RBC Economics says the odds of a Canadian housing market crash are low, but “cannot be ruled out entirely”

RBC Economics says that homebuyers across the country “will feel the pinch of rising rates.”

The Bank of Canada has so far raised its interest rate twice this year, and has yet to do so.

RBC economist Robert Hogue believes the central bank will raise rates a further one percent, taking them to 2 percent by the end of 2022.

Hogue is convinced that rising interest rates will be a game changer in the Canadian real estate market, as it will make mortgages more expensive.

To illustrate, a one percent increase in the Bank of Canada rate translates to $526 more in monthly payments for a typical home in Vancouver.

Additionally, those who qualify for a mortgage “will find that higher rates reduce the size of the mortgage they can get and the price they can afford.”

Citing as an example, Hogue noted that Canadian households earning the median income will see their maximum purchase budget reduced by 15 percent.

This will cool down the market which saw sizzling activity in 2021 due to low interest rates.

“We now expect resale home activity to slow faster than anticipated and, perhaps more importantly, see prices peak this spring as market sentiment sours on extreme optimism,” he wrote. Hogue in a report published on April 21.

“In this altered scenario,” the economist continued, “local markets could experience a slight price correction, partially reversing the outsized gains recorded last year.”

Hogue wrote that Canada’s most expensive real estate markets will feel the effects of higher rates the most.

“We expect downward price pressure to be most intense in Vancouver, Toronto and other expensive markets,” the economist wrote.

Hogue continued: “This will translate to larger annual price declines in 2023 in British Columbia and Ontario.”

“By comparison,” the RBC economist continued, “we expect activity and prices to be more resilient in Alberta, where local markets have more to recover from after a prolonged slump before the pandemic.”

Although resale figures are expected to decline and prices to experience a “modest” correction, the outlook for the Canadian real estate market is not really gloomy.

“While it cannot be completely ruled out, we consider the odds of a market downturn to be low,” Hogue wrote.

The economist explained that “solid demographic fundamentals will continue to support the Canadian real estate market.”

“Millennials, in their prime home-buying years, will continue to be a force, and rising immigration will further drive housing demand. These factors will prevent demand from freezing,” Hogue wrote.

Overall, Hogue believes 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.”

“After last year’s extreme price increases and heated bidding wars, this would be a welcome change,” Hogue concluded.


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