RBC predicts Ontario’s house price correction is underway

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A “historic” housing correction is currently underway in Canada and more expensive markets in Ontario and British Columbia will likely be the “epicenter” of the downturn, according to a new report from RBC.

House prices in the Greater Toronto Area have soared during the pandemic and are up nearly 36% year-over-year as recently as February.

But the Bank of Canada’s aggressive interest rate hike campaign has weighed on the market since then, which has now seen four straight months of falling prices.

In its report, released last week, RBC said it now expects the average home price in Canada to fall about 12% from February’s peak by early 2023.

He says that if this did materialize, it “would be the steepest correction of the last five national recessions.”

The bank, however, says the correction will play out differently depending on your market.

It says housing could be “more resilient” in already relatively affordable markets, with prices only expected to fall by around 3% in Alberta and Saskatchewan and between 5 and 8% in most other provinces.

But the bank warns buyers in high-priced markets like Ontario and British Columbia will be “particularly interest rate sensitive” and could find themselves on the sidelines in greater numbers.

This, in turn, could lead to a larger correction in these markets.

“We forecast home resales in British Columbia and Ontario to fall 45% and 38% respectively in 2022 and 2023, paving the way for a decline in the home price index of more than 14% from quarterly high to low in both provinces,” the report said. “The depth of the recession would rival that of the early 1990s in Ontario (when resales fell 41% and prices fell 15%), although it would be well below the episode of the early 1990s. 1980s in British Columbia (when resales fell 62 percent and prices 27 percent).

The Bank of Canada has raised its key overnight rate from 0.25% to 2.5% in recent months in a bid to rein in inflation and warned that further hikes are likely to be needed.

In its report, RBC said it now expects the overnight rate to reach 3.25% by October.

That, combined with higher qualifying rates for mortgage stress tests, “will hamper exhausted buyers in all parts of the country” and ultimately result in a “significant correction,” according to the bank.

However, RBC economist Robert Hogue points out in the report that the bank does not expect a “collapse” in house prices at this stage.

“We would say the current downturn should be seen as a welcome cooling after a two-year frenzy that has placed a huge financial burden on many new homeowners and made dreams of ownership harder to achieve,” he said. declared. “While a more severe or prolonged recession cannot be ruled out, we expect the correction to end in the first half of 2023 – lasting around a year – with some markets likely stabilizing faster than others. Strong demographic fundamentals (including booming immigration) and a low probability of overbuilding should prevent the market from entering a death spiral.

The latest data from the Toronto Region Real Estate Board suggests sales fell 41% year-over-year in June, while the average home price was still up 5% from the previous June to reach $1,146,254.

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