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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