Real Estate Prices Can Fall 30%

housing dilemma

RBC Suggests Real Estate Prices Can Fall 30%

RBC has suggested that they don’t see growth happening in real estate over the next year. You can read the full article on Better Dwelling here:

Risk models suggest the bank expects almost no price growth over the next 12 months. If there is growth, it will be modest growth at best. At worst, the bank is forecasting a 30% drop in home prices and 18 months of deteriorating conditions.

How Does Forecasting Work?

Banks have to make reasonable assumptions and manage the risk. They have to be optimistic, but realistic at the same time. If they are too optimistic – they wouldn’t be ready for any economic shock. 

Being too pessimistic and they wouldn’t be taking sufficient market risk, reducing profits. It’s a careful balance and the models aren’t meant for consumers so much as they’re meant for risk balance.

The Downside To The Forecast – Canadian Home Prices Fall 30%

In the bank’s downside scenario, RBC see’s the potential for a sharp fall! It should be noted that RBC is predicting a sharper fall than most expect. In a contraction, their forecast shows prices falling 30% over a 12-month period. This would be large enough to be considered a crash. 

A housing crash has been predicted by many for months. Many have been speculating this bubble is far overdue for a bust as we did not take our medicine in 2008 when the rest of the world did. Since then, debt has been piled on at staggering rates.

The following four years are forecasted to see an average of 4.2% compound annual growth. 

The Upside To The Forecast –  Home Prices Rising 11%

The alternative to RBC’s downside is the upside, where prices rise more than expected. This shows double-digit growth. 

Home prices could rise 10.9% in this scenario, followed by four years of compound annual growth at 9.6%. It’s hard to see home prices growing 5x the rate of income for five years, but that’s part of the forecast.

Realistic Forecast:

RBC isn’t forecasting much for prices, but the downside is much bigger than the upside. 

Policy missteps can extend the trend in a different direction, but experts warn this is a mistake. As Oxford Economics pointed out recently, higher price growth can increase risk substantially.

If you are buying, selling or refinancing a home let us know if we can help in any way – Gregg Bamford and Ryan Bamford. 

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