Speaker 1:
This is the Real Pulse, a podcast series where RBC capital markets experts share their insights on the latest trends and opportunities in commercial real estate.
Nurit Altman:
Decades long monetary policies supporting low interest rates have been a strong tailwind for the Canadian housing market. Coupled with robust demand for all types of housing, driven by demographic trends and ambitious immigration policies Canadian house prices reached a peak in February 2022. But a sharp reversal of policy in March and a forward trajectory of interest rate hikes has set the stage for a very different housing market than the ones Canadians have become accustomed to.
Nurit Altman:
Today I am joined by Robert Hogue, assistant chief economist RBC Economics, who will help us decipher what rising interest rates, construction costs and recessionary fears will mean for the housing market. Robert, thanks for joining us today.
Robert Hogue:
Well, thanks for having me.
Nurit Altman:
The Canadian Real Estate Association just came out with their June report on the Canadian housing market showing another monthly decline in sales volumes and prices. I don't think this came as a surprise to many, but the pace of change may have been. What do you see as the trajectory of house prices in Canada over the next 24 months? When will we see the trough and what do you think that will look like?
Robert Hogue:
Right. I mean, this is a thing in the phase of the market that we've sort of all been expecting for, especially those who are on the market to buy a home expecting for, for sometimes that finally the market is cooling and clearly the increase in interest rates that we've seen since March, I think have played a huge role in this. So now we are now in that cooling phase of home prices have begun depending on what part of the country we're talking about. But for example, good parts of Ontario and some parts of BC we're seeing now three up to four months of a month to month over price declines and we think that's probably just the beginning.
Robert Hogue:
With the prospects of even higher rates at these policy rates over the coming months, we do think that the market will cool further in the near term over the coming months into the fall. Probably in later stages of this year and possibly early next year, which will further exert some downward pressure on home prices.
Robert Hogue:
Now, today the price declines, as I mentioned, have been sort of concentrated in good parts of Ontario and BC, but our view is that it's probably going to start spreading to other parts of the country. Probably to a different magnitude, but nonetheless, they will become much more prevalent than what we've seen so far. So that on a national basis is going to start to add up to a fairly significant correction.
Robert Hogue:
Now, I mean, when we talk about price corrections here, we all wonder how low prices can get, but in our opinion, if we look at benchmark prices, which are different than average prices, and maybe we can discuss that if you want. But the peak to trough, we're looking at somewhere around 12, 13% on a national level, and obviously a bit more at the local level with the GTE, for example, seeing some more significant price declines. That's already on the way, underway right as we speak.
Robert Hogue:
It's probably worth pointing out that really going forward and what's kind of starting to unfold now is a decoupling of markets, which after a period of more than two years of... Well, the Canadian housing market having been so incredibly synchronized, it is back to normal in that sense. That we're going to see the different parts of the country correcting more than others. Some may be entirely resilient and there might be parts of Atlantic Canada, for example, that are much more relatively affordable that will see less of a price correction.
Robert Hogue:
So a much more varied picture going forward. Overall, a fairly significant correction though, not a collapse. Now there's still some fundamental factors that will support or create more what I would characterize as a safety net under the Canadian housing market, but nonetheless, a fairly significant correction.
Nurit Altman:
So Robert, you touched on this, maybe you can dig into it a little bit more. Why you see benchmark prices being very different than what we see playing out in the average price of a home in Canada.
Robert Hogue:
Right. Because now benchmark prices are in our view, probably the best measure of prices. Basically they focus more, they highlight more on individual types of housing, how they evolve over time. They're not influenced by the composition of sales that play into average home prices. So you may have an average price decline from month to month, just because the market has been more at the lower end and there are more sales at the lower end of market. The higher end being a bit more quiet. So just the composition of sales does matter on average prices, whereas the benchmark prices are control for this. So in our view, we focus much more on benchmark prices.
Nurit Altman:
So despite the fact that house prices may be declining, boring costs are pricing many perspective home buyers out of the market. Because of this, we expect to see strong continued demand for rental housing. How do you forecast the rental market will perform over the next year and how do you see condominiums fitting into that picture?
Robert Hogue:
Given the current context of higher home ownership cost the bar to become an owner has risen quite significantly over the past year. First due to higher prices, but more recently due to significant hikes in interest rates. So this will basically back more people into the rental market. So in that sense, we're very bullish in terms of rental demand.
Robert Hogue:
Now this creates its own set of challenges where the rental vacancy rates are already extremely low in many parts of Canada. So this will, from a renter's perspective, make things even more challenging. But from an owner perspective, I think that's a space that will have significant demand and probably significant upward pressure on rent, which is already something that we're seeing today and we've seeing over the recent past. So clearly there's some significant upside on rent as well.
Nurit Altman:
Housing affordability has been a hot button political issue in Canada for some time and was a key focus of the last federal budget. A combination of rising rates and rising rents doesn't set the stage for improved affordability. So how do you expect governments will react to the changes that we're seeing in the market from a policy perspective, both at a federal and provincial level?
Robert Hogue:
Well, I think we've seen, I would say over the last year, a significant change in the conversation from a policy perspective. Much more emphasis now on the supply side and this is something that folks in the sector, in the housing sector, and especially in terms of home builders have been talking about for years. But I think now policy makers are paying a lot more attention to this.
Robert Hogue:
Now this is no silver bullet here. I'm not suggesting that boosting the supply and addressing all the obstacles that are in the way of new construction, for example. Whether it's permitting issues or zoning issues, there's a whole list of issues or development costs, charges. There's a whole list of issues to be addressed and by addressing them we'll probably not make the market affordable overnight, but this is part of the long term solution.
Robert Hogue:
Now, what are the prospects of housing, especially on ownership, becoming affordable in large markets like Toronto or Vancouver? I would say the things, unfortunately, are quite dim there. I think those are markets where there is significantly more demand than there's available supply and the types of what people want is will take time to build. But nonetheless, I think when you look at the various addressing supply issues should reduce the pressure, the affordability pressure over time.
Robert Hogue:
Now in addition to that, if we're going to see as what we expect to see a price correction, this at the margin could eventually also lead to some improvement in affordability. Now a type of price correction that would make Toronto affordable, for example, would have to be very significant, which is something that is not our base case. But nonetheless will contribute that plus more supply will eventually contribute to some, I guess, improvement on the affordability side.
Nurit Altman:
Well, a view that policy may support an increase in supply, I think will be music to the years of many listening today. I know this is a market that everyone is watching very closely. So we appreciate you sharing your insights. Thanks for being with us.
Robert Hogue:
Well, it's been my pleasure.
Nurit Altman:
I'm Nurit Altman and this is the Real Pulse.
Speaker 1:
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