Canada’s largest bank sees much higher home price growth in the near future. RBC shared the update to their national home price forecast for 2021. The bank now expects prices to grow almost twice as much as they previously thought. In their previous forecasts, they had expected significantly more government action. With no new policy tools, the market will be left to manage itself. This may take longer, since they didn’t just leave the market alone — they added more demand.
Canadian Home Sales Now Expected To Rise 16%, Double The Previous Estimate
Canadian home sales are being revised much higher for this year. Sales are expected to reach 636,700 units in 2021, up 16% from the year before. This is a massive revision from the 588,300 home sales they had forecast for this year, back in January. An 8.22% increase in home sales would be scorching hot growth. This is just the upward revision from less than half a year ago.
They expect things to cool down as the year goes on, as well as a sharp drop in home sales next year. Home sales are now forecast to fall to 505,300 for 2022, down 21% from the forecast for this year’s sales. A sharp drop does lead to a different makeup in revenue for a whole industry. However, these sales numbers are still higher than 2018 or 2019 sales. Down compared to the pandemic boost, but still substantial.
Canadian Home Price Forecast Revised Much Higher
The bank has also made a substantial revision to its home price forecast. The typical home is expected to rise to $697,400 in 2021, using the RPS House Price Index (HPI). This represents an increase of 13% from 2020, up from the previous forecast of 8.4% they made in January. Next year’s growth is expected to fall to 3.3%, as the number of sales continues to fall. However, this is still a surprising amount of growth after the amount of pulled forward demand we just saw.
If you took a peek at their macroeconomic assumption forecast, this is a little different. This would be the equivalent of the base case scenario. We won’t get the worst case or best case scenarios until the next quarterly filings.
RBC Revised The Forecast Based On Government Inaction
The bank didn’t mince words when it came to why they revised this forecast — government inaction. “Canadian policy makers mostly ignored calls for forceful action,” said RBC senior economist Robert Hogue.
Policymakers are treading lightly, relying on the expansion of existing programs. Measures that may have an impact include: the Canada-wide 1% tax on vacant, non-resident owned residential property; the tightening of the mortgage stress test; and the welcome addition of supply.
The expansion of the First-Time Home Buyer Incentive in Toronto, Vancouver, and Victoria was a sticking point. Canada had been warned by the IMF that programs like this would only push prices higher. RBC appears to agree, saying it, “will only further stoke demand.”
Self-Correcting Forces Will Take Much Longer
The market lacks a disruptive policy catalyst, like the introduction of the foreign buyer taxes in BC or Ontario. RBC feels this will leave the housing to rebalance using the market process. Rising interest rates, deteriorating affordability, mortgage stress test, and the economic reopening are factors that will work to cool. Together these factors will cool housing using market forces.
RBC also expects high home prices to be the biggest factor in cooling the market. As home prices increase, more sellers are expected to cash out, and reap some of those profits. When prices rise too high, qualified buyers tend to drop out. At the same time, sellers face more incentive to list a home for sale. Until inventory outstrips sales, they don’t expect price growth to cool, but see it rising.
It appears RBC expected more demand-side cooling pressures, but nothing significant materialized. They actually went the other way technically, implementing demand incentive schemes. Market forces keep trying to cool things down, but that doesn’t appear to be where Canada wants the market to go. This isn’t too much of a surprise considering the scramble to push home prices higher last year.
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