Real estate prices in Canada could see a slight decline if one of the world’s biggest forecasters is right. Economy of Oxford‘ The latest forecast shows house prices will drop 24% by mid-2024. Higher interest rates and anti-speculation policies should start lowering prices this fall. If these measures fail to correct prices and they rise further, a 40% crash and a financial crisis are expected.
Real estate prices in Canada are expected to fall by 24%
The company sees a substantial decline in home prices, but not enough to get back to before 2020. Starting this fall, they forecast a 24% decline that will bottom out by mid-2024. Home prices have risen 50% since the Bank of Canada (BoC) began cutting interest rates. Even with this correction, the company expects prices to still be 15% higher than before 2020.
Home prices in Canada are expected to drop 24% by 2024
The average Canadian home price, household affordability range and Oxford Economics forecast of future price increases.
Source: Oxford Economics.
Don’t expect house prices to rebound quickly thereafter. From 2025 to 2030, they see supply outpacing demand and maintaining annual growth below 1% for five years. This will allow incomes to catch up and affordability to return by mid-2028. The forecast is an ideal combination of price dips and flats minimizing fallout. If that were to happen, they don’t see a recession or a major economic drag. Most price reductions would not be realized by the owners.
Lower house prices should restore housing affordability
The Oxford Economics Housing Affordability Index (HAI) for Canada.
Source: Oxford Economics; Haver Analytics.
If Canadian house prices continue to rise, they expect a 40% crash and a financial crisis
Just two years ago, the company was not considering such a significant drop in prices. Then the boom of 2020 began, pushing home prices to extremes. If prices continue their “unsustainable” climb, the correction turns into a crash. In this scenario, a 40% price drop would occur, along with the potential for a financial crisis. They also point out that it’s unlikely, but the 24% drop in their base scenario may lead to further fallout. Further research is needed in this area, which they plan to update us with.
Inflation set to push negative yields through 2030
The company uses nominal price data and considers inflation to play an important role in affordability. Investors may want to take note, since CREA’s benchmark is inflation-adjusted. Suppose the BoC manages an inflation target of 2 points from 2024 to 2030. By 2030, the price of a house will be 5% higher than the inflation-adjusted value in 2020. The base scenario shows 5% growth over a whole decade, which is a big change from the last decade.
The firm argues that a correction in house prices “may cause short-term problems”, but it is necessary for a healthy economy. As mentioned, those primarily affected would be recent buyers and investors. The former are unlikely to make any losses, as they would live in the house for some time.
The alternative, if the disconnection is preserved, leads to long-term economic damage. The required leverage and perpetually diverted cash flow are big risks. Every dollar spent on housing is not invested in more productive sectors of the economy. If cities prioritize house price growth over local economic growth, future economic growth is stifled. When this happens, cities and countries with a better value proposition become more attractive. Even New York, with an economy the size of Canada, struggles to keep its population growing at these prices.
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