RBC’s “Worst Case” For Canadian Real Estate Is A Price Drop of Nearly 30%

Canada’s largest bank is prepared for price drops most would find unthinkable. Royal Bank of Canada (RBC) filings show possible risk scenario forecasts. Over the next year, the base forecast shows virtually flat growth. In a best case scenario, growth would hit levels similar to previous years. In a worst case, they forecast prices can make the biggest drop since the early 1980s. 

Macroeconomic Scenario Assumptions

Quick intro to IFRS 9 macroeconomic assumptions for people that aren’t in finance, or aren’t secret finance nerds. IFRS 9 is a financial reporting standard used by most of the world’s banks at this time. One of these standards requires an assessment of risk, using unbiased and possible economic outcomes. Typically three  macroeconomic scenarios are used: a base, best, and worst case scenario.

The base, best, and worst cases are what they sound like. The base case is the average scenario you currently expect. The best case is an ideal projection, if everything is perfect. The worst case is the most severe outcome you can realistically expect. The organization needs to be ready for each one of these scenarios.

The forecast numbers are important for each organization’s preparedness. Too optimistic, and just a few impairments can result in serious damage. Too negative, and you’ll be putting aside way too much capital, placing a drag on company growth. These aren’t just random numbers, they’re considered reasonable outcomes. That said, let’s look at their real estate scenarios.

Base Case: Canadian Real Estate Prices Are Flat

The base case isn’t as ambitious as most would guess, and it’s actually quite modest. The bank’s forecast sees prices rising 0.6% over the next 12-month, with the numbers starting in October. They expect compound annual growth of 4.5% for the following 2 to 5 years. Basically, they see the market as flat in this scenario.

RBC’s Canadian Real Estate Risk Scenarios

RBC’s macroeconomic scenario assumptions for Canadian real estate prices under various risk scenarios.
Source: RBC, CREA, Better Dwelling.

Best Case: Canadian Real Estate Prices Rise 6%

The best case sees lower price growth than we’re currently seeing, but not far off. This ideal scenario would see home prices jump 6.1% over the next 12 months. That would be followed by compound annual growth of 11.1%, which is pretty big. It just might not seem huge in comparison to the past few years. 

Worst Case: Canadian Real Estate Prices Fall Almost 30%

The worst case scenario is much larger than most banks have acknowledged, but is similar to Moody’s worst. The bank forecasts a national price drop of 29.6% over the next 12 months in this scenario. Compound annual growth of about 2.9% would follow in the next 2 to 5 years. Canada hasn’t seen such a significant decline at the national level since the early 80s.

Earlier this month, RBC’s chief risk officer said he was putting more weight on the downside scenario. However, he didn’t use the 29% price decline seen in this economic risk forecast. Instead he said they expect prices to fall around 7%, and remain depressed until late 2023. Reading between the lines, it sounds like they are internally forecasting a worse than expected outcome, but not the worst scenario they’ve prepared.

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  • Trader Jim 3 years ago

    Before everyone freaks out, you need to read the last paragraph. I look at risk scenarios all day, and if this was a trade, what it’s saying is you’re risking 30 points to get 6 points in gains.

    If you were investing, you probably wouldn’t take that trade unless your only other options were losing 30 points to get a 5 point gain, and you were forced to allocated.

    • Karen Wilson 3 years ago

      When can we get an options market to help us price in real estate prices? 😂

      • Kyle 3 years ago

        It exists. That’s what condo presales are. haha.

        • Correcting Everything 3 years ago

          Condo pre-sales are futures, not options. You have to close, or sell the contract.

          • Erik 3 years ago

            You can technically let them expire worthless and not show up, which is what some foreign buyers have been doing at some projects. So technically that would function as an option.

    • Cheryl Schumaker 3 years ago

      I was thinking real estate would hit a high, I was hoping that real estate would plunge given that we can now have businesses in our homes as most of us will be working out of our houses so everybody will want a house now

  • Fazid 3 years ago

    Manhattan rents are falling to almost Vancouver levels. Vancouver must have a bunch of high paid Wall Street types filling up the towers.


    • Liam 3 years ago

      Real question. I live in the city, and my job said I can work from home. I’d like to live in the city, but my options are pay a massive premium for space that doesn’t provide a higher income, or move to a smaller city?

      I don’t see why anyone would stay unless prices take a deep dive in Vancouver.

    • Travis Hunter 3 years ago

      Also Biden risk. If people moved to Canada because of Trump, what happens when Trump is gone and their real estate prices are cheaper?

    • Winnie The Pooh 3 years ago

      Vancouver feels like San Francisco. Rents are falling, because work from home is sending renters to anywhere. But buyers really believe work from home is temporary, so prices are still rising.

      Who’s going to be right? God knows. It’s going to be interesting to see how the tech-ification of every industry changes things though. As things transition to digital first, people will shift.


