‘The correction is far from over’: RBC predicts 14% home price decline by spring 2023

The Royal Bank of Canada expects home prices to drop 14 per cent below the recent nation-wide peak as homebuyers feel the pinch of higher interest rates.

RBC recalibrated its original prediction of 12 per cent to 14 per cent on Sept. 15 after the Bank of Canada raised its key overnight lending rate by three-quarters of a percentage point Sept. 7.

The historic correction" is largely attributed to the Bank of Canada's need to cool inflation which has quickly pushed interest rates to their highest levels since the 2008 financial crisis.

With a half percentage point rate hike expected in October, and another quarter percentage point in December, RBC economist Robert Hogue, told the Star that the new calculations take into account the future hikes.

This forecast anticipates the upcoming rate hikes, so we don't think it's likely to change," Hogue said. The rate hikes are baked into this prediction. It's not a huge change, but it reflects the conditions of the market."

Home sale activity in August was the quietest in three and a half years, falling for a sixth-straight month. Fewer, and more budget constrained, active buyers in the market are taking steam out of the prices, the report says.

In August, home prices fell by 1.6 per cent month-over-month and 7.4 per cent since the February 2022 peak. The home price decline will continue in the near-term as interest rates climb, the report adds.

RBC also raised its forecast for the policy interest rate to four per cent in December, up from the 3.5 per cent previously predicted. The Bank of Canada's policy rate impacts big bank's prime rate which variable-rate mortgages are tied to, resulting in higher borrowing costs for homeowners and buyers.

Home prices have fallen significantly in Ontario and B.C. and the market is also softening in Atlantic Canada and Quebec, the report says. Historically, higher demand has been concentrated in Ontario and B.C. but smaller cities including Montreal and Halifax have seen more interprovincial migration in recent years, driving demand and straining supply.

Interest rate hikes impact everyone, no province is entirely sheltered," Hogue said, but regions with expensive properties, like the GTA and Vancouver, are more sensitive to rate hikes because of higher mortgage debt.

We do expect price declines through out the country but in different magnitudes," he added.

Ontario and B.C.'s home prices will decline by 16 per cent in spring 2023, whereas Alberta and Saskatchewan will see a four per cent drop, the report says.

Another factor impacting falling home prices are mortgage pre-approvals, which are propping up the market, said Robert Kavcic, senior economist at BMO.

Often, homebuyers are pre-approved for a mortgage - a borrower secures a rate for typically 90 to 120 days, while shopping for a home. That means, if someone was pre-approved in June, when the average five-year fixed rate was 3.59 per cent, they will not be hit with the higher borrowing costs as rates are now more than 4.5 per cent.

Current home sales fail to reflect current mortgage rates, since many homebuyers secured their interest rates months ago, which is why home prices won't bottom out until spring 2023, says Kavcic.

It's not a huge concern but it delays the adjustment process for the housing market," he said. The housing figures in September won't reflect the reality of the market conditions. We won't see it reflected until the later half of 2022 or early 2023."

Philip Cross, senior fellow at the Macdonald-Laurier Institute and former chief economic analyst at Statistics Canada, said while RBC's new forecast is more reflective of the market, he sees home prices dropping by at least 20 per cent.

As the RBC report notes, home prices are still higher than a year ago when the country was in a housing bubble meaning home prices are still unaffordable for many and have even further to fall, he added.

Last week, Jerome Powell, chair of the U.S. Federal Reserve Board said he is strongly committed" to fighting inflation, indicating that high interest rates will be around for longer than people think, making things worse for the housing market," Cross said.

Because of this, Cross predicts home prices will be the lowest by the end of 2023, not the spring.

The correction is far from being over. It will be more prolonged and steeper than predicted."

Clarrie Feinstein is a Toronto-based staff reporter for the Star. Reach Clarrie via email: clarriefeinstein@torstar.ca