RBC: Canada real estate market will recover from bottom out early next year
One of Canada’s big banks RBC is calling for the country’s cooling housing market to hit a low point in the spring before fully adjusting to rising interest rates.
Canada home average price down 22% since February
The average price of a Canadian home sold in August was $637,673, a number that has fallen by more than 20 per cent since February.
The Canadian Real Estate Association said Thursday that the number of homes that sold on the realtor group’s MLS system has now fallen for six months in a row, since the Bank of Canada began to raise interest rates in March.
Home sales are down by 24 per cent from this time last year. And the average selling price has lost almost $200,000 since hitting an all-time high of $816,720 in February.
Home sales down 1% between July and August
The average price of homes sold in Canada in August fell 3.9 per cent from the same month last year to $637,673 according to new statistics released Thursday by the Canadian Real Estate Association.
Home sales, meanwhile, edged down just one per cent between July and August, marking this the sixth consecutive — though smallest — month-over-month decline in volumes.
It was close to an even split between the number of markets where sales were up and those where sales were down. Gains were led by the Greater Toronto Area (GTA) and a large regional mix of other Ontario markets. These were offset by declines in Greater Vancouver, Calgary, Edmonton, Winnipeg and Halifax-Dartmouth.
Despite the decline from last August, the actual (not seasonally adjusted) national average price inched up $7,702 over July. It is heavily influenced by sales in Greater Vancouver and the GTA, two of Canada’s most active and expensive housing markets.
“August saw national sales hold steady month-to-month for the first time since February which, along with a stabilization of demand/supply conditions in many markets, could be an early sign that this year’s sharp adjustment in housing markets across Canada may have mostly run its course,” Jill Oudil, chair of CREA, said in the report. “Some buyers may choose to remain on the sidelines until they see clearer signs of borrowing costs and prices also stabilizing.”
Meanwhile, The Aggregate Composite MLS Home Price Index (HPI) edged down 1.6 per cent on a month-over-month basis in August, not a small decline historically, but smaller than those in June and July. It was still up by 7.1 per cent on a year-over-year basis in August. This was the first single-digit increase in almost two years, as year-over-year comparisons have been winding down at a brisk pace from the near-30 per cent year-over-year gains logged just six months ago.
RBC assistant chief economist Robert Hogue said on Friday in a report that home buyers are “on the defensive” as the Bank of Canada continues to raise interest rates. The central bank delivered a 75-basis-point hike last week and signalled rates will have to rise further in the months ahead as core inflation remains hot.
But the higher cost of borrowing has sent a chilling effect through the housing market, with the Canadian Real Estate Association (CREA) reporting Thursday that home sales in August were down one per cent compared with July and 24.7 per cent lower than the same month last year.
CREA also trimmed its forecast for both housing activity and price growth. It now expects home sales to decline 20 per cent by the end of 2022 relative to last year’s peak.
Hogue’s forecast is even more dire, however, expecting a 23 per cent decline in year-over-year sales by the end of this year and a further 14 per cent drop in 2023.
RBC is now calling for the Bank of Canada’s benchmark interest rate to hit four per cent by year’s end, up from an earlier call of 3.5 per cent.
“Higher interest rates will disqualify more buyers from obtaining a mortgage and shrink the size of a mortgage others can qualify for,” Hogue wrote.
He added that, “fewer—and more budget-constrained—active buyers in the market are taking steam out of prices.”
Hogue wrote that he expects the housing market will adjust to the higher-rate environment early next year.
Come spring, he expects Canadian home prices will bottom out around 14 per cent lower than the peak seen in February 2022.
That drop would be steeper in Ontario and British Columbia, he added, calling for home prices to drop 16 per cent peak-to-trough in both provinces. Alberta and Saskatchewan, meanwhile, would see only a four per cent decline in prices, Hogue predicts.
Hogue’s estimates are more conservative than other market forecasts.
TD Bank said in late August that it expects an “unprecedented” 20 to 25 per cent drop in home prices in the first quarter of 2023 from the highs a year earlier.
Credit union Desjardins also expects a decline of nearly 25 per cent in home prices by the end of 2023.
This article was first reported by the Canadian Press and Financial Post.