Canada’s Housing Market on Verge of a Major Correction, RBC Predicts

Canada’s Housing Market on Verge of a Major Correction, RBC Predicts
A "sold" sign in front of a house in the Riverdale area of Toronto on Sept. 29, 2021. (The Canadian Press/Evan Buhler).
Peter Wilson
Canadians can soon expect the largest housing market correction in over 40 years, the Royal Bank of Canada predicts in a new report.

Robert Hogue, an analyst at RBC Economics and the author of the report, said surging inflation has caused RBC to change its former economic forecast to a more severe alternative.

“The economic landscape is rapidly becoming less hospitable for Canada’s housing market,” Hogue said in the report. “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.”

Ontarians and British Columbians—especially those buying real estate in Toronto, Vancouver, and Victoria—will be hit hardest due to housing affordability being especially “stretched” in those areas, Hogue said.

“We expect local outcomes to vary widely with the priciest, more interest-sensitive areas facing larger declines,” he said.

Housing prices will shoot up to recent record highs before the correction sends them plummeting downwards, Hogue predicts. Rising mortgage rates are mostly to blame as they “are squeezing housing affordability hard” and putting it “on track to reach worst-ever levels,” he said

This in turn will cause a “historic correction” that will bring housing prices tumbling down. In total, RBC is predicting prices to fall 42 percent from the “record-high levels” they will reach in the fall of 2022.

“Cumulatively, this 42% plummet ... since early 2021 would exceed the peak-to-trough declines of all four previous national downturns,” the report said.

The previous Canadian housing market correction record was a 38 percent price drop that occurred during the 2008 Great Recession. Before that, the largest drops were in the early and late 1980s.

“With demand weakening significantly and affordability exceptionally stressed in parts of the country, we believe prices will have to give,” Hogue said, noting however that housing prices won’t dip at the same rate across the country.

RBC’s forecast has housing prices in Ontario and B.C. dropping by 45 percent and 38 percent, respectively, while those in Alberta and Saskatchewan will dip a meagre 3 percent to 8 percent.

“While we project resale activity to cumulatively decline more than 20 percent 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,” said Hogue.

However, RBC believes the national downturn will be “a correction, not a collapse,” and that correction be over sometime in the first half of 2023.

“We think both activity and prices are set for a material correction,” Hogue said. “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.”