Canadian Real Estate Is In For A “Game Changer,” Forecast Revised Lower: RBC

Canadian real estate is approaching a game changing environment, according to the country’s biggest bank. RBC Economics notified customers they’ve made downward revisions to their home sale forecast, as rates rise higher than expected. The Bank of Canada (BoC) tries to cool potentially destabilizing inflation, it’s expected to reduce budgets. Lower budgets following record demand means the market is likely to cool significantly, and with that comes lower prices. 

Canadian Interest Rates Will Have To Rise Higher Than Previously Thought

The BoC is no longer screwing around and is scrambling to tackle inflation, which threatens to destabilize the economy. A 50 basis point (bp) hike to 1% was done in April, and they openly said they would “forcefully” raise the policy rate to neutral by the end of the year. RBC sees this adding 100 bps (in-line with the BoC’s estimate) over a six month period. That would make the overnight rate 2%, which is higher than the pre-pandemic peak. 

“Canadians haven’t seen this large an increase in such a short period since the tightening cycle of 2005-2006,” explains Robert Hogue, a senior economist at RBC. Adding that to the recent boom that just occurred, they see a slowdown going forward.  

Canadian Home Buyers Have “Nowhere To Escape” 

The economist warns “there’s nowhere to escape” this time, referencing consumer mortgage interest rates. Fixed rates, previously the most popular types of mortgages, began climbing last year with the bond market. A climbing bond market typically accompanies rising interest rates, which influence variable mortgage rates. However, due to the belief inflation was transitory, the BoC didn’t raise the overnight rate and variable interest mortgages became the majority. 

Now that interest rates are rising aggressively, the gap between fixed and variable rates is closing fast. “ The impact on mortgage borrowing has been muted so far because borrowers have instead gravitated toward variable-rate mortgages, for which rates remained exceptionally low. But the Bank of Canada’s hiking campaign will soon make variable rates more expensive too, leaving borrowers with no escape,” he says.  

Canadian Home Buyer Budgets Are Shrinking

Higher mortgage rates do a number of things, but the ultimate impact is the same — you can buy less house. Rising rates mean each dollar borrowed will cost more, and RBC estimates budgets will shrink by more than 15% in the coming weeks. 

“That will more than reverse the increase in 2020 and early-2021 when declining rates provide substantial added budget room,” he says. A reduction in interest rates pulls forward home sales, and conversely higher rates push them out or force price cuts.  

Canadian Home Sales Will Crater, Expectations Lowered

Just passing record sales and reduced budgets is expected to significantly reduce demand in the coming months. RBC sees home resales falling 13% in 2022, and fall another 14% in 2023. It works out to about 50,000 fewer home sales than they had previously anticipated. 

Hogue explains, “This implies a significant slowdown over the spring to fall period before sales stabilize in 2023 on a quarterly basis. We think this cooling will help the market return to balance.”

Canadian Real Estate Prices To Peak This Spring

Home price growth has been stronger than anticipated this year (no one expected that), but they don’t see it sticking. For this year, they expect the growth in the benchmark home to be 8.1% higher than last year across Canada. That would be lower than it currently is, with potentially fast quarterly drops. 

The bank is still optimistic about home price growth but warns, “we think the national benchmark price could drop close to 5% on a quarterly basis from peak to trough.” 
RBC calling a slowdown is the second call from a major real estate player this week. Royal LePage made recent headlines for forecasting 15% growth in 2022, but BMO dived into the numbers explaining that’s also lower than current prices. The market is generally in agreement things will be slower, they just can’t agree what the means for prices.