Canada’s largest bank is prepared for price drops most would find unthinkable. Royal Bank of Canada (RBC) filings show possible risk scenario forecasts. Over the next year, the base forecast shows virtually flat growth. In a best case scenario, growth would hit levels similar to previous years. In a worst case, they forecast prices can make the biggest drop since the early 1980s.
Macroeconomic Scenario Assumptions
Quick intro to IFRS 9 macroeconomic assumptions for people that aren’t in finance, or aren’t secret finance nerds. IFRS 9 is a financial reporting standard used by most of the world’s banks at this time. One of these standards requires an assessment of risk, using unbiased and possible economic outcomes. Typically three macroeconomic scenarios are used: a base, best, and worst case scenario.
The base, best, and worst cases are what they sound like. The base case is the average scenario you currently expect. The best case is an ideal projection, if everything is perfect. The worst case is the most severe outcome you can realistically expect. The organization needs to be ready for each one of these scenarios.
The forecast numbers are important for each organization’s preparedness. Too optimistic, and just a few impairments can result in serious damage. Too negative, and you’ll be putting aside way too much capital, placing a drag on company growth. These aren’t just random numbers, they’re considered reasonable outcomes. That said, let’s look at their real estate scenarios.
Base Case: Canadian Real Estate Prices Are Flat
The base case isn’t as ambitious as most would guess, and it’s actually quite modest. The bank’s forecast sees prices rising 0.6% over the next 12-month, with the numbers starting in October. They expect compound annual growth of 4.5% for the following 2 to 5 years. Basically, they see the market as flat in this scenario.
RBC’s Canadian Real Estate Risk Scenarios
RBC’s macroeconomic scenario assumptions for Canadian real estate prices under various risk scenarios.Source: RBC, CREA, Better Dwelling.
Best Case: Canadian Real Estate Prices Rise 6%
The best case sees lower price growth than we’re currently seeing, but not far off. This ideal scenario would see home prices jump 6.1% over the next 12 months. That would be followed by compound annual growth of 11.1%, which is pretty big. It just might not seem huge in comparison to the past few years.
Worst Case: Canadian Real Estate Prices Fall Almost 30%
The worst case scenario is much larger than most banks have acknowledged, but is similar to Moody’s worst. The bank forecasts a national price drop of 29.6% over the next 12 months in this scenario. Compound annual growth of about 2.9% would follow in the next 2 to 5 years. Canada hasn’t seen such a significant decline at the national level since the early 80s.
Earlier this month, RBC’s chief risk officer said he was putting more weight on the downside scenario. However, he didn’t use the 29% price decline seen in this economic risk forecast. Instead he said they expect prices to fall around 7%, and remain depressed until late 2023. Reading between the lines, it sounds like they are internally forecasting a worse than expected outcome, but not the worst scenario they’ve prepared.
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TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