  • Quan 3 years ago

    RBC’s chief of risk is a smart guy, and I’d agree. It’s going to surprise people lower, but it won’t be the end of the world. Canada would let inflation murder people’s families before it let banks take on that kind of loss.

    • Quan 3 years ago

      I should add, these declines are going to be in the city. People lost their local businesses and jobs. They have an expensive house they can live off of. The smart thing is to sell it and move to a smaller city.

  • Michael 3 years ago

    So worst case, prices go back to 2016 levels. Not an unrealistic outlook given current circumstances.

    • DownToFinance 3 years ago

      Not a snowball’s chance in fiery hell the BOC and the Gov would allow RE prices to crater 30%. We would see massive bailouts to homeowners before that kind of price drop materializes. No Canadian Government would allow the fragile Canadian home owner (voter) to suffer that kind of loss after pumping RE for years.

      • WordontheStreet 3 years ago

        That might be true if ONLY homeowners could vote.
        But what about all the people who don’t own homes? They’re a sizable voting block too.

      • Home buyer 3 years ago

        I think the measure would be more along the lines of allowing longer amortizations vs keeping prices up. The key driver for price growth is always demand and the only way to completely control price is to buy houses directly.

        • guy person 3 years ago

          There is more than one way to skin a cat.
          Sometimes its better to think of what is happening to the supply and demand of money then consider how it affects the real estate market. If the D curve for money remains the same, but S shifts outward due to money printing or low overnight lending rate, then quantity of D increases as there is a movement along the D curve (NOT A SHIFT). Supply of money in turn has a direct effect on the demand curve for real estate. Higher QofD for money translates to an outward shift in the D curve for real estate. Houses are not directly purchased by the BOC, but the BOC certainly is controlling the prices. Ceteris paribus, if BOC raised interest rates by 200 basis points over a couple years it would tank the market. If they wanted to drop interest rates into the negative then it will support current market prices (given COVID, if they wanted to increase RE prices they would likely need to use more QE so the gov can buy more mortgage-backed securities to counteract the left shift in money supply due to decreased income).

      • Rene Albert 3 years ago

        Massive bailouts will be ending soon…don’t count on it!

      • idan11 3 years ago

        Wrong – now THEY don’t care about voters anymore.
        Read the NEWS –
        Liberals want weekend voting, mail-in ballot changes to be ready for possible pandemic election

        From article
        “…up to five million electors would opt to vote by mail, a dramatic increase from the nearly 50,000 in the 2019 federal election…”

        Good luck, Canadian Voters!

      • Bob Walter 3 years ago

        So you’re proposing the market/government is responsible and has a moral compass by not letting values drop 30%.

        If you reverse that position, what responsible market/government with a moral compass would let house prices triple over the last 15 years, while incomes did not rise same amount?

        What responsible government would take extreme measures to pump up the bubble in 2008 while the US bubble was deflating?

        I would argue all the signs are of irresponsible government, and that when the ball drops such a government would be just fine with a drop of 30%. Why would they bail you out, the banks have already gotten their money and packaged up your mortgages into derivatives and sold them on the global market.

        • guy person 3 years ago

          I think he is suggesting that the government lacks the moral fibre to allow prices correct to healthier numbers. Thats how I am reading it anyway.

      • Frederick Davey 3 years ago

        The 30% loss is only if you sell, and many people saw greater than 30% gains over the years that they’ve held principal homes in large centers. As someone who watches from a less prosperous region who pays more in relative tax I have a hard time imagining my tax dollars subsidizing some millionaires because they might lose a portion of their millions.

      • Shane 3 years ago

        The vast majority (over 80%) of homeowners only own 1 property, so a price drop is some great news for them. Think about it, I own a 400K home, but I’m interested in an 800K home (which I can not afford). If prices drop 50% (my home will be 200K and the other home 400K), I now need to add only 200K instead of 400K in order to upgrade. It’s a win-win.

        Another (huge) group that will benefit is the first time homeowners and the new(er) generation.

        The only people who lose are those who own multiple properties…And they don’t really need our pitty (at least not as much as the other groups I mentioned).

  • straw walker 3 years ago

    I wonder if the rush to buy real estate was because of the new ownership transparency law that is now being enacted.

  • fred 3 years ago

    Yes , in normal situation , But when Bank of Canada printing money more than any other countries in G20 , and interfering the market by cutting interest rate to zero and , negative rate while inflation is well above %10 , i would say the price will go up another %20-%30 just in 2021
    Plus the whole economy is not functioning , imagine you have 2-3 million in cash where do you put your money? I would say the best place is real estate, That is why i think the price goes up not down.

