National Bank of Canada Tells Investors They’re Preparing For Real Estate Price Drops

Another Big Six bank has notified investors they’re prepared for falling home prices in the near future. National Bank of Canada (NBC) notified investors last week the bank has revised its outlook based on data up to Oct 31. While some indicators had surprising improvements from the previous forecast, some have revised lower. In all scenarios, including a surprisingly good one, the bank expects real estate prices to fall. 

Forecasting Scenarios

Forecasts for analysts are a little different from consumer forecasts, because they have multiple scenarios. Instead of one straight-forward answer, risk professionals prefer to look at a base case, along with at least one upside and downside. The base case is the scenario they believe is likely to unfold with the current information. Conditions change fast though, so they typically include a list of things to watch for, in case the picture gets better or worse. 

The scenarios are fairly self-explanatory, but let’s go over them anyway. In the base case, the assumption is we continue the modest recovery that we’re seeing, without a hiccup. The upside would see a rapid deployment of an effective vaccine, and monetary measures contain any downside. The downside includes a delay in deployment of an effective vaccine, and/or fiscal measures aren’t effective. All three scenarios aren’t outrageously outlying in any way.

Canadian Real Estate Prices To Fall Over 5% In The Base Case

NBC’s base case scenario sees a modest price decline over the next 12 months. The bank sees home prices falling 5.2% over the next 12 months. In this scenario, other cofactors are GDP making a substantial climb of 3.0% in this period. They also see unemployment at 8.9%, which is inline with what RBC forecasted last week. This base case is just a little smaller than Canada’s largest bank is expecting, as well as the CMHC

National Bank of Canada Real Estate Price Forecast

NBC’s national real estate price forecast based on risk scenarios.
Source: NBC, CREA, Better Dwelling.

Canadian Real Estate Prices Expected To Fall 1.5% Optimistically

The upside also sees Canadian real estate prices falling, but not as much. In an upside scenario, the bank is forecasting a price decline of 1.5% over the next 12 months. In the upside scenario, GDP grows by 3.7% over the same period. Unemployment also settles at 8.4%, significantly higher than last year, but a big improvement. Recessionary levels of employment and GDP in an optimistic scenario, only translate to a small price drop. 

Canadian Real Estate Prices Expected To Fall Almost 10% In A Worst Case

The downside scenario sees Canadian real estate prices falling at almost double the base case. Home prices are forecasted to fall 9.9% over the next 12 months from October. GDP would make a very small decline of just 0.4% in the same period. The unemployment rate also increased to 10.4%, almost double the rate last year. The downside decline is similar to what other non-vested risk firms have forecasted.

The forecast for price declines isn’t far off from RBC’s last week, the CMHC, or other risk agencies. These numbers are for national declines, and likely mean markets that are most overvalued are likely to see bigger drops, while undervalued markets may see little impact. 

Declines might seem unusual at this time while record real estate sales are happening. However, most risk agencies, and even the BoC, said they don’t see mortgage defaults or price drops until next year. 

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  • Marc 4 years ago

    9% national. So everything increases, and the City of Toronto drops 20%? Because crap’s already hitting the fan there, while the country inflates with government backstops.

  • Ian 4 years ago

    Divergent values. The premium of being in a big city is rapidly going to vanish as Canada’s most valuable company pushing work from home isn’t just a cost cutter for their overhead, it essential disrupts the real estate market.

  • The Truth Shall Set You Free 4 years ago

    Interesting how when the CMHC made a statement regarding home price declines they were crucified for it by everyone including the big banks and now the big banks are reversing course with their forecasts (otherwise known as predictions) to fall in line behind the CMHC. I’m interested to see how the various real estate boards are going to twist this data to turn this positive.

    • David 4 years ago

      Evan Sidall who quits CMCH this month had nothing to lose this year and spoke his mind. Of course, that’s betraying all his colleagues and former acquaintances (bankers, RE agents, politicians). They did not like it for sure; this is a mafia family.

  • Average Man 4 years ago

    Genuinely thrilling. Let the bodies hit the floor.

    (An aside: has anyone heard the theory that “Let the Bodies Hit the Floor” and “It’s Raining Men” are about the same incident told from two very different perspectives?)

  • Pepp 4 years ago

    They should not allow people with multiple residential properties to defer mortgage payments.

    That was the biggest mistake the government made, or it was probably intentional.

  • straw walker 4 years ago

    The citizens of most counties when asked, see real estate as the #1 investment…That is seen as a much better investment than the US dollar and gold.
    It will be hard to break this theory. unless rates move higher

    • Shah 4 years ago

      Agreed because it makes sense.
      There are so many people holding cash to jump into the market, so even if it falls a little bit, it will quickly rise again because you know they say ‘buy when market is down.’

      People should stop dreaming that prices will decline drastically, however they can totally dream that annual increase in prices might be less than 2-4%.

      • SH 4 years ago

        If that were true, then no housing correction would have ever happened in the history of the world.

  • SH 4 years ago

    These statements are only being trotted out as a pre-emptive strike so that government will think of more ways to subvert capitalism to prop up this gasbag.

    They don’t want Trudeau to get complacent in his mission to transfer money from Canadian wage-earners to foreign real estate speculators.

  • nfar 4 years ago

    Not going to happen if we open our doors to Hong Kong residents.

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