Most Canadian Real Estate Gains Will Be Wiped Out Starting This Year: Oxford Econ

    Canadian real estate prices have already begun to see growth slow, but this is just the beginning. Oxford Economics is reiterating its forecast as factors line up to return affordability. They see home prices falling by 24%, wiping out most of the gains made since the start of 2020. The declines are expected to begin this year and go right into 2024 — a slow but sustainable process.

    Canadian Real Estate Price Are Forecast To Fall by 24%

    Canadian real estate prices are expected to begin their sharp decline this year. Rising rates, record un-affordability, and policies to curb demand and boost supply all contribute. As mentioned before, the firm previously forecast a 24% decline in home prices. So far the forecast sticks, as the economic environment returns to efficiency.

    “After cresting in late summer 50% above their pre-pandemic level, we forecast home prices will decline 24% by mid-2024,” said Tony Stillo, the firm’s Director of Economics.

    The forecast calls for a significant drop but not enough to wipe out all gains since 2020. Home prices increased roughly 50% since the start of the pandemic. Math-challenged folks may think that’s just half of the increase made. However, the rate of decline applies to a much larger number. A 24% price drop by 2024 would leave a gain of ~14 points since 2020.

    That’s roughly 3.3% compound annual growth (CAGR) over the period. Not a bad increase by any means, but not the kind of growth many investors expect. Even with the price drop, affordability won’t be restored in any capacity, yet. We’ll circle back to this point, but first — why not intervene to prevent a market drop?

    Canadian Real Estate Prices Can Fall Up To 40% If Delayed

    No doubt policymakers are already being pressured to prevent any price drops. A wealth effect is when people spend more money because they feel rich. Rising home prices are believed to have boosted spending this way. Concerns that falling home prices may reduce consumption are valid. However, Capital Economics doesn’t see it being as significant as many assume.

    “Lower house prices will likely have a modest negative effect on consumption, but we don’t expect it will result in a recession or undue stress on the financial system,” explained Stillio. “…should the price boom continue unabated, risks grow of a larger crash with dire economic consequences.”

    In addition, market inefficiency is more likely to reduce consumption more than a reduced wealth effect. High inflation erodes consumption by forcing consumers to pay more for less goods. Younger, prime consumers, are also dedicating more of their income to shelter. This diverts from consumption and reallocates capital to those less likely to spend. It’s sort of a reverse Robin Hood scenario.

    Longer economic inefficiencies also require much greater corrections to return to efficiency. They reiterated a warning that if home prices continue to rise, the fallout will be much worse. A drop of 40% and the risk of a financial crisis is what they previously stated the outcome would be. Falling home prices sound bad, but pushing a market to its absolute failure is even worse. The sooner a market corrects, the more quickly it becomes efficient. 

    Canada Won’t Be Economically Devastated By A Real Estate Crash

    It’s unlikely the Canadian economy would be devastated if home prices fall. Strong economic growth, a tight labor market, and (ideally) stable inflation, will help. Higher interest rates will cost high debt consumers more but savings will help.

    “… we think the nearly $245bn (9.4% of GDP) in excess savings built up by households during the pandemic, along with significant pent-up demand, will continue to support strong consumer spending growth of 5.9% in 2022.”

    Housing Affordability Index (HAI): Canada

    Index (0.9 to 1.1 affordable range)

    Source: Oxford Economics/Haver Analytics.

    Canadian real estate prices still won’t be affordable with a 24% drop, but it’ll be a start. Price declines tend to drive speculators away and supply creation will help. Low home price growth will allow wages to catch up over time and affordability will catch up over time as well. This is otherwise known as a soft landing, and if you look at the above chart, you can see how ideal (and rare) it looks.

    There are a lot of concerns about home prices falling but the risk of them not falling is much worse. The further concentrated an economy becomes on housing, the less flexible its response in a downturn. This leads to a greater chance of absolute failure that won’t respond to policy.

    Source: Better Dwelling


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