RBC says Canada’s real estate market’s “historic correction” may lead to a 42% sales decline

The latest report by RBC shows that Canada’s real estate market may be dealing with its largest downturn in 40 years.

Following a period of skyrocketing home prices during the pandemic with more than 50% gains in certain markets, the national home prices may go down by more than 12% at the beginning of 2023, RBC says.

Such a drop would be larger than any of the four corrections Canada’s real estate market has seen in the past 40 years, noted Royal Bank of Canada economist Robert Hogue.

“The economic conditions are quickly becoming less hospitable for Canada’s housing market,” – he added.

The correction can be mostly caused by the Bank of Canada’s new monetary policy, raising interest rates to their highest levels since we’ve survived the 2008 financial crisis.

As inflation has reached its 40-years record high level and it’s expected to keep growing in the coming months, the central bank raised its key lending rate to 2.5% in July, increasing the cost of borrowing for mortgage holders and potential homebuyers.

The market is already showing significant signs of cooling. According to the Canadian Real Estate Association (CREA), the market slowed for the third consecutive month in June, while housing prices saw their largest monthly drop on record.

RBC expects home sales to fall by 23% this year and by 15% in 2023. The overall decline (of 42% since early 2021) would be larger than the 38% decrease we’ve seen in 2008 and 2009.

According to the bank’s forecasts, British Columbia and Ontario will show the largest declines: by 45% and 38% respectively, in 2022 and 2023.

The level of that correction may compete with the downturn Ontario faced in the early 1990s, when home sales were down by 41% and prices fell by 15%. However, Hogue says, it will not be as bad as the 1980s correction in British Columbia, when sales went down by 62% and prices plummeted by 27%.

Although economists have expected a cool-down in the real estate market for months, RBC’s forecast is one the most pessimistic among Canada’s large banks.

Earlier, RBC was the first to predict a “moderate” recession for the national economy in early 2023.

But although RBC expects a correction, Hogue says it does not predict a full collapse in the real estate market.

“We’d say the unfolding downturn could be seen as a welcoming cool-down after a two-year period of madness that put a huge financial burden on many homeowners and made ownership dreams harder to fulfil,” – noted Hogue.

“While a stronger or prolonged decline cannot be ruled out, we do believe the correction will be over approximately in the first half of the next year, with certain markets stabilizing even faster.”