Canada’s biggest bank, RBC, believes that the country’s real estate market is going to experience a significant drop. They had previously mentioned that they were going to revise their predictions, and now they’ve officially confirmed it. According to the bank, this drop will be more significant than what they had initially anticipated. They are now expecting the largest decrease in both home sales and prices in Canadian history. But they want to reassure everyone that there’s no need to panic; they see this as a positive change after the last two years.
What's Causing This Drop?
The Canadian real estate market is facing some challenges because of rising inflation rates. This is causing interest rates to go up. These higher rates are expected to cool down the housing market more quickly. By October, RBC predicts that the overnight interest rate will reach 3.25%, a level not seen in over a decade. This will make borrowing money more expensive and close the gap between fixed and variable interest rates.
A "Historic Correction" Is Happening:
RBC is describing the current situation as a “historic correction” and has adjusted its earlier forecasts accordingly. Home sales have already dropped by 13% compared to last year, and RBC expects another 17% drop by early next year. Overall, they anticipate a 42% decline in home sales from the peak to the trough by early 2023. This would be a more significant decline than in any other historical period.
Biggest Price Drop Ever
The decrease in home sales is expected to lead to a substantial drop in home prices. More homes are becoming available for sale while the number of actual sales is declining. RBC’s assistant chief economist, Robert Hogue, says that with weakening demand and affordability problems in some parts of the country, prices will have to come down. RBC predicts a 12.4% drop in home prices by next year, a significant shift from the 4% growth they were forecasting earlier in the year. While this may not sound like much, it would be the most substantial price drop ever seen on a national scale.
Impacts on British Columbia and Ontario
British Columbia and Ontario are expected to be hit the hardest. RBC is forecasting a 14% drop in the housing price index aggregates for these provinces. Hogue mentions that while this downturn may be comparable to the one in Ontario in the early 1990s, it won’t be as severe as the early 1980s episode in British Columbia.
A Positive Development
RBC wants to emphasize that this is a correction and not a crash, and it could lead to a healthier economy. They believe that this downturn is a welcome cooldown following a two-year frenzy in the housing market. It’s seen as a positive change to relieve the financial burden on many new homeowners and make it easier for people to achieve their dreams of homeownership. They expect this correction to last approximately a year, with some housing markets stabilizing faster than others, hopefully by the first half of 2023.