According to a new report by RBC Economics, Canada’s housing market correction is slowing down, with a bottom expected to be formed in the coming months
The report predicts a 15 per cent peak-to-trough decline in the national RPS Home Price Index, with roughly half of that decline still to come.
While RBC economists expect the recovery phase to start slowly later this year as affordability issues and a weaker economy continue to hold back buyers, the pace of the recovery should progressively pick up in 2024 once the economy clears its “soft patch,” inflation returns to target, and the Bank of Canada reverses part of the massive rate increases it has imposed since March 2022.
Immigration will continue to fuel demand through the medium term (and possibly beyond), raising the odds of supply shortages if housing starts don’t increase.
Unless the “economy craters,” there is little downside left
The steep slide in home resales, which began in March 2020, ended a two-year market frenzy, but the slowdown has significantly calmed since the fall.
RBC Economics predicts that unless the economy craters, there is little downside left.
Accounting for the growth in housing stock, nationwide resales are the quietest they’ve been since the 2008-2009 global financial crisis, excluding the lockdown period in the spring of 2020.
RBC predicts that some markets, like those in Ontario and possibly Atlantic Canada, might be ahead of the pack in forming a bottom, while others, like those in the Prairies and Quebec, might lag somewhat.
No further rate hikes expected, but no cuts either
RBC expects that the Bank of Canada’s rate hiking cycle is likely on hold and that January 2023’s 25 basis-point hike was the final strike in a historic campaign that drove the policy rate up by 425 basis points, taking it to 4.5 per cent in less than a year.
RBC believes the interest rate environment will remain restrictive for a while, and the Bank of Canada will abstain from cutting rates until 2024.
Affordability issues will continue
Buyers will continue to face steep challenges due to affordability issues, especially in the country’s more expensive markets, with RBC predicting the sharp deterioration in housing affordability since 2021 won’t unwind quickly.
Lingering affordability issues will stand in the way of a quick market rebound and a material easing in buyers’ budget constraints.
Prices have further fall
The report also predicts that home prices will continue to decline in the coming months.
The national RPS HPI will likely fall another eight per cent by the third quarter from fourth quarter levels—with markets in British Columbia and Ontario still bearing the biggest downside risk.
RBC’s peak-to-trough price forecasts range from -19 per cent in Ontario and -16 per cent in British Columbia to -6 per cent in Alberta and -5 per cent in Newfoundland and Labrador.
Other price measures, like the MLS HPI and MLS average sales price, have already exceeded RBC’s national peak-to-trough forecast of -15 per cent, largely because these measures are more volatile than the RPS HPI.
They soared higher during the dramatic run-up earlier in the pandemic and responded more quickly to the downturn, as has typically been the case in prior cycles, RBC reports.
Canada’s housing market has “solid fundamentals”
Despite the recent swings in the Canadian housing market, analysts suggest that the fundamentals remain solid.
The market’s recent volatility can largely be attributed to the unique circumstances of the global pandemic and exceptionally low interest rates. However, once the market has adjusted to higher interest rates, analysts predict that solid fundamentals will once again come to the fore in 2024.
One key indicator of the strength of the Canadian housing market is the historically low inventory of homes for sale, and “there are no signs of overbuilding virtually anywhere in the country,” RBC reports.
This is particularly noteworthy given the rapid growth of Canada’s population, which has seen its largest increase in generations over the past year and booming immigration is expected to keep this trend going over the medium term.
New homes needed for longer-term balance
Analysts caution that the lack of supply could pose a problem in the longer term. While home building has picked up in Canada over the past three years, more is needed to meet the supercharged demand for housing.
Analysts estimate that the housing stock must expand by at least 270,000 units per year by 2025 just to accommodate the growth in households, let alone address the housing affordability crisis in many Canadian cities.
However, it is unclear whether the construction industry has the capacity to ramp up production in the face of significant labour shortages.
Read RBC Economic’s full report, authored by Robert Hogue, here.