Canada heads for a hard landing, property prices to fall 30%: Oxford Econ

Canadians, buckle up and brace yourself for some turmoil in the coming months. Oxford Economics has warned investors to prepare for a hard landing for the Canadian economy. The research firm attributes the coming shock to higher debt burdens, higher inflation, and higher rates. The resulting shock is expected to cause home prices to fall by about 30% from their peak.

Canadians should prepare for a hard landing

A hard landing is a recession that occurs after a price adjustment, when trying to cool inflation. This is in contrast to a soft landing, where prices are rising but the economy is only slowing – there is no recession. Tony Stillo, director at Oxford Econ, expects a mild recession to begin in the fourth quarter of 2022. He attributes the outlook to higher interest rates, high inflation and weak global demand to the outlook.

They currently see a moderate recession over the next six months. The company’s models show a contraction of 1.8% from peak to trough, from the fourth quarter of 2022 to the second quarter of 2023. A recession of this magnitude is considered moderate, so we are past the soft landing point or the moderate regression point.

Canada’s huge debt to beat recovery

Canadian households are too heavily indebted to make a flexible response. Because of the huge debt burden, small increases in interest will add up to a large income transfer. The company expects 8.2% of disposable income to be used for mortgage payments in the second quarter of 2023, up from 6.5% this year. It’s higher than the 2018-2019 debt cycle, and it consumes the largest share of income since 2009.

“Canada’s historically high home debt and home prices are making the economy more sensitive to interest rates,” Stillo said. “