Canada’s housing market faces ‘historic correction’ that could see sales drop 42%, RBC says
Jul. 25, 2022
Canada’s largest bank predicts home prices could drop by more than 12% early next year and unit sales could drop 42% between early 2021 by end of next year, making it the worst slump since the early 1990s.
Canada’s housing market could be facing its biggest downturn in recent history, according to a new report from RBC.
After the price of residential properties soared during the pandemic — with some of the most expensive regions experiencing increases of 50 per cent or more — Canada’s largest bank is predicting that national home prices could deflate by more than 12 per cent early next year.
That decline would be larger than any of the four corrections the Canadian housing market has experienced in the past 40 years, said Royal Bank of Canada economist Robert Hogue.
“The economic landscape is rapidly becoming less hospitable for Canada’s housing market,” said Hogue.
The correction can largely be attributed to the Bank of Canada’s new-found monetary policy, which has quickly pushed interest rates to their highest levels since the aftermath of the 2008 financial crisis.
With inflation reaching four-decade highs and threatening to climb higher in the coming months, the Bank of Canada hiked its interest rates to 2.5 per cent in July, spiking the cost of borrowing for mortgage holders and prospective homebuyers.
Already, the market has shown significant signs of cooling. According to the Canadian Real Estate Association (CREA), the market slowed for the third straight month in June while home prices posted their largest monthly decline on record.
Home sales are expected to slump 23 per cent this year and 15 per cent next year, RBC said in its Friday report. That total decline — a drop of 42 per cent since early 2021 — would be higher than the 38 per cent decline the market faced in 2008 and 2009.
RBC expects the Bank of Canada to raise interest rates to 3.25 per cent by October, which “will send more buyers to the sidelines, especially in British Columbia and Ontario where affordability is extremely stretched,” Hogue said.
“It’s a big bite for borrowers to swallow that will spoil or delay home ownership plans for many buyers.”
British Columbia and Ontario will be the epicentre of this correction, RBC projects.
The study forecasts that home sales in the two provinces, where home prices soared during the pandemic, will fall 45 per cent and 38 per cent respectively, in 2022 and 2023.
The magnitude of that correction would rival the downturn Ontario experienced in the early 1990s, when home sales fell 41 per cent and prices dropped 15 per cent, though it would not be as bad as the 1980s correction in B.C. when sales fell 62 per cent and prices 27 per cent, said Hogue.
While economists have predicted a cool-down in the housing market for months, RBC’s forecast is among the most gloomy to come from one of the big Canadian banks.
Earlier this month, RBC also got out ahead of the other banks to predict a “moderate” recession across the Canadian economy in early 2023.
But while RBC is expecting a correction, it does not anticipate a total collapse in the housing market, Hogue said.
“We’d argue the unfolding downturn should be seen as a welcome cool-down following a two-year long frenzy that put a huge financial burden on many new homeowners and made ownership dreams harder to achieve,” said Hogue.
“While a more severe or prolonged slump cannot be ruled out, we expect the correction to be over sometime in the first half of 2023 — lasting approximately a year — with some markets likely stabilizing faster than others.”