"Historic correction underway" in Canada's housing market: RBC

Vancouver single-family house (Shutterstock)

Nearly two years of unsustainable real estate market activity across Canada will culminate in a tremendous housing downturn.

This is the latest trajectory outlook, according to RBC Economics’ newly released market forecast, which expects home sales and prices will continue to deepen into the fall and through next year.

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Home sales will drop by another 17% nationwide by early 2023 — following drops of 19% in the second quarter and 13% between the first quarter of 2021 and the first quarter of 2022. This would lead to a 42% drop from the record-high levels experienced in early 2021, which would exceed the previous peak-to-trough declines of all four previous national downturns: a drop of 33% in 1981-1982, a drop of 33% in 1989-1990, a drop of 38% in 2008-2009, and a drop of 20% in 2016-2018.

RBC surmises that based on its forecast, a “historic correction underway” is now underway in Canada, but it emphasizes that this is not a “collapse” of the housing market. The federal government’s decision to open the flood doors to immigration and the low likelihood of overbuilding new housing supply will “keep the market from entering a death spiral.”

The Bank of Canada’s interest rate hike of 1% — rising from 1.5% to 2.5% — earlier this month has sent a shockwave across the market, indicative of the bank taking a much more aggressive approach to consumer inflation and the rampant growth in real estate prices. More interest rate hikes are expected through the end of 2022.

“The Bank of Canada’s more aggressive course has clearly dimmed the outlook for Canada’s housing market. We think both activity and prices are set for a material correction,” reads the market bulletin.

“Still, 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.

The correction is expected to last a year, possibly until sometime in the first half of 2023.

Benchmark home prices across Canada went up by 1.5% in 2019, then soared by 9.4% in 2020, 19.2% in 2021, and 10.1% in 2022, with this year’s increases largely attributed to the first half of the year. A drop of 7.3% is expected for 2023.

By early 2023, it is expected the aggregate home price will fall by more than 12%, which would make it the steepest correction of the past five national housing downturns. The average price of homes sold could drop by 17% on more on a quarterly basis.

RBC expects British Columbia and Ontario will be the “epicentre” of the downturn, given that homebuyers and owners in these expensive markets are most sensitive to the interest rate hikes. In 2022 and 2023, home resales in BC will plummet by 45%, while Ontario will see a drop of 38%. Ontario’s downturn could rival that of its rough housing market of the early 1990s (resales fell by 41%, and prices fell by 15%), but BC’s downturn will still be well short of its historic downturn in the early 1980s (resales fell by 62%, and prices fell by 27%).

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