RBC predicts a 14% fall in house prices in the spring of 2023

The Royal Bank of Canada expects house prices to fall 14 percent below the recent nationwide peak as home buyers feel the pinch of higher interest rates.

RBC revised its original forecast from 12 percent to 14 percent on Sept. 15, after the Bank of Canada raised its key overnight interest rate by three-quarters of a percentage point on Sept. 7.

The ‘historic correction’ has been largely attributed to the Bank of Canada’s need to cool inflation, which has quickly pushed interest rates to the highest level since the 2008 financial crisis.

With interest rates expected to rise half a percentage point in October and another quarter of a percentage point in December, RBC economist Robert Hogue told the Star that the new calculations take into account future walks.

“This forecast anticipates the upcoming rate hikes, so we don’t think it’s likely to change,” Hogue said. “The rate hikes are baked into this forecast. It’s not a huge change, but it reflects the conditions of the market.”

Home sales in August were the quietest in three and a half years, falling for a sixth straight month. Fewer, and more limited, active buyers in the market are taking steam from prices, the report said.

In August, house prices fell 1.6 percent month-on-month and 7.4 percent since their February 2022 peak. The decline in house prices will continue in the near term as interest rates rise, the report adds.

RBC also raised its forecast for the key rate in December to four percent, from the previously forecast 3.5 percent. The Bank of Canada’s policy rate affects the prime rate of the major banks to which floating-rate mortgages are tied, resulting in higher borrowing costs for homeowners and buyers.

Home prices have fallen significantly in Ontario and BC, and the market is softening in Atlantic Canada and Quebec as well, the report said. Historically, higher demand has been concentrated in Ontario and BC, but smaller cities, including Montreal and Halifax, have seen more interprovincial migration in recent years, boosting demand and putting pressure on supply.

“Rate hikes affect everyone, no province is completely foreclosed,” Hogue says, but regions with expensive properties, such as the GTA and Vancouver, are more sensitive to rate hikes due to higher mortgage debt.

“We expect price declines across the country, but to varying degrees,” he added.

Home prices in Ontario and BC are set to fall 16 percent in the spring of 2023, while Alberta and Saskatchewan will see a four percent drop, the report said.

Another factor influencing falling house prices is the pre-approvals of mortgages, which support the market, said Robert Kavcic, senior economist at BMO.

Often, home buyers are pre-approved for a mortgage — a borrower sets a rate for typically 90 to 120 days while looking for a home. That means if someone got pre-approved in June, when the average five-year fixed rate was 3.59 percent, they won’t be affected by the higher borrowing costs, as rates are now over 4.5 percent.

Current home sales don’t reflect current mortgage rates, as many homebuyers secured their interest months ago, which is why home prices won’t bottom out until spring 2023, Kavcic says.

“It’s not a big concern, but it’s slowing down the adjustment process for the housing market,” he said. “September housing figures will not reflect the reality of market conditions. We won’t see it reflected until the second half of 2022 or early 2023.”

Philip Cross, a senior fellow at the Macdonald-Laurier Institute and former chief economic analyst at Statistics Canada, said that while RBC’s new forecast is more reflective of the market, he sees house prices fall by at least 20 percent.

as the RBC report notes, house prices are still higher than a year ago when the country was in a housing bubble, meaning house prices are still unaffordable for many and will fall even further, he added.

Last week, US Federal Reserve Board chairman Jerome Powell said he is “strongly committed” to fighting inflation, indicating that high interest rates “will last longer than people think, making the housing market worse” said Cross. .

Therefore, Cross predicts that house prices will be lowest in late 2023, not in the spring.

“The correction is far from over. It will be longer and steeper than predicted.”

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