Canada's largest bank has downgraded its outlook for the housing market, and now forecasts a historic correction, worse than any national decline seen in this country in the past 40 years.
Inflation has put the Bank of CanadaBank of Canada on a course of aggressive hikes that will take its policy rate to restrictive levels by the fall, according to RBC assistant chief economist Robert Hogue, who wrote in a report released Friday.
He said that this will send more buyers to the sidelines, especially in British Columbia and Ontario, where affordability is extremely stretched.
RBC believes home sales will fall nearly 23% this year and 15% next year, and national benchmark prices will drop more than 12% from peak to trough by the second quarter of 2023.
Hogue said that the 42% drop in home sales from the peak in early 2021 will surpass the declines seen in the past four national downturns. In 1981 -- 82 and again in 1989 -- 1990 sales fell 33%, in 2008 -- 09 sales fell 38% and 20% in 2016 -- 2018.
He said that the 12% decline in prices by early 2023 will be the steepest correction in the past five housing downturns.
The housing correction began when the Bank started to hike rates in March but the 100 basis point-rise on July 13 - an increase that brought variable rates within sight of fixed rates - will speed the cooling, Hogue said.
RBC expects the Bank's policy rate to reach 3.25% by October - a big bite for borrowers to swallow that will spoil or delay homeownership plans for many buyers. Hogue believes that the correction will be the epicentre of the correction. In British Columbia and Ontario, home sales fell by 45% and 38% in 2022 and 2023, and prices fell more than 14% from the quarterly peak to trough. Ontario saw a decline in the early 1990s when sales fell 41% and prices 15%, but it is not as bad as what happened in B.C. The sales fell 62% and prices 27% in the early 1980s, said Hogue.
More affordable areas of the country should be able to fare better. Sales are expected to fall more than 20% from record levels in every other province than Ontario and B.C. RBC expects to fall less than 3% in Alberta and Saskatchewan and between 5% and 8% in most of the other provinces by the first half of 2023.
In Quebec, RBC sees home sales fall 16.8% by the end of 2022 and down 6.1% in 2023. Prices are expected to end higher than the year before, but will decline 5.1% in 2023.
While RBC economists are expecting a historic correction, they don't see a collapse in the housing market.
They argue that this downturn should be seen as a welcome cooldown after the two-year buying frenzy that put homeownership out of reach for many Canadians.
RBC expects the correction to come in the first half of 2023, though a steeper and longer downturn can't be ruled out.
The market should not be in a death spiral because of solid demographic fundamentals including soaring immigration and a low likelihood of overbuilding, according to Hogue.