Canada's housing correction now runs "far and wide": RBC

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Canada’s housing correction now runs “far and wide” as higher interest rates continued to take a “huge toll” in July.

In a recent report, Robert Hogue, assistant chief economist at RBC, said the downturn has deepened in housing markets across the country.

In Toronto and Vancouver — the two least affordable markets — the decline is “quickly” becoming one of the sharpest drops in the last 50 years.

“Prices are sliding fast, and the exuberance that permeated these markets earlier this year is being replaced by fear,” Hogue said. “[Toronto and Vancouver] are most at risk in light of their excessively stretched affordability and outsized price gains during the pandemic.”

In Toronto, the pullback is in full force, and the “frenzy” that propelled the city’s housing market to unforeseen heights last winter is “completely gone,” the economist noted.

Excluding the lockdown of April 2020, housing activity is at its slowest pace in more than 13 years. Previously rock-bottom inventories have risen 58% year-over-year, while Toronto’s composite MLS Home Price Index (HPI) has fallen 13% since March 2022, to $1,160,000.

“We expect buyers to remain on the defensive in the months ahead as they deal with rising interest rates and poor affordability,” Hogue said.

“We see them in a position to extract further price concessions, especially in the 905 belt where property values soared during the pandemic. Condos in the City of Toronto are likely to remain relatively more resilient.”

Since the spring, rising interest rates have been pouring “buckets of ice-cold water” on Vancouver’s housing market. Activity has fallen 40% in the last four months and prices are weakening — the composite MLS HPI has fallen 4.5% since April.

RBC believes the city’s correction is still in its early stages, and buyers in the region will only face further pressure as rates rise and affordability reaches “suffocating levels.”

Sellers have considerably less power, and property values are expected to fall “rapidly” in the coming months. The pain will be felt particularly in single detached homes, while condo apartments will prove to be more resilient.

“Soaring interest rates have been the catalyst for this widespread correction,” Hogue said.

“Higher borrowing costs have pushed many buyers to the sidelines and reduced the purchasing budget of others.”

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While the downturn is more contained in other parts of the country, its existence cannot be ignored.

In Calgary, where activity is still well above pre-pandemic levels, property values are beginning to ease as buyers waver.

Higher interest rates are pushing buyers towards more affordable options, such as condos, and easing demand for single detached homes. Supply is dwindling in the latter, too, as sellers hesitate.

Calgary’s composite MLS HPI has dipped since the peak seen in May, and RBC expects the same course of action in the near term. However, Hogue said prices will be supported to a degree by tight demand-supply conditions and positive economic and demographic fundamentals.

Activity has steadily moderated in Montreal, where home resales stood 17% below pre-pandemic levels last month. A calmer environment and rising inventories have brought balance back to the market, Hogue said.

Median prices for both single family homes and condos fell month-over-month in July, and RBC expects that property values will continue to ease in the near-term as the market adjusts to higher interest rates.

“Our expectations for further hikes by the Bank of Canada—another 75 basis points to go in the overnight rate by the fall—will keep chilling the market in the months ahead,” Hogue said.

“We expect the downturn to intensify and spread further as buyers take a wait-and-see approach while ascertaining the impact of higher lending rates.”