Canada’s biggest bank is seeing the country’s housing bubble burst like no other. Last week we explained that RBC is preparing to revise its forecast down and today they made it official. The bank explained to investors that the correction will be larger than previously expected. They are now predicting the biggest drop in history for both sales and price. However, there is no reason to panic, the bank says this should be “welcome” after the last two years.
The Canadian real estate sector faces far greater headwinds than previously thought
Canadian real estate faces significant headwinds from inflation driving up rates. The rate hike is expected to accelerate the cooling of the market in the short term. In October, RBC expects the overnight rate to rise to 3.25%, a rate not seen in more than a decade. This should close the gap between fixed and variable rates, eliminating cheap money.
Canadian real estate is in the midst of a ‘historic correction’
A “historic correction” is underway, the bank warned as it revised down its forecast. Home sales were down 13% from last year, and are asking for another 17% lower early next year. Overall, they estimate a 42% drop in home sales from peak to trough in early 2023. That would exceed the peak-to-trough drop during any other historical period.
Previous Canadian Home Sales Corrections:
- 1981-1982: -33%
- 1989-1990: -33%
- 2008-2009: -38%
- 2016-2018: -20%
Canadian real estate to see biggest price correction ever
The drop in home sales is expected to trigger a price correction, an epic one. Higher inventories begin to appear, while the number of home sales declines. “With demand weakening significantly and affordability exceptionally stressed in some parts of the country, we believe prices will need to ease,” said Robert Hogue, RBC’s deputy chief economist.
The bank used the RPS/Royal LePage aggregate HPI to measure and forecast the price of a typical home. They see house prices falling 12.4% next year, a big change from the 4% growth they predicted in the first quarter. It may not seem like much, but this drop would be the largest in history on a national scale.
The more common CREA MLS HPI didn’t exist before 2005, so making a comparison is a bit difficult. During the 2017-2018 correction, the RPS IPH fell by 1.1%, but the CREA IPH fell by 3.6% over the same period. A little further back, during the 2008-2009 correction, the RPS fell 3.7% while the MLS HPI dropped 9.0%. The CREA HPI is about three times the RPS, if you’re looking for context.
Real estate in BC and Ontario is expected to feel the brunt of the brunt. RBC forecasts a 14% drop in the respective provinces’ RPS HPI aggregates. “The magnitude of the decline would rival that of the early 1990s in Ontario, although it is well below the early 1980s episode in British Columbia,” Hogue said.
A Canadian Housing Crash Should Be ‘Welcome’
The bank is keen to stress that this is a correction and not a crash, and would actually lead to a healthier economy. “…we would argue that the slump in development should be seen as a welcome recovery after a two-year frenzy that placed a heavy financial burden on many new homeowners and made home ownership dreams more difficult to achieve,” he said.
Adding that “while a more severe or prolonged downturn cannot be ruled out, we expect the correction to end sometime in the first half of 2023, lasting about a year, with some markets likely to stabilize faster than others.”