Canada’s largest bank has downgraded its outlook for the housing market and now forecasts a “historic correction,” worse than any national decline seen in this country in the past 40 years.
Soaring inflation has put the Bank of Canada on a course of aggressive hikes that will take its policy rate to restrictive levels by the fall, wrote RBC assistant chief economist Robert Hogue in the report that came out Friday.
“This will send more buyers to the sidelines, especially in British Columbia and Ontario where affordability is extremely stretched,” he said.
RBC now expects home sales to fall nearly 23% this year and 15% next year, and national benchmark prices to drop more than 12% from peak to trough by the second quarter of 2023.
The 42% drop in home sales from the peak in early 2021 will exceed the declines seen in the past four national downturns, Hogue said. In 1981-82 and again in 1989-1990 sales fell 33%; they fell 38% in 2008-09 and 20% in 2016-2018.
The 12% decline in prices by early 2023 will be the steepest correction in the past five housing downturns, he said.
The housing correction first began to take hold when the Bank started to hike rates in March, but the 100-basis point-rise on July 13 — an increase that brought variable rates within sight of fixed rates — will speed the cooling, Hogue said.
RBC expects the Bank’s policy rate to reach 3.25% by October — “a big bite for borrowers to swallow that will spoil or delay homeownership plans for many buyers.”
The most expensive provinces, Ontario and B.C., will be the epicentre of the correction, says Hogue. RBC sees home resales in British Columbia and Ontario falling 45% and 38% in 2022 and 2023, respectively, and prices falling more than 14% from quarterly peak to trough. The downturn will rival the decline Ontario saw in the early 1990s when sales fell 41% and prices 15%, but it’s not as bad as what B.C. went through in the early 1980s when sales fell 62% and prices 27%, said Hogue.
More affordable areas of the country should fare better. While sales are expected to fall more than 20% from record levels in every other province than Ontario and B.C., prices may prove more resilient. RBC expects prices to fall less than 3% in Alberta and Saskatchewan and between 5% and 8% in most of the other provinces by the first half of 2023.
In Quebec, RBC sees home sales falling 16.8% by the end of 2022 and down 6.1% in 2023. Prices are expected to end 2022 7.5% higher than the year before and but then decline 5.1% in 2023.
But while RBC economists are predicting a “historic correction,” they do not see a collapse in the housing market.
Rather, they argue that this downturn should be seen as a “welcome cooldown” after the two-year buying frenzy that put homeownership out of reach for many Canadians.
RBC expects the correction to wind up in the first half of 2023, though a steeper and longer downturn can’t be ruled out.
“Solid demographic fundamentals (including soaring immigration) and a low likelihood of overbuilding should keep the market from entering a death spiral,” wrote Hogue.