago

    Investors are a major cause of extraordinary rises in home prices over the last few years. May they pay the price…

    And unfortunately, naive buyers who just couldn’t resist getting on the bandwagon will also get seriously hurt! Old adage…if it looks too good to be true, it usually is!

  • Reply
    Sidney 22 hours ago

    25%. That’s the down payment for the recent bag holders. Unless you’re dumb enough to have a below 2% CMHC down payment that is.

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