Canada

Scotiabank Cuts Worst-Case Scenario For Canadian Real Estate, Sees Higher Price Growth

One Canadian bank doesn’t see home prices coming down anytime soon. Scotiabank shared their latest risk forecast in their Q2 2021 earnings. As of April 30, 2021, the bank sees a better outlook than they did in January. Home price growth is forecast to accelerate in the base and best case scenarios. As for the worst-case scenarios, they only expect a small decline in one of them.

Macroeconomic Scenario Assumptions

Financial organizations are required to disclose risk using unbiased and realistic outcomes. They do this by forecasting various macroeconomic indicators, such as home prices. Generally, the forecast is broken into a base case, best case, and worst-case scenarios. Scotiabank does it similar to other banks, but they do one extra risk scenario. Gosh darn keeners.

The base case is what the bank expects in the event of a v-shaped recovery. It’s the scenario they believe is most likely to occur. The best case, or “optimistic,” scenario is if things go much better than planned. The worst case, or “pessimistic,” scenarios come in two flavors — regular, and front load.

The pessimistic scenario is similar to other bank risk forecasts, which have a drop in the rate of growth. It’s then followed by gradual increases in growth over the next few years. The front load is more like a shock scenario, where the losses occur relatively fast. It’s then followed by a sharp recovery in growth, also called a v-shaped recovery. Instead of the economy making a v-shaped recovery, home prices do in a front load scenario.

Canadian Home Prices Rise 7% In The Base Case

The base case scenario sees big growth this year, with a taper in future years. At the forecast date, they see home prices rising 7.5% over the following 12-month period. This is a significant acceleration from the 4% growth in the January numbers. Prices would slow down after the boom in this outcome.

The remaining forecast period would see smaller, but still positive growth. Expected is 2% growth over the following medium-term (2 to 5 years usually). This is a mild acceleration from the 1.7% growth they expected in January numbers. Modest growth over the next year, with prices moving with inflation afterward. The target for inflation, anyway.

Canadian Home Prices Rise 9.2% In The Best Case

In the best case scenario, the bank doesn’t quite see double-digit growth, but it’s close. Home prices are expected to rise 9.2% over the next 12-month period. Back in January, the best case scenario was almost half of that number, at 5.3%. This would mean a very sharp acceleration would happen.

The remaining forecast shows modest growth and higher expectations. They see 4.2% growth in the following medium-term. Back in January, the remaining forecast was only 3.1% for this segment. A little more acceleration on this one as well.

Canadian Home Prices Are Flat In The Worst-Case

The worst-case scenario doesn’t see price drops. Instead, home prices would stagnate. The forecast shows 0.4% growth over the next 12-months. In January, they had forecast home prices would drop 6.6% in the next 12-months. Scotiabank doesn’t really see much of a worst-case scenario as a possibility.

The remaining forecast period is expected to follow with fairly brisk growth. They see home prices rising 2.9% in the following medium-term. This one is interesting since they had forecast growth of 4.2% back in January. While the more immediate forecast improves in this scenario, the medium-term is dampened.

Home Prices Make A Modest Drop In A Front Load Scenario

A front loaded worst-case scenario would see a much sharper drop in the near term. Home prices would make a 5.9% decline over the next 12-months. Back in January, they had seen a 12.6% home price drop as a possibility in the worst-case. The odds of home prices falling significantly are slim in their opinion. The size of the drop is also much lower than what some other banks see in a downturn.

The front load scenario, once again, does see all of the bad news up front. That leaves the remaining forecast period with 4% growth in the following medium-term. January had seen 6.4% medium-term growth, so there is price growth deceleration. This occurs in both worst-case scenarios. However, the front loaded scenario sees 30% higher medium-term home price growth.

Scotiabank’s risk forecast shows they expect a much more tame market over the next year. The best case scenario shows about half the rate of growth the market is currently seeing. As for the worst-case, a fall in home prices would be relatively small in their opinion. Even in the front loaded scenario, the declines are retraced in less than two years.

It’s a little unusual to see such a divergence on downside risk. BMO and RBC both see a worst-case drop of nearly 30% in a downturn. Even that wouldn’t be able to fully roll back price growth in major cities like Toronto and Vancouver. However, it’s still 5x larger than the worst drop Scotiabank sees occurring. In other words, the bank sees a lack of housing affordability stretching for a few more years.

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21 Comments

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  • Ian Brown 4 months ago

    I like these bank forecasts that are like, “well, prices increased 50% this year, so they’ll probably only increase another 10% next year. Otherwise, it’s unreasonable”

    • Doomcouver 4 months ago

      This is just bank analysts trying to justify their existence by pulling a number out of thin air. They didn’t see the 2008 crash coming, and banks won’t see the next housing crash coming either.

