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Canada’s real estate correction is all set to continue, following a brief interruption. High-profile macroeconomics firm Oxford Economics sees the Spring bounce as temporary. Their latest forecast shows the correction is only halfway, and will last well into next year. Higher mortgage rates and macroeconomic erosion may also prevent a rapid recovery.
Canada’s Real Estate Correction Is Only Half Over
Canada’s real estate correction hit pause after the central bank literally said “pause.” In January 2023, it looked like home prices hit a bottom after falling more than 17% from the peak (March 2022). Prices reversed course, increasing tens of thousands per month as pent-up demand released. Now prices in key markets are dropping, as the latest hike proved there was no pause.
“Canada’s housing downturn is not over, as we think the spring resale housing revival is nearing an end,” says Tony Stillo, the firm’s Director of Canada Economics.
Stillo’s team sees home prices falling another 10% by the first half of 2024. In total, a typical home across Canada will have dropped between 20% and 25% from peak-to-trough, in line with their earlier forecast at the start of the correction.
Source: Oxford Economics.
Canadian Real Estate Prices Won’t Bounce Back As Easily This Time
Canadian home prices bounced quickly in January, but that might not be the case next time. Real estate corrections usually are accompanied by rising unemployment, and falling consumer demand. It wasn’t the case with the first half of the correction, where the economy outperformed. The sentiment just shifted, and sentiment shifts with words like “pause.”
Stillo’s forecast sees the final act of the correction to be more than just a shift in sentiment. “We expect a second leg down in house prices and sales will be driven by the onset of recession, higher mortgage rates, tighter credit conditions, record unaffordability, and the impact of government policies to curb speculation and ban foreign buyers,” he says.
Canadian Mortgage Rates Are Expected To Rise Further
Canadian mortgage rates have been so low for so long, it may be hard to see further increases. Unfortunately, they’re likely to rise even further according to the firm. They see the latest BoC rate hike helping to push mortgage rates up to 6.1% by H2 2023, further weighing on housing.
Source: Oxford Economics.
Higher costs already have investors moving away from real estate investment. Stillo’s analysis points to residential investment’s 3.9% quarterly decline in Q1 2023. They see further declines through next year, as construction, renovation, and home resales will further slow as financing costs rise, and returns fade.
Source: Oxford Economics.
Stillo previously warned that correction mitigation is possible in some cases. However, each time a correction is mitigated, it requires a larger correction. It’s a trade off for short-term satisfaction at the risk of more economic damage.
It’s kind of like using a payday loan to make the minimum payments on your credit card. If you’re in a pickle, it looks like it works, but then you’re left with a much bigger problem. Now Canada is at the point where experts see further mitigation can produce a financial crisis.
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