Canada’s “Big Six” banks are now some of the country’s biggest real estate bears. Quarterly regulatory filings reveal their forecasts used for risk planning, and capital allocation. Despite seeing long-term value, just one Big Six has forecast home prices rising over the next year. Most don’t see a quick recovery either, with some expecting prices to remain lower 5 years later.
The Big Six Base Case For Real Estate
Financial institutions are required to produce risk scenarios to help allocate resources. It’s a part of IFRS 9 accounting standards, and includes macro forecasts. The forecasts are major indicators like GDP, unemployment, and oil prices. Today we’re looking at one of the big ones—home prices.
The risk scenarios are broken down into three areas—a base case, and two alternatives. Today we’re only looking at the base case, which is their working assumption. This forecast assumes things don’t boom or bust, those are alternative scenarios. Instead, things just work out as planned and we head down the most likely path.
RBC Is The Only Big Six Forecasting Higher Home Prices Next Year
RBC is the only Big Six expecting prices to rise in their base case scenario. The bank expects prices to rise 2.6% to $732,300 by next year, followed by 5.1% compound annual growth for the next four years. At the end of the 5-year forecast, a home would be around $893,500—about 25.2% higher than current prices.
Growth isn’t all that ambitious by itself, resembling a conservative index fund. However, when it follows record price growth, it’s an absurdly large climb. It’s definitely a sentiment that no other bank shares with RBC.
It’s worth noting that RBC has separately said they believe we’re only halfway though the correction. Taken together, that means they see prices falling sharply, then bouncing back. They actually bounce so fast in this scenario, it would have to reverse more than half the decline by next year. Ambitious, to say the least.
That’s it for big banks that see gains within the next 12 months.
National Bank Is The Second Most “Bullish” With A Sharp Drop
National Bank is the second most ambitious when it comes to growth, though it sees a contraction. The bank’s base case sees prices falling 9.6% over the next year. Following is an average of a 1.3% compound annual growth rate (CAGR) for the four years after. That would leave the price of a typical home at roughly $679,400, about 4.8% lower than the most recent numbers.
Even in the second most bullish bank’s forecast, home prices fail to recover within 5 years. Not very bullish.
CIBC Expects Canadian Real Estate Prices To Gain 2% Over 5 Years
CIBC is in third with its base case scenario, though it sees a stronger recovery. The bank’s base case scenario sees prices falling another 10.2% over the next year. It would then be followed by 3.3% CAGR, ending the 5-year forecast at $729,800—2.3% higher than the current price. Not the robust gain investors have in mind, but still higher growth than National Bank.
Scotiabank Sees Canadian Real Estate Prices Down For A While
Scotiabank’s base case doesn’t see a real estate recovery over the next five years. They expect prices to fall 12.3% over the next year, with 0.3% CAGR over the following 4 years. If applied to the benchmark, that would leave a typical home around $618,500 by 2028, or 12.3% lower than current prices. The bank’s forecast is notably the biggest drop remaining at the end of the 5-year period.
BMO Has The Most Bearish Real Estate Call, But A Sharp Recovery
The BMO base case forecast has the sharpest downturn over the next year, but sees a brisk recovery. Home prices are forecast to fall 14.0% by next year, with 5.2% CAGR over the following 4 years. At the end of the forecast, a typical home would cost $751,800—about 5.2% higher than the current level. It’s not a huge gain, but the deepest forecast correction bounces back fast.
Worth emphasizing that this is the base case—this is if nothing goes wrong with the economy. In the most likely scenario, all but one bank sees home prices falling over the next year. Higher interest rates are seen at least at this level through next year, limiting the odds of a bounce.
Go ahead and rise, people still can’t afford the. Only buys will be investors and money launders. Same old nothing changes.
Perhaps look at the positive. House prices are probably going down more and then flatlining over a few years. This gives you time to save up a down payment whilst not seeing prices rising faster than your down payment. Take advantage of it! Interest rates are higher, so your down payment can earn some interest. And by the time the interest rates drop and house prices start to increase you will be able to get a mortgage at a lower rate than currently on a lower priced house! And don’t forget the new First Time Home Buyers savings account!
It would be interesting to see how these banks arrived at these predictions. No one really knows what will happen, of course. Even if, as BMO predicts, home prices fall 14.0% by next year, housing is still not affordable for regular people in the GTA.
I have to wonder: will the price declines projected for the next year (2024) bring median home prices back to ‘affordability’ (i.e. a multiple of 3-5x’s of median incomes) for any given geographic area? It wouldn’t appear that way, so we’re still stuck with the same problem, yes?
Also am curious to see how the banks see the indicated ‘bounce back’ in prices even happening at all between 2024 and 2028 – particularly in light of the disparity from median incomes, debt-to-income ratios, and the OECD report of October 2021 indicating Canada’s economic growth will be dead last of all member countries for the next 40 years.