A growing number of economic forecasts see Canadian house prices falling in the near term, with some suggesting declines of around 25% or more.
The latest such report came from Capital Economics, which outlined how the coming surge in interest rates poses a key risk to housing.
With bond markets forecasting the Bank of Canada’s policy rate to reach 2.50% by next year, Capital Economics economist Stephen Brown asked, “can the housing market withstand a return to pre-pandemic mortgage rates, even though prices have risen by more than 50% in the interim? The answer is a firm ‘no,'” he answered.
If the overnight lending rate, which influences prime rate and, in turn, variable mortgage rates, reached 2%, Brown said house price increases should slow to “little more than zero” next year, while a higher policy rate would trigger a decline in house prices.
“We shouldn’t assume that the Bank wants to avoid house price declines at any cost,” he added. “House prices are a key driver of shelter inflation, so moderate declines would help to get consumer price inflation under control without seriously jeopardizing the economy.”
But with prices currently so high versus traditional valuation metrics, Brown said the risk is that an initial decline could trigger a “downward spiral” of lower house prices and lower house price expectations.
Oxford Economics expects a 24% decline
Meanwhile, the latest forecast from Oxford Economics has home prices falling 24% by mid-2024.
One of the triggers is expected to be house prices themselves, according to report author Tony Stillo, director of Canada Economics at Oxford.
He noted that prices were 19% above the borrowing capacity of median-income households as of late 2021, and are expected to reach 38% above what the average household can afford by the middle of this year.
“We believe this will cause the housing market to reach a breaking point and crash under the weight of its own success before year-end,” Stillo wrote.
Another factor is higher borrowing rates, with the Bank of Canada’s policy rate expected to reach at least 2% by 2024. Oxford also expects average 5-year fixed rates will reach 4.25% by the end of this year and 5% towards the end of the decade.
Oxford says the third factor that could send house prices lower is the introduction of government policies that have already been promised during the last election, including a house-flipping tax, a tax on non-resident-owned vacant homes and a temporary ban on foreign ownership.
While a 24% decline sounds significant—and usually is—Oxford noted that after the recent run-up in prices, a 24% decline would still leave prices roughly 15% higher than pre-pandemic levels.
However, should there be no pull-back and if prices continue to rise higher, Oxford says the likelihood of a more substantial decline grows.
“Although unlikely, a crash could see home prices plummet by 40% or more, with dire consequences for the broader economy and financial system,” the report noted. “The fallout from a housing crash would look a lot like the U.S. housing meltdown during the global financial crisis, despite a minimal role for subprime lending in Canada.”
Not all forecasts involve price declines
Not everyone thinks home prices are about to turn negative, at least not yet.
In its most recent forecast, RBC Economics said prices are likely to grow by 6.2%, which would be a drop from the 17.8% gain seen in 2021, based on house price data from RPS.
“Plenty of unmet demand remains and will continue to fuel tremendous activity across the country,” reads the report by RBC economist Robert Hogue. “Still, we expect the Bank of Canada’s rate liftoff to turn down the market’s heat in 2022 as deteriorating affordability sends buyers to the sidelines.”
Earlier this month, the Canadian Real Estate Association also released an updated housing market forecast where it revised up its expectations.
CREA expects an annual average sale price of $786,000—a nearly $47,000 increase from its initial forecast released in December—which would represent an annual gain of 14.3% over 2021 prices. It expects the pace of price growth to slow further in 2023 to an annual rate of 3.2%.
Considering the same experts didn’t predict the steep run in real estate values experienced across the country – indeed, the world – I’m not holding my breathe for a significant decline.
I think the RBC team has it right.
I really can’t understand why anyone quotes Capital Economics as their predictions are always extreme and I’d love for someone to show me just once when they were correct. They grab headlines with their doom and gloom predictions and we give more credence to their nonsense when we promote it. What credibility do they actually have?
That’s some spectacularly bone headed logic. Zero…for prepandemic interest rates that were already at historical lows…dumb, dumb, dumb, dumb dumb….
Maybe if it were averaged throughout the country…maybe. pretty sure a 2% increase will have minimum impact in my market as homes are still selling for over a half million over asking.
I would like a purge of advice, I bought a house with a 1.7% variable mortgage rate, in 6 months went up to 2%. Should I change to a fixed mortgage rate before goes up?
2 major increases in the 5-yr from major banks already this week, Monday & Friday. Two substantial bank rate hikes in the next 3 months, we’ll be well over 4% on the 5-yr by July. It could get ugly.
Applying Elliott Wave Theory analysis (applicable to stock & commodity markets and any tradable asset including real estate) the housing market since 2002 is in a powerful 5th Wave of 5 (to complete the cycle) before any significant correction occurs. I would agree with the RBC assessment that price growth will remain strong for the foreseeable future.
I’m not really an economist, but house prices will not decrease. Let’s be realistic. The current material prices in the world and in Canada. The cost of living shows that this job is difficult.
no more cheap labor .Canada all livelihood is construction
Our company is developing a 2600 unit neighborhood in a town with currently 4,000 residents in Ontario. Covid made building a nightmare with material hard to get, workers not working, permits taking forever and a big one that no one talks about is the amount of government employees that produce nothing for the economy. Point is if it ever gets to a point where building becomes practical again and these projects get finished we could see a large increase in supply which mixed with rising rates and such would crash the market as offers could become scarce
Nonsense talk:”Although unlikely, a crash could see home prices plummet by 40% or more, with dire consequences for the broader economy and financial system,”
Reality: A crash is the best outcome possible. Blowing off the bubble (down to 50% of 2019 prices) is just what the economy needs. As happened in ’82 that reset the cost of living, and the cost of materials and labor. Many citizens entered the housing market that had previously given up, much junk housing could now be replaced. New building increased quality by going from 2×4 R12 to 2×6 R20 walls and R40 ceilings and increased new building sizes. Tar paper shingle use declined, tile with 5 times the life became common. Every 10% decline in housing cost represents a 4% increase in the standard of living, in the quality of life for the entire population excepting the stinking speculators who blew this disastrous bubble in the first place. Manufacturing in Canada can become economic again. Jobs Jobs Jobs will be created that will never happen if the bubble prices are propped up.
Unlikely house prices will go down. But the raise that we’ve seen in the past 2/3 years is not in line with the inflation. People are making less money and buying more expensive houses. Just wondering who exactly drives these prices up? Canadians or foreign investors?
I have heard similar comments in the past whereby the market will sustain and prices will not fall due to demand. I stated over 2 years ago a correction of at least 30% is on the horizon….being in the real estate business for over 40 years and have seen so many variable markets…this correction has started and will continue for another year or two….and most likely see a 40% correction in prices and sales. I experienced the same scenario back in 1990 and 1994…with so many associates losing their wealth in the millions.
This realty bubble has burst and the air is slowly being released. Unfortunate for those who purchased in the last 3 or 4 months and those who choose to buy within the next 2 years. This time around will be much worse than the past with exorbitant inflation, Ukraine War, Commodity prices, lack of supply in products available.
My predictions in the past have been 100% correct.
my prediction over heated market will crash by up to 75%+ by 2025!(there is a great depression in the making)
vancouver toronoto and all major cities in canada!
the fiat money lie will kill the supply
since 1971 the world reserve currency has been nothing but a debt time bomb! and the end of the fiat money system is very near!