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Bubble burst risk: Canadian home prices predicted to fall by 24%

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If Oxford Economics forecasts apply, Canada’s home prices could fall sharply over the next two years, effectively eliminating many of the surges across the pandemic so far.

House prices could fall by 24% from fall 2022 to summer 2024, according to a recent analysis by a UK-based international research group.

The profits accumulated over the past few years, especially those leading up to the pandemic, were unsustainable and created an inherently bubble-like state, but they were still in the U.S. housing market in the late 2000s. It crashed.

As of the end of 2021, Canadian home prices were 19% higher than Canada’s median income households’ borrowing capacity. And so far in 2022, this unsustainable upward trend continues, with home prices expected to reach 38% higher than most borrowers can afford by the summer of 2022. I am.

The latest information on the national housing market last month According to the Canadian Real Estate Association (CREA), the country’s average home prices rose 21% year-on-year, setting a new record of $ 748,450.

“We believe this will push the housing market to its limits and collapse under the weight of our own success by the end of the year,” the report reads.

Home prices in Canada are expected to fall 24% by 2024 and will be ready for household borrowing by 2028. (Oxford Economics)

Other factors driving Oxford Economics’ forecasts of falling home prices include continued expectations of the Bank of Canada (BOC) to raise interest rates. This started at the beginning of March 2022. BOC raises key interest rate from 0.25% to 0.5%Banks raised interest rates for the first time since 2018.

Oxford believes that key interest rates will be tripled further within the remaining period of 2022, then by 2024, and by the summer of 2024 the interest rate will be 2%. Fixed rate 5-year mortgage rates will rise about 1 percentage point to 4.25% by the end of 2020, eventually reaching a maximum of 5% by 2023.

All of this has the effect of reducing household borrowing capacity and puts downward pressure on demand.

Other factors considered by the analysis include the federal government’s upcoming interventionist policies on housing demand, specifically taxes on house inside out, bans on foreign home ownership, and vacant homes owned by non-residents. Tax is included.

But even with a 24% drop, Canadian home prices are about 15% higher than they were before the pandemic, leading to healthier market conditions paired with near-realistic home prices that Canadians can afford. Currently, it is not expected that this type of decline will lead to a recession.

However, the analysis also outlines the worst-case scenario in which home prices fell by 40% over the same period and could cause a crash similar to what the US housing market experienced in 2008. The conditions of a potential financial crisis, it is very unlikely.

“Despite the minimal role of subprime mortgages in Canada, the impact of the collapse of housing is very similar to the collapse of housing in the United States during the global financial crisis,” the report said. ..

Current forecasts predict that house prices will be better in line with household borrowing capacity by 2028, but the impact may be non-uniform nationwide. Canada’s Ambitious Immigration Goals — Welcome more than 1.2 million immigrants in 3 years — Especially in the major urban areas of Vancouver and Toronto, we are beginning to contribute to the country’s tight housing market.

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