Report calling house prices to drop 23 per cent this year from Whitby to West Vancouver

A Royal Bank report is predicting housing prices in Canada to fall nearly 23 per cent this year and 15 per cent next year, with the national benchmark price to drop more than 12 per cent “from peak to trough” by the second quarter of 2023.

High-end homes, which are the most interest-sensitive, are expected to face larger declines, with relatively affordable markets showing greater resilience.

“The economic landscape is rapidly becoming less hospitable for Canada’s housing market,” the report declared. “With inflation touching four-decade highs—and threatening to climb even further in the near term – the Bank of Canada is now embarked on a more aggressive course that we believe will take its policy interest rate to restrictive levels by the fall. This will send more buyers to the sidelines, especially in British Columbia and Ontario where affordability is extremely stretched.”

The first signs of a market correction emerged soon after the Bank initiated its rate liftoff in March and the “outsized” 100 basis-point rate increase the central bank delivered on July 13 will likely speed up the market’s cooling phase in the near term.

“While the move won’t necessarily result in a higher terminal point—we still expect the overnight rate will reach 3.25 per cent by October – it’s a big bite for borrowers to swallow that will spoil or delay homeownership plans for many buyers. The hike took variable mortgage rates roughly up to par with fixed rates, effectively shutting the last window of super cheap borrowing costs available to buyers.”

Rising rates are squeezing housing affordability hard, the report continued. “By the time the Bank of Canada is done, RBC’s aggregate affordability measure could easily be at it worst-ever level nation-wide, with Vancouver, Toronto, Victoria and other expensive markets leading the way.”

“We see demand coming under increasing downward pressure in Ontario and parts of British Columbia as a result. Things will get more challenging in other parts of Canada too, albeit to a lesser degree thanks to relatively favourable affordability starting points and weaker interest rate sensitivities. Higher mortgage stress test’s qualifying rates will hamper stretched-out buyers in every region of the country. And higher client rates will reduce the size of a mortgage – and maximum purchase price – qualifying borrowers can get from coast to coast.

RBC expects home re-sales will fall another 17 per cent in Canada by early next year – after dropping 19 per cent in the second quarter and 13 per cent between the first quarter of 2021 and first quarter of 2022.

Cumulatively, this 42 per cent plummet (from record-high levels) since early 2021 would exceed the peak-to-trough declines of all four previous national downturns – 33 per cent in 1981-1982, 33 per cent in 1989-1990, 38 per cent in 2008-2009 and 20 per cent in 2016-2018.

With demand weakening significantly and affordability exceptionally stressed in parts of the country, RBC believe prices will have to give, predicting that the average price of homes sold in Canada could fall by 17 per cent or more (on a quarterly basis) in part due to a shift in the composition of sales toward lower-priced markets and housing categories—as buyers seek more affordable options. The average price is already down 8.6 per cent between the first and second quarters of this year, with notable declines in Ontario (-7.6 per cent) and British Columbia (-4.9 per cent).

“Buyers in high-priced markets are especially sensitive to interest rates and we believe will struggle the most in the period ahead. Our forecast has home resales in British Columbia and Ontario cumulatively sagging 45 per cent and 38 per cent respectively, in 2022 and 2023, setting the stage for a home price index drop exceeding 14 per cent from quarterly peak to trough in both provinces. The magnitude of the downturn would rival that of the early-1990s in Ontario when resales fell 41 per cent and prices 15 per cent.”

While we project resale activity to cumulatively decline more than 20% in every other province (from all-round record levels) this year and next, we think prices will be more resilient in the more affordable regions of the country. We project prices to slip less than 3% in Alberta and Saskatchewan, and between 5% and 8% in the majority of other provinces by the first half of 2023.

The Bank of Canada’s more “aggressive course” has “clearly dimmed the outlook” for Canada’s housing market, the report concludes.

“We think both activity and prices are set for a material correction. 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. While a more severe or prolonged slump cannot be ruled out, we expect the correction to be over sometime in the first half of 2023 – lasting approximately a year – with some markets likely stabilizing faster than others. Solid demographic fundamentals (including soaring immigration) and a low likelihood of overbuilding should keep the market from entering a death spiral.”