Earlier this year, Canada’s largest bank forecasted low home price growth. However, RBC warned risk was slanted to the downside which is now here. In the bank’s commentary on existing-home sales, they found the correction is spreading. As a result, the bank now expects prices to fall across the country over the next few months. Their low price growth forecast just got a double digit revision lower.
Canadian Real Estate Prices Are Dropping Fastest In Places With Recent Booms
Canadian real estate prices are falling at a faster and faster rate, as buyers pullback. The national aggregate dropped 1.9% in June, the biggest monthly decline in history. It follows declines in May (-0.5%) and June (-1.0%). RBC notes interest sensitive markets like Ontario and BC are leading the market lower. “Interest sensitive” is economist code for high priced markets without incomes to support it.
“The price correction is concentrated in Ontario where the MLS HPI fell in all markets last month—significantly so in cottage country, London, Woodstock, Kitchener-Waterloo and other areas that saw tremendous appreciation during the pandemic,” said Robert Hogue, assistant chief economist at RBC.
The Canadian Real Estate Price Correction Is Spreading
The correction is beginning to spread to other regions, notes the bank. They mention the HPI dropped in Winnipeg, Montreal, and Quebec City in June. They see this as a “turning point” for the market. “Calgary and Halifax may not be far behind with the index largely flat last month,” said Hogue.
It’s commonly heard in smaller markets. They justify home prices as relative to other cities. “Sure, it’s expensive but it’s way cheaper than Toronto!” What happens when Toronto is overpriced and begins falling thousands per week? Yep, you got it.
Over the past couple of years, price growth has increased fastest outside of expensive regions. This is clearly a sign of credit-driven growth, an issue organizations like the BIS say drove prices higher. As the credit driven correction cools markets, it’s unlikely to see cities like Halifax sell for more than Toronto. Credit based corrections tend to be broad as the cost of capital corrects.
Reduced credit stimulus has RBC seeing the correction as a more broad-based issue. “These developments fit our view that property values will come under increasing downward pressure across Canada over the coming months with pricier markets on the front line of that trend,” he noted.
Canada’s Supply and Demand Pressures Are Easing, Market Nearly Balanced
The Bank of Canada (BoC) this week said rates were climbing to help ease excess demand, and RBC seems to agree. Hogue notes existing-home sales fell 5.6% in June, and are 27% lower than February 2022. At the same time, inventory has climbed slightly pushing the market into balanced.
“…[this has given] buyers more options to pick from—and significantly reducing the degree of competition between them,” he says.
Higher rates and reduced demand help cool price growth. It’s a predictable outcome, just like low rates stimulate demand and price growth.
Canada’s Real Estate Correction Is Just Getting Started
RBC sees the correction as just getting started, and will put a pin in some buyer plans until prices fall. June numbers are obviously not impacted by this week’s rate hikes. With mortgage pre-approvals securing rates for months, it might be a while before the market sees the whole impact. As higher financing costs work their way into the market, a further slowdown is expected.
“The outsized 100 basis-point rate increase the Bank of Canada delivered on July 13 will no doubt chill the market even more in the coming months. Higher mortgage rates will spoil or delay homeownership plans for many buyers, especially in British Columbia and Ontario where affordability is particularly stretched.”
RBC Revises Positive Real Estate Price Forecast Deep Into Negative Territory
Hogue expects the BoC to execute on its plan to move rates above the neutral rate. This would produce a slightly restrictive economy, designed to bring prices lower. He sees this happening as early as this fall, and it “… will deepen the correction in both provinces, and broaden it to other parts of the country.”
Consequently, RBC in passing revised its existing-home sale forecasts. They see the volume of existing-home sales falling 34% and the national HPI dropping 13%, by early next year. Just a few months ago their filings showed a 4% increase for prices, but they did warn risk is slanted to the downside. A 16.6% swing lower is a heck of a revision.
The previous forecast shows the maximum drop to be around 30% in their adverse scenario. It’s unclear if the recent revised expectations means a change for this next quarter. The economy could just be playing out towards the downside, but we’ll have to wait and see how that evolves.
In the coming weeks it would be surprising not to see other banks revise their forecast. Risk happens fast.