Home prices to peak this spring following rate hikes, RBC says
Home prices will peak this spring, after more aggressive interest rate hikes from the Bank of Canada prove a “game changer” for the housing market, Royal Bank’s economics team predicts.
Low rates have been stoking housing demand in this country for years, but now the tide is turning and interest rates will rise “significantly,” economist Robert Hogue said in a report this week.
Measures to cool housing in the federal budget, and separate policies planned by Ontario and Nova Scotia, are further reasons for homebuyers to pause.
“We now expect home resale activity to slow more quickly than previously anticipated and, perhaps more important, we see prices peaking this spring as market sentiment sours from extreme bullishness,” wrote Hogue in the note.
“In this altered landscape, local markets could experience a mild price correction, partly reversing outsized gains recorded in the past year.”
The Bank of Canada has now raised rates to one per cent, and RBC expects the central bank will add another 100 basis points over the next six months to reach two per cent, slightly above the pre-pandemic level of 1.75 per cent.
“Canadians haven’t seen this large an increase in such a short period since the tightening cycle of 20052006,” wrote Hogue.
Expectations of a more aggressive rate path prompted RBC to cut its housing forecasts. It now sees home sales falling 13 per cent this year and another 14 per cent in 2023.
Prices will peak this spring and then weaken modestly over the rest of the year, Hogue said. RBC increased its price forecast for 2022 to an 8.1 per cent rise, because of a stronger-than-expected start to the year. But it lowered its forecast for 2023, where it now sees prices falling by 2.2 per cent.
“We think the national benchmark price could drop close to five per cent on a quarterly basis from peak to trough,” said Hogue.
Expensive markets such as Vancouver and the Greater Toronto Area, which saw the biggest gains, will likely see the biggest declines.
But it’s not all bad, said Hogue.
“Rather than pose a major threat, we think rising interest rates are likely to bring welcome changes to the market — including more sustainable activity, fewer price wars, more balanced conditions, and modest price relief for buyers,” he wrote.
In a separate report, the Canada Mortgage and Housing Corporation said Thursday that home price and sales growth will moderate in the coming years from recent pandemic-era highs but stay elevated in 2022 as higher employment and immigration drive demand.
Sales and price growth will continue to moderate more in line with historical averages by late 2023 or early 2024 amid higher mortgage rates but elevated price levels will persist, putting greater pressure on affordability for new homebuyers, the national housing agency said in its 2022-2024 market outlook.
“Improving levels of employment and immigration are expected to be key factors as the impact of pandemic restrictions continue to recede,” Bob Dugan, chief economist at the CMHC, said in the report.
“Price growth will likely continue to be led by markets with low listings, including Vancouver, Toronto, and Montreal,” he said.
Canadian housing prices have surged during the COVID-19 pandemic, with the average cost of a home rising more than 50 per cent over the last two years, according to data from the Canadian Real Estate Association.