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Canadian Housing: Economists Forecast upto 25% Decline in Home Prices by End 2023

Economy Aug 16, 2022 17:22
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By Ketki Saxena 

Investing.com -- Canada’s red-hot housing market has shown signs of easing as the Bank of Canada’s rapid raising of rates begins to take effect. 

Amongst the most recent indicators of a cooldown in Canadian housing is last week’s data from the Canadian real estate association showed slowing sales activity for the fifth month in a row, and a monthly easing in average home prices across the country.

The moderation in Canadian residential real estate is at least partially a result of the Bank of Canada’s rapid raising of interest rates, which makes borrowing, including mortgages, more expensive for Canadian consumers. The benchmark overnight lending rate, which was held during the pandemic at its emergency low of 0.25% until March, is now at 2.5% 

As a note from RBC (TSX:RY) economics summarizes, “The Bank of Canada’s outsized 100 basis-point rate hike delivered on July 13 threw ice-cold water on the market—disqualifying some buyers from obtaining a mortgage and shrinking the size of mortgage others can qualify for.” 

And economists at some of Canada’s top financial institutions foresee a long way to go before rates peak, and subsequently, before the housing market bottoms. The consensus estimate from leading Canadian economists is for the policy rate at 3.25% by year-end, and for a peak-to-trough decline in housing prices of 20-25% by the end of the year, and an over 35% decline in home re-sales during that period. 

Here’s what economists at Canada’s leading financial institutions forecast for the housing market, and the Bank of Canada’s rate hikes in the next year.

TD (TSX:TD) Economics

​​TD Economics believes that despite the recent cooling,  the “real estate sector's fall from grace isn't done yet,” and expects values to decline by nearly a fifth from their pandemic level peaks. 

A post by Toronto Dominion bank’s director of economics, James Orlando, notes that “the peak-to-trough decline in prices since the first quarter to continue to push towards our forecast of 19%” as “The BoC unlikely to pause on rate hikes until later this year”. 

Orlando notes,  “The BoC is poised to continue hiking its policy rate at a significant pace as it will need much more evidence that inflation is declining”, adding that. “We are looking for the policy rate to reach 3% by September, getting to 3.25% by year-end”. 

Desjardins Securities Inc

Economists at Desjardins Securities Inc. believe that Canadian homes could lose up to a quarter of their value by the end of next year. 

In a report last week Thursday, Desjardins economists Randall Bartlett, Helene Begin and Marc Desormeaux noted that they ​​expect Canadian house prices to fall between 20% and 25% by next December. 

“Canada’s housing market is correcting quickly, and faster than we anticipated in our downbeat June forecast,” the note stated, citing “Weaker data so far this year and more aggressive monetary policy than previously anticipated, leading to higher mortgage borrowing costs” as the reason for the “gloomier outlook”. 

Desjardins now expects “The Bank of Canada’s policy interest rate to top out at 3.25% later this year.”

RBC Economics

In its monthly housing market update, RBC Economics’s Robert Hogue today noted the end of the pandemic era property boom, projecting “home resales to fall 23% in Canada this year and a further 15% next year.” 

Hague adds that “With the balance of power having dramatically shifted in their favour, buyers will be in a position to continue extracting price concessions from sellers for some time to come.”

RBC further notes that for the Canadian residential real estate market, the “bottom is likely many months away still as our central bank has more work to do—we expect a further 100 basis-point rate increase to 3.5% by the fall.”

RBC remains amongst the most hawkish of Canadian banks on Bank of Canada rate hike expectations, adding that it expects “an additional 100 basis-point rate increase over the next two rate announcements in September and October.”

Canadian Housing: Economists Forecast upto 25% Decline in Home Prices by End 2023
 

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