Capital Economics Says We Could Go Back To Pre-Pandemic Levels

An increase in borrowing rates could reduce Canadian housing prices by 10 percent over the next year, according to Capital Economics. That would lead to an even bigger drop in real estate investment.

“When interest rates rise, home sales are usually the first domino to fall and this time is no different. With sales plunging, it is no longer a question of whether house prices will fall, but rather how much will they fall by?” – said Stephen Brown, senior Canada economist at Capital Economics.

According to the latest housing data for April, significant sales declines are underway as higher interest rates discourage some buyers in many major markets across Canada, such as Toronto, Vancouver and Montreal.

In recent months, fixed mortgage rates have surged ahead of higher interest rates, while variable rates – which now account for over half of new mortgages, according to Bank of Montreal data – have also risen with the Bank of Canada’s benchmark rate.

Home Prices 25 Percent Lower Than In 2019?

Brown also said he’s assuming that home sales will be cut to 25% below the pre-pandemic average from 2019 and added:

“Because house prices have risen so far beyond a level that can be justified by underlying fundamentals, we suspect that, even in the absence of forced selling, prices will fall by 10 percent during this tightening cycle”.

According to Brown, if the prices decline by 10 percent Brown, the biggest impact would be the pullback in housing investment. Even though that would cause a slowdown in economic growth, he does not expect it to result in a contraction of GDP.

“But if house prices fell by much more than we expect – which clearly should not be ruled out given their elevated level – a recession would be almost inevitable.”

If you ask Brown, the Bank of Canada doesn’t really understand how sensitive real estate investors are to interest rates. It is expected, however, for the Bank to stop its tightening cycle once the rate reaches 2.5 percent.