The Latest in Mortgage News: RBC downgrades its housing market forecast



RBC says it expects the country’s housing correction to “deepen” in the coming months with resale activity and prices falling more than expected.

The bank now sees home resales falling nearly 23% this year and 15% next year, with the national benchmark price falling a total of 12% “from peak to trough” by the second quarter of 2023.

“This would also rank as the steepest correction of the past five national downturns,” wrote RBC economist Robert Hogue.

“We expect local outcomes to vary widely with the priciest, more interest-sensitive areas facing larger declines, and relatively affordable markets showing greater resilience.”

He called the current correction “historic,” adding that buyers in the high-priced markets of Ontario and B.C. are “especially sensitive” to interest rates and “will struggle the most in the period ahead.”

The Bank of Canada’s latest 100-bps rate hike in July is expected to “speed up” the market’s cooling phase, Hogue added.

“While the move won’t necessarily result in a higher terminal point—we still expect the overnight rate will reach 3.25% by October—it’s a big bite for borrowers to swallow that will spoil or delay homeownership plans for many buyers,” he said.

Yet, Hogue added that housing is experiencing “a correction, not a collapse,” and that the unfolding downturn should be a “welcome cool-down following a two-year-long frenzy.”

“While a more severe or prolonged slump cannot be ruled out, we expect the correction to be over sometime in the first half of 2023—lasting approximately a year—with some markets likely stabilizing faster than others,” he said. “Solid demographic fundamentals (including soaring immigration) and a low likelihood of overbuilding should keep the market from entering a death spiral.”

U.S. Fed and BoC back on par after 75-bps rate hike

The U.S. central bank raised its benchmark rate by 75 basis points on Wednesday, matching the Bank of Canada’s current rate of 2.50%. The move was fully expected by markets.

In a press conference following the decision, Fed Chair Jerome Powell said he doesn’t believe the U.S. is currently in a recession as “there are too many areas of the economy that are performing well,” including its strong labour market.

“With the Fed only now getting to what many would consider a neutral rate, there’s still some further tightening that needs to be done to at least move rates into slightly restrictive territory,” noted economists from National Bank of Canada. “It’s clear (for now) that the Fed thinks the American economy will be able to withstand higher rates…”

Consumer confidence slips; affordability a key concern

The Conference Board of Canada’s consumer confidence index continued to fall in July, with inflation and affordability concerns top of mind.

Following an 8.8-point drop in June, the index fell another 6.6 points in July. Optimism over current finances slipped 11.4%, while those with a pessimistic view of their finances was up 33.3%.

The survey also showed an increase in short-term (one-year) inflation expectations, while longer-term expectations (three years) saw only a modest increase. “This signals that consumers are confident that inflation will be tamed in the long-run but remain worried about the immediate future,” the Conference Board noted.

As prices and interest rates continue to rise, affordability remains a top concern for consumers.