March 15, 2023 Looking for light at the end of the tunnel: a positive perspective on the housing dip

RBC recently released a special housing report summarizing its outlook on the Canadian market, aptly titled 'Canadian housing market outlook: the bottom of the downturn is in sight'. Speaking for RBC Economics, Robert Hogue, Assistant Chief Economist at RBC, attempts to answer the question on everyone's mind: when will this start to turn around? Given the circumstances, RBC's outlook was generally positive but clearly established the road to recovery will be a long and uphill journey.

Last year's policy led to this year's consequences

As the report summarizes, RBC believes the Canadian housing market correction has not yet run its full course – but the end is in sight. The prediction is that activity will bottom out in the spring of this year, with a levelling out of prices to follow a couple of months later, provided interest rates aren't further raised. RBC predicted a 15% peak-to-trough decline in home prices, with roughly half of this decline still to come. Regionally, the prediction for British Columbia is only slightly higher, 16%, compared to Ontario's 19% and Alberta's 6%. It's key to look at these numbers with the note that these dips offset some of the immense and unsustainable home price increases seen during the pandemic.

The slowdown market has moderated, but that's partially because activity can't get much quieter than its current level. There's little downside left to slide into. National resales are the quietest they've been since the 2008-2009 global financial crisis (excluding the initial pandemic lockdown of spring 2020), and consumers are still suffering the sharp deterioration of housing affordability unrolling since 2021. The enduring costs of 2022's policy changes will likely continue to be felt in 2023.

Increased affordability required for a more rapid rebound

Affordability issues are actually easing, albeit gradually. Last week during its March update, the Bank of Canada announced its decision to hold the interest rate at 4.5%. RBC predicted the Bank will hold that rate through early 2024 and then gradually lower rates to reach 3% by late 2024 or early 2025. This will bring mortgage holders some relief and mortgage applicants more budget to work with. Affordability stands in the way of a more rapid rebound as it affects buyers' budget constraints to purchase. It will take time to unwind the decreases of 2021. This holds particular truth for British Columbia and other expensive markets, where ownership costs ballooned during the pandemic years.

Strong fundamentals hold promise for the future

The Canadian real estate market has undergone a dramatic swing since March 2022 due in large part to the unprecedented impact of the pandemic and the persistently low-interest rates. Despite these challenges, RBC emphasizes the underlying structure of the market remains fundamentally sound, especially for investors. While inventories are rising modestly, they still remain historically low, and there are no signs of overbuilding in any region of the country. Canada's population has grown significantly over the past year, which is expected to continue thanks to booming immigration. This influx of people is expected to drive demand for housing, further fueling the market. Looking ahead to 2024, RBC anticipates that the market will stabilize as it adjusts to higher interest rates, revealing the solid fundamentals that have been present all along. Despite recent turbulence, these factors indicate the Canadian real estate market will remain a reliable and lucrative investment for those with a long-term outlook.

Homebuilding necessary to achieve balance long-term

Homebuilding is the key to restoring long-term balance in the Canadian housing market in a market eager to prevent supply and demand imbalances again. RBC describes the country's track record for construction and supply response in recent years as underwhelming. While the number of housing completions has increased from less than 190,000 units in 2019 to around 220,000 units in 2021 and 2022, it has not been enough to meet the soaring demand for homes across the country, which is bad news for buyers. The report shows Canada's housing stock must expand by at least 270,000 units annually by 2025 to keep pace with the growth in households and address the pressing issue of housing affordability in many Canadian cities. The current rate of homebuilding is insufficient, and there is considerable pressure to ramp up the construction of new homes. Booming immigration numbers have the potential to aggravate and alleviate the problem. Immigrant numbers will fuel demand through the medium term (and possibly beyond), raising the odds of deep supply shortages in the future if homebuilding fails to pick up. However, they may also increase the labour pool to reduce labour shortages – a significant barrier in the construction industry at present. In the recent MLA Intel 2023 report, MLA forecasted a total of 95 pre-sale programs to launch in Metro Vancouver in 2023. These programs will bring approximately a total of 11,000 pre-sale units to market this year to contribute to that shortage.

As Hogue states in the report, the Canadian housing market correction has yet to run its course, but it is gradually letting up. Activity should hit bottom sometime this spring, and prices should level out in a few months, leading into a recovery phase expected to slowly gain strength later this year after affordability issues and a weakened economy also correct. As newfound stability depends on the Bank of Canada ceasing increases on interest rates, the housing market should incrementally pick up through 2024 if inflation returns to the target rates and interest hikes are reversed. While Canada's real estate market's challenges are not insignificant, its fundamental strengths have enabled it to weather the storm thus far. Low inventory levels, steady population growth, and resiliency of the Canadian economy are all factors that bode well for the future of the market.