RBC's worst that could happen
Banks like RBC base their national housing price projections partly on macroeconomic indicators like employment, consumer spending and economic growth. So for RBC’s worst case to play out, Canada would have to return to the economic turbulence seen in the first few months of the pandemic, with a colossal rise in unemployment, a prolonged recession and plummeting growth.
In the housing market nuclear winter that RBC laid out, a home in Canada priced at $713,500 in March 2021 would be valued at $502,304 by June of next year.
A sudden drop to that extent — 29.6% — would be catastrophic for any recent homebuyers who were able to cobble together only a minimum down payment of 5%. Even new owners who put 20% down would find themselves short on equity, and if they felt pressure to sell after a price collapse, they'd have to do it at a loss.
But RBC’s worst-that-could-happen situation involves the wheels coming off the economy in April 2021. We’re already into June, and things are looking up. At least one COVID-19 vaccination has been shot into the arms of more than 23 million Canadians, and lockdown procedures are finally being lifted — though very slowly — in Ontario, the country’s largest economy. Even RBC analysts are upbeat.
RBC Global Asset Management chief economist Eric Lascelles recently predicted that Canada will “enjoy a profound economic recovery." Lascelles had little negative to say about the housing market.
Looking at the market’s potential for 2021, including the continued impact of low mortgage rates, Lascelles said Canada can look forward to "a housing market that’s likely to be a little bit less hot, but probably not one that’s going to be correcting or anything quite like that."
More likely scenarios
To be fair, RBC isn’t the only institution that painted a gloomy and unlikely worst-case scenario for housing. Bank of Montreal's saw real estate prices falling by 28.7% between March 2021 and December 2022. Canada Mortgage and Housing Corporation's nightmare situation involved home prices falling by 50% and unemployment reaching a peak of 25%.
RBC’s filing documents also include base-case and best-case scenarios. In the former, the average home price could hit $871,417 by April 2026. In the latter, it could reach more than $1.2 million.
It hurts to say this, first-time homebuyers, but those outcomes are far more likely than RBC's doomsday outlook. The base case would require annual average price growth of about 4.4% over the next five years. That’s pretty much a given. The best-case scenario relies on average growth of approximately 14.4% per year.
That’s hardly out of the question. The national average selling price in April was 41.9% higher than a year earlier, according to the Canadian Real Estate Association.
Reasons to bet against a Canadian housing crash
Even with home values heading into uncharted territory at a time of global economic misery, there are several reasons the housing market is unlikely to falter in the future:
Immigration. The Canadian government will be welcoming 400,000 newcomers to the country in 2021, 2022 and 2023. That’s 1.2 million people who will be putting pressure on the housing market, either as buyers or renters. Sellers will have no shortage of new families to sell to, and investors who saw their rental income crushed by the pandemic will once again be able to raise rents.
Low mortgage rates. As the economy continues recovering, mortgage rates will inevitably start rising. But with many lenders still offering variable rates below 2%, Canadians will find entering the housing market inviting — from a mortgage perspective, at least — for quite some time.
Unquenched demand. Even with new "stress test" rules raising the bar for mortgage borrowers, there are still more buyers than there are properties for sale. Each time a home sells after receiving bids from 15 optimistic house hunters, that means 14 bidders will still be in need of a house once the dust settles.
Rigorous underwriting. Lenders put Canadian homebuyers’ finances under an electron microscope before being approved for their mortgages. Their credit scores are evaluated, their incomes are verified and their debt-to-income ratios are carefully measured. In Canada, legitimate lenders do not give mortgages to people who can’t afford them.
Put those factors together and it becomes very difficult to imagine a situation where homeowners will ever be forced to sell their homes at a significant loss, en masse and simultaneously — the three hallmarks of a housing crash.
If some unforeseen economic calamity were to take place, one that slaughters the incomes of both homeowners and renters, you might see sellers desperately racing to get out of their mortgages. Until then, though, the real worst-case scenario Canadian homebuyers have to worry about is actually RBC’s best — one where most properties in the country are worth over $1 million.