Demand will likely cool in 2022 due to steadily deteriorating affordability, it says
Much of the recent home price spikes in Canada stemmed from buyers front-running interest rate increases, and this is a phenomenon that is not likely to last long, according to Robert Hogue, senior economist at RBC Economics.
“Early reports from real estate boards showed the temperature generally rising once again with home resales holding at historically high levels last month,” Hogue said. “Trends over the past three months marked a departure from the broad cooling that took place in the spring and summer.”
Still, RBC is “unconvinced” that this will herald a new phase of accelerated housing activity, Hogue said. This is because deteriorating affordability due to inexorable price gains and interest rate hikes, together with more relaxed public health protocols, might steadily cool demand over the next year.
“We expect the current verve to fade in the coming months, followed by a gradual moderation,” Hogue said. “We expect extremely tight demand-supply conditions will keep prices under intense upward pressure in the near term, though we see such pressure easing significantly by the second half of 2022 as markets achieve a better balance.”
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However, the situation is likely to become worse before it takes a turn for the better, Hogue said. This will be especially apparent in red-hot markets like Toronto and Vancouver.
“Clearly, affordability is taking a huge hit right now and the situation is likely to worsen when interest rates go up,” Hogue said. “Self-correcting mechanisms will eventually kick in to rebalance the market, though exceptionally tight supply is poised to keep prices on an upward trajectory in the near term. This would apply to both the single-family home and condo apartment segments.”
