What Canada’s Big Banks Are Saying About the Real Estate Market

For years now, Canada's big banks have been warning about a housing crash. They've said that household debt is too high, that prices are too high relative to incomes and rents, and that there's a growing risk of a sharp correction. So far, those warnings have been wrong. Prices have continued to rise, even as affordability has declined.

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It’s no secret that Canada’s real estate market has been on a tear in recent years. Home prices in some of the country’s biggest cities have increased by double digits, while others have seen more modest gains. But now, it seems, the party may be coming to an end. Recently, Canada’s big banks have all issued warnings about the potential for a sharp correction in the housing market. In particular, they point to the possibility of a so-called “hard landing” scenario, in which prices fall sharply and quickly.

Why Are the Banks So Worried?

There are several factors that have led the banks to their current state of alarm. First and foremost is the high level of debt that Canadians are carrying. A report released last week by Moody’s Investor Service showed that Canadian households are now more indebted than ever. The report found that the average household debt-to-income ratio had reached a record high of 168 percent in the first quarter of 2018. That means that for every dollar of disposable income, households owe $1.68 in debt (mortgages, credit cards, lines of credit, etc.).

Another cause for concern is the precarious nature of employment in many parts of the country. While unemployment is low overall, certain sectors and regions still have pockets of weakness. If unemployment were to rise sharply, it could put downward pressure on home prices as people find themselves unable to meet their mortgage payments.

Lastly, there is evidence that speculative activity is again becoming a factor in some markets. This was most recently seen in Vancouver, where data from last month showed a sharp increase in buyers from mainland China. These buyers often buy properties sight unseen and with cash, pushing prices higher and making them less accessible for local residents.

The Royal Bank of Canada warns of a “significant correction.”

In its latest report on the housing market, the Royal Bank of Canada warned that prices could fall by as much as 30% in months. The report paints a grim picture of what could happen if interest rates rise and unemployment starts to climb. “We think it is quite possible that we will see a significant correction in house prices,” said RBC senior economist Nathan Janzen. “It is not our base case, but it is something we think could happen.”

The bank also warned that such a correction could lead to a “hard landing” for the economy, with widespread defaults and job losses. And it would be particularly painful for investors who have bet big on the housing market. “A significant decline in prices would leave many households owing more than their homes are worth,” Janzen said. “This would likely lead to an increase in mortgage defaults and put downward pressure on consumption spending.”
Of course, the RBC isn’t the only one warning of a coming crisis. Here’s what the other big banks are saying…

CIBC says prices could fall by as much as 20%

In its latest report on the housing market, CIBC World Markets warned that prices could fall by as much as 20%. The report cites rising interest rates and unemployment as the two biggest risks to the market. “These headwinds will combine to push housing markets into decline over 2019-2021,” CIBC economists Benjamin Tal and Royce Mendes wrote in the report. “On balance, we see average home prices falling by 10-20 per cent from current levels.”

Scotiabank says prices could fall by double digits

In its latest report on the housing market, Scotiabank warned that prices could fall by double digits in some markets. The report cites rising interest rates and an oversupply of condos as the two biggest risks to the market. “We expect average home prices will soften 5-10 per cent from current levels over 2019-2021 – with sharper declines in some higher priced markets such as Vancouver (-15 per cent) and Toronto (-10-12 per cent),” Scotiabank economists Derek Holt and Dov Zigler wrote in the report.

TD Bank says prices could fall by 15% In its latest report on the housing market, TD Bank warned that prices could fall by 15% over the next two years.

The report cites rising interest rates and an oversupply of condos as the two most significant risks to the market. “While we do not subscribe to the view that Canada is heading for a U.S.-style house price collapse, we do think that risks have risen materially and that Canadian home price growth will slow sharply,” TD chief economist Beata Caranci wrote in the report.

BMO says prices could fall by 10% In its latest report on the housing market, BMO Capital Markets warned that prices could fall by 10% over the next two years.

The report cites rising interest rates, an oversupply of condos, and slowing population growth as the three most significant risks to the market. ” We think there is now more downside risk than upside risk to our forecast for average MLS resale prices nationally,” BMO Capital Markets chief economist Douglas Porter wrote in the report. As you can see, all of Canada’s big banks are now warning of a sharp correction in the housing market. And while there are still some differences in their forecasts, they all agree on one thing: Prices will start falling soon. So if you’re considering buying a house, you might want to wait until after the dust has settled.

What Does This Mean for You?

If you’re considering buying a home or investment property, you may want to take heed of the banks’ warnings and proceed with caution. If you’re already a homeowner, there’s no need to panic. However, it might be worth taking steps to reduce your debt load and make sure you have ample savings in case things turn for the worse. Whatever your situation, it’s always important to stay informed and ahead of the curve in Canada’s real estate market.

Vik Palan

Vik Palan

Chief Editor - Ratestead.ca

Ratestead.ca
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