    • Canada is broke 3 years ago

      Yah cause you know, the avg CDN family has 2 or 3 mill sitting around HAHAHAHAHA meanwhile hundreds of thousands are crying cause they dont have 2k to pay back CRA, $2,000…….seriously, hundreds of thousands have deferred credit cards and mortgages, home ownership is the highest in G7. Immigrations has cratered.

      Investors are still negative cashflow who bought in last 2, 3 4 years? How many thousands of renters stopped paying…..

      provide facts, your imbarassing yourself sounding like another entitled Cdn….nothing but a house, debt and hands open….

      Take a drive through the average neighborhood, how many cars do you see. We have rooming houses on every corner in richmond hill, markham….Brampton is more expensive than parts of Hawaii. PLEASE! wake up. And Il still to majority of my wealth in stocks. From buying since march/April lows, Im up on avg 30% – 100 perent depending on asset class….

      who cares where house prices go…unless your broke or all eggs in it =)

      • Erik 3 years ago

        It’s spelled “embarrass”. Low interest rates may turn into negative interest rates. Real estate is like 20% of Canadian GDP…. Just because you want it to happen, doesn’t mean a 30% correction will happen…

        I hope it does though 😬🙃

    • Marc 3 years ago

      People forget they printed a lot of money in the early 80s too, and immigration was high. Didn’t matter. People didn’t want to live in Montreal because of the costs, and the capital of finance shifted to Toronto. It can happen again.

  • fred 3 years ago

    If they enforce AML in real estate the whole economy will collapse.

  • Joe 3 years ago

    The economy is flooded with money coming from all the support the government is pumping into the economy. But take for example the regular family who owns a home and who has both parents still working their normal office jobs, just working from home. Do they actually benefit much from all these support?

    1) They will be saving more since holiday/eating out/commuting expenditures have decrease
    2) They will be benefitting from the low interest rates if they were to refinance for at a lower rate.
    3) If their property is in the city (e.g. Toronto), they can probably still sell it for a decent price and get a bigger space outside the city even with the downward pressure on condo prices now.

    I would say the reasons why house prices are increasing is driven by the following:
    1) Rents are falling and mortgage rates are low so it makes more sense for renters to buy now
    2) Mortgage deferrals are putting a backstop for people who lost their incomes and need to sell.
    3) Possibly, some investors made profits off the equity market run up since the lows in March/April and now looking to invest in RE.
    4) Anticipation that immigration levels will be elevated once pandemic passes over, so people are buying real estate.
    5) Falling mortgage rates make upsizing to a large home more affordable

    For 2021, the only downside I do see is that mortgage deferrals will expire and there might be a surge in listings but with mortgage rates remaining low, I feel that there is enough demand to absorb this supply. There may be some pullbacks in prices in suburbs when people start returning to work in the city but I don’t feel like this will be too much.

    I recently sold my property and will be renting for a while so of course my hope is that the real estate market will tank but I am not too optimistic about that happening at least in the GTA (for houses) where most home owners seem to have enough cushion to absorb any temporary loss in income. For condos, I do see them continue to fall at least until the vaccine is widely available.

  • Bob Walter 3 years ago

    It’s a bit of a nonsense number 30%.
    Where does that bring prices, to the level of 2017?

    2017 was already well into bubble territory,
    you would have to drop to the prices of 10 years ago to get any semblance of a better valuation.

    • The Truth Shall Set You Free 3 years ago

      Around 2005 is when home prices started to blast off. When home prices start to correct (not just condos but all sectors) which will be around May/June 2021, they will slide back to around where they were early 2000s which will put them back around where home prices were roughly 4-5 times yearly average family income levels (which is where they were historically).

      • John Gibbons 3 years ago

        Wow if you actually believe that I feel sorry for you. I’m a real estate bear but that line just screams “I want a house but can’t come close to affording one”.

  • George 3 years ago

    Same bank predicted in 2014 that the house prices will go down 18%. Insread, ever since the prices more than doubled.

    • Taryn 3 years ago

      No, they forecasted oil regions prices would crash. Some oil cities are down 30% from then.

  • Kate Payler 3 years ago

    I hope home prices do fall by 30% or more. The market is so way over priced that homes are listed for sale at a reasonable price and then bid up tens of thousands of dollars more. The average Canadian can no longer afford to buy a home if they do not own one now they never will or have massive huge mortgage then when interest rate go up they will be forced into bankruptcy.

  • Giant bill 3 years ago

    Do not make any judgement before you get all information. We don’t know what is going to happen next year, neither they tell you. We don’t have any data. There must be some reason, we don’t know, but they do know. If printing money can resolve the financial issue, then we don’t need work.

  • fred 3 years ago

    Do not be worry bank of Canada is here to bail out The real estate market as before , Because is too big to fail.

  • CD 3 years ago

    I really would just love to see a lot of smarmy real estate agents and other industry parasites out of work.

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