Canadian financial organizations are required to disclose risk using unbiased and realistic outcomes and they do it by creating forecasts split into three — a best case, base case, and worst-case scenarios. Below are two of their forecasts plus much more:
Prepared and presented by Lorimer Wilson, Managing Editor of munKNEE.com
1. RBC: Canadian Real Estate Prices Could Drop 30% In The Worst-Case Scenario
In their base-case scenario (i.e. if everything goes as planned), RBC sees:
- home price growth slowing to 3% over the following 12 months from current levels
- but still advancing by a compound annual growth of 3.7% over the next 2 to 5 years.
In their best-case scenario (i.e. where house prices surprise to the upside), RBC sees:
- a 10.9% increase in home price growth over the next 12 months
- followed by a 11.1% compound annual growth over the next 3 to 5 years.
In their worst-case scenario RBC forecasts that:
- home prices could fall up to 29.6% over the next 12 months
- followed by a compounded annual growth of 4.2% in the following 3 to 5 years.
The risk-reward ratio is still surprisingly high between the best and worst scenarios. If housing were a stock, investors would say their model shows a risk-reward ratio is 0.34:1. For context, most professional traders would look for a ratio of 2:1 or greater. (Source of above content)
2. BMO: Canadian Real Estate Prices Could Increase 33% In The Best-Case Scenario
Canada’s high flying real estate prices – Canadian home prices increased by 23% in April – when compared to a year before are increasing the risk of a large correction according to BMO who just made big revisions to its risk forecast.
1. In their base-case scenario, or the most likely outcome, BMO sees:
- 17.8% price growth in 2021, followed by another 5.1% in 2022 for a total increase at 23.81% higher by the end of 2022…
2. In their best-case scenario, BMO sees exuberance pushing prices more than twice as high as previously thought which would make the country pretty much unlivable for anyone under 40. They see:
- prices rising up to 20.8% in 2021, and then adding another 10% in 2022 for a gain of 32.88% by the end of next year. If you consider that few local incomes can already support these prices, it would require a huge injection of foreign capital.
3. In their worst case scenario BMO sees:
- a drop of 12.3% for 2021, and another 18.7% decline in 2022 for a compounded 28.7% decline in home prices from a year before.
The bearish case is much worse than previously expected, but the bullish case also got better. It’s kind of confusing if you’ve never seen a risk scenario, but the takeaway is uncertainty. The spread between the best and worst-case scenarios is now 33.1 points for 2021. It was only 18.7 points in October. Markets see the spread shrink in more predictable environments. Spreads increase in less predictable ones. (Source of the above content)
3. RBC: The Real Estate Mania In Canada May Be Coming To An End
- Buyer demand is down 12.5% from a month before.
- In addition, sellers were down 5.4% from a month before which has led to some market pressures easing. Home prices are still rising very sharply (+2.4% in April), which may be why sellers are starting to drop out of the market. Over the past year, home prices at the national level increased by $135,000 (23.1%). Home prices are rising faster, while fewer buyers come to market. (Source of content)
- Toronto’s new single-family home prices made a sharp drop last month with the benchmark falling to $1,395,190 in April, down 3.35% ($48,448) from a month before. Prices are still 24.8% ($277,249) higher than the same month last year though. New home prices are still up significantly, even after the drop. However, that drop is something to keep an eye on, considering it would only take 6 months of those to wipe all gains.
- New condo apartments in Toronto also saw price declines with the benchmark price of a new condo reached $1,058,432 in April, down 0.55% ($5,885) from a month before. Prices are still up 7.5% ($73,844) though.
- Inventory is still very tight, and this is the highest April ratio since 2017 and the month-over-month decline helps to explain why prices slipped. (Source of this content)
The market is still very tight, but conditions are beginning to loosen — not tighten. Price growth continues to accelerate even faster though. When demand falls and prices rise, the market is operating on momentum. Now we’re all waiting to see if the engine can rev back into a higher gear, or it will fizzle out. (Source of content)
3. American New Home Prices Rise Over 20% From Last Year
U.S. new home prices are growing at the fastest rate in well over a generation having reached the all-time high in April (up 11.43%) but the real story is the rate of annual price growth (up 20.09%) though, which hasn’t advanced this quickly in over 30 years.
High flying home prices, however, may be getting close to pushing their limits as last month, home sales also saw a sharp decline in volume, partially attributed to prices. As prices continue to rise, fewer qualified buyers exist. It’s going to take a few months of demand tapering to cool rising builder costs though. (Source of above content)
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