  • Omar 4 months ago

    When RBC and BMO both move their forecast to a maximum downturn of 6% too, then that’s when I’ll see the possibility of home prices falling. Until then, there’s too much focus on falling home price growth for it to happen.

    • Trader Jim 4 months ago

      This isn’t totally wrong. If you knew risk was coming, you would mitigate it.

  • Vince Fornelli 4 months ago

    Finally, a bank with some sense. There’s no way home prices are falling. It’s too much political liability. Morneau screwed up, now they have to deal with the 30% gain over a year.

    Ridiculous? Yes. But don’t give taxpayers money, and expect it back. People were mad after they were told they incorrectly claimed CERB, and complained about it until they let them keep the money. Now expect that with a whole country.

    • Jason Chau 4 months ago

      What an epically bad take, my friend. All the best to you.

    • Doomcouver 4 months ago

      Canada’s housing market is too big to bail. If the price trend reverses direction, the Government of Canada will be as powerless to stop the crash, just like they were powerless to stop the run-up.

  • WE 4 months ago

    If home prices don’t fall, the current cap rates don’t make sense. This means all rents need to adjust higher.

    Rents would need to adjust to the level of home price carrying costs, since homes absorbed the slack in credit.

    If you think inflation isn’t right now, wait until you see how it looks in a few years when a waiter has to pay $3,000/month rent, and a grocery clerk needs $30/hr to support new home prices.

    People complain about higher minimum wages, but they have no clue what they’re in for soon.

    • Whiskey Foxtrot 4 months ago

      It’s already here in Toronto. Every new employee that moves to the city needs to ask for 10% or more per year now. At my work they do income equalization within a tolerance.

      It’s hard not to escalate costs in this kind of environment. People are also making more than they thought they would, but the quality of life is also significantly lower.

    • Doomcouver 4 months ago

      Where have you been for the past decade+? Cap rates have been trash in the main cities in Canada for ages now. Landlords are expecting a wind-fall every year on capital appreciation and will accept extremely low rent just to offset their costs. That’s not going to change just because prices have gotten even more ludicrous.

  • Pat 4 months ago

    no idea WHO the F to believe, they NO NOTHING, NO ONE KNOWS anything to be honest.

    • Whiskey Foxtrot 4 months ago

      It’s honestly hard to find this, because you have no idea how dumb someone can get in office. It’s best to just move to a place with more reasonable outcomes. This is now the second Trudeau to cause a housing bubble and inflation crisis.

    • Doomcouver 4 months ago

      Exactly how much longer can a deeply irrational asset market remain irrational? Anyone who claims to know is kidding themselves. It’s all guesswork and speculation really.

  • Patrick L 4 months ago

    To the moon, baby. I can’t wait until my town house in Hamilton is worth more than a mansion in Malibu.

    Who needs the perfect views and great weather, when I can just look at perpetual roadside construction. So much more satisfying.

    • Doomcouver 4 months ago

      Heck you don’t need to go to Malibu. Just do like all the McMansion owners in Vancouver do, plant a perfectly good palm tree, and watch it shrivel and die because you spent twice as much to live somewhere half as nice.

    • Sam 4 months ago

      Ahhhh…the beautiful hum of kakakakakaka! Take a deep breath of concrete dust and asphalt paving fumes….! Smell the wonderfully fresh slaggy smoke of steel manufacturing…..! Go on a rousing tour of scooter-watching…..

      Btw, I lived in Hamilton and my kids still do. Love the city. My parents live in Sarnia. I love that town too. The underdog character, community…hate to see the affordability erode.

  • Patrick 4 months ago

    Demand is way too high compared to supply. Thus the prices will never fall.

  • Sammy 4 months ago

    that is alright! Keep it going !!! we are about to sell our detached home in Canada and leave for Europe.

    • Marko Von Marcovich 4 months ago

      You do realize that other than Spain and a handful of other countries Canadian real estate is beyond cheap compared to the EU right?

  • Crazy Canuck 4 months ago

    Sounds like they secured boatloads from wealthy investors to buy Canadien real estate. To the people who don’t owe homes just remember you will still have to pay your taxes while the wealthy park their money and pay no taxes. Also people who have had huge gains still pay low property taxes.

    • LT 4 months ago

      I’m glad RealAnon showed up to tell us a bank giving a moderate forecast is really an agenda to lower prices so they can scoop up all the houses. I know if I got unlimited free money to lend people money to buy homes, I would want to not use it and just borrow from other people to buy homes.

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