A "historic" housing correction is now underway in Canada and costlier markets in Ontario and British Columbia are likely to be the "epicentre" of the downturn, a new report from RBC suggests.
In its report, released last week, RBC said that it now expects the average home prices across Canada to decline by approximately 12 per cent from the February peak by early 2023.
It says that if that does indeed materialize it would “rank as the steepest correction of the past five national downturns.”
The bank, however, says that the correction will play out differently depending on your market.
It says that housing could be “more resilient,” in markets that are already relatively affordable, with prices only projected to fall by about three per cent in Alberta and Saskatchewan and between five and eight per cent in the majority of other provinces.
But the bank warns that buyers in high-priced markets like Ontario and British Columbia will be “especially sensitive to interest rates” and could find themselves on the sidelines in greater numbers.
That, in turn, could lead to a more significant correction in those markets.
“Our forecast has home resales in British Columbia and Ontario cumulatively sagging 45 per cent and 38 per cent respectively, in 2022 and 2023, setting the stage for a home price index drop exceeding 14 per cent from quarterly peak to trough in both provinces,” the report states. “The magnitude of the downturn would rival that of the early-1990s in Ontario (when resales fell 41 per cent and prices 15 per cent) though come well short of the early 1980s’ episode in British Columbia (when resales slumped 62 per cent and prices 27 per cent).”
The Bank of Canada has increased its key overnight lending rate from 0.25 per cent to 2.5 per cent over the last several months in a bid to curb inflation and has warned that more hikes will likely be necessary.
In its report, RBC said that it now expects the overnight rate will reach 3.25 per cent by October.
That, combined with higher mortgage stress test qualifying rates, will “hamper stretched-out buyers in every region of the country” and ultimately bring about a “material correction,” the bank says.
However, RBC economist Robert Hogue does point out in the report that the bank does not anticipate a “collapse” in house prices at this point.
“We’d argue the unfolding downturn should be seen as a welcome cooldown following a two year-long frenzy that put a huge financial burden on many new homeowners and made ownership dreams harder to achieve,” he said. “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. Solid demographic fundamentals (including soaring immigration) and a low likelihood of overbuilding should keep the market from entering a death spiral.”
The latest data from the Toronto Region Real Estate Board suggested that sales were down 41 per cent year-over-year in June while the average home price was still up five per cent from the previous June to $1,146,254.