The chances of a crash are low, but the Canadian housing market is heading towards a “soft landing,” a new RBC report published Wednesday has suggested.
Barring a spike in unemployment or a serious hike in interest rates — both of which could have damaging effects on housing activity — RBC expects the market to cool down beginning with a slight downturn in home sales in 2016.
Nationally, RBC is forecasting existing home sales to fall by less than 1 per cent next year, but the bank anticipates a more pronounced cooling-off period to follow.
“We would expect steeper declines to take place after 2016 based on our interest rate scenario,” wrote Robert Hogue, RBC’s senior economist and the author of the report.
The scenario the bank has outlined is one of increasing interest rates in mid-2016. In particular, the report predicts the Bank of Canada will raise the overnight interest rate by 75 basis points to 1.25 per cent over the latter half of 2016.
This move would mark a departure from recent Bank of Canada rate adjustments. The overnight interest rate sits at 0.5 per cent after two cuts this year.
The report stressed that the possible ensuing decline in home resales from a rate hike would be “moderate and controlled,” lasting up to several years but remaining within the under-10-per-cent range.
Of course, given the Canadian housing market’s strong performance in recent years and the fact that it has exceeded expectations in 2015, the report noted the same pattern could continue.
“Interest rates may not rise as much — or at all or even decline further — as we assume, and continue to stimulate growth in homebuyer demand.”
A booming economy stateside, for instance, could spark continued Canadian housing gains.
The high number of condo completions in Toronto — and to a lesser extent Montreal, Ottawa and Regina — and subsequent surge of unsold units is forecasted to push prices down in those markets, but RBC expects “the effects will be contained and transitory.”
Many units coming onto the market are the result of a 2012 construction boom, RBC points out, and starts have since moderated.
RBC’s analysis appears in line with a recent TD report that predicted a soft landing for Toronto’s housing market.
Overall, the RBC report lists a number of reasons why the chances of a crash — such as Canadian resales nosediving by more than 25 per cent — are “remote”
RBC expects economic growth, spurring both job creation and higher incomes, to reduce risk. Two of the last three times there was a decline of more than 10 per cent in annual Canadian home resales it was in a recession climate, the bank noted.
The report has also projected immigration will bring in more potential buyers and that interest rate increases will be a “gradual and drawn-out process.”
“We believe that monetary authorities in Canada and abroad will proceed very cautiously,” the report said.