Homebuyers are ‘feeling the heat’ as home prices drop 14%

Prices will continue to drop as the central bank raises the cost of borrowing, economist predicts

Homebuyers are ‘feeling the heat’ as home prices drop 14%

The Bank of Canada’s efforts to quash inflation with quick interest rate hikes is putting the screws on Canadian homebuyers, warns from Royal Bank of Canada.

Robert Hogue, assistant chief economist at RBC, stated in a note to clients that he anticipates prices will continue to fall as the central bank raises borrowing costs, which RBC sees peaking at half a percentage point above its previous forecasts.

“The national composite MLS Home Price Index fell a further 1.6 per cent month-over-month in August. It’s now down 7.4 per cent since February’s peak, within striking distance of the eight per cent peak-to-trough decline recorded during 2017-19 downturn,” he said.

“We see that trend continuing in the near term with the Bank of Canada poised to stay in tightening mode until the end of this year. We have updated our policy rate call to four per cent by December, up from the 3.5 per cent we previously expected.”

Read more: Bank of Canada keeps foot on gas with another supersized rate hike

The consensus view among RBC, TD, and Scotiabank for the Bank of Canada’s terminal rate – essentially where a central bank ends its cycle of rate increases or decreases – is 4%, according to reporting from BNN.

That places rates squarely in the so-called "restrictive territory" that limits economic growth; the central bank has previously warned that rates above 3% will stifle output.

To lower inflation, which is currently running at 7.6%, more than three times the central bank's target, the central bank raised its benchmark rate from the pandemic low of 0.25% to 3.25%.

The next 18 months will see a further slowdown in housing activity, according to Hogue, as potential buyers are pushed away by the higher cost of borrowing.

He added that in the upcoming months, buyers should be on the defensive due to the likelihood that the Bank of Canada will raise its policy rate further into restrictive territory by year's end.

“Higher interest rates will disqualify more buyers from obtaining a mortgage and shrink the size of a mortgage others can qualify for. We project home resales to fall 23 per cent in Canada this year and a further 15 per cent next year.”

Read more: 38% of Canadians unsure what rising rates imply for them

Overall, according to Hogue, prices will bottom out by the beginning of next year, though the pain will be felt more keenly in British Columbia and Ontario, where prices rose sharply during the pandemic.

“We think the market will adjust to higher interest rates by early 2023. Any recovery will likely take a few months to tighten demand-supply conditions, placing the bottom for prices around springtime (overall for Canada),” he said.

“We expect benchmark prices will be down approximately 14 per cent from the recent peak nationwide. On a provincial basis, we project Ontario and British Columbia to record the largest peak-to-trough declines [16 per cent], and place Alberta and Saskatchewan at the other end of the scale at [declines of four per cent].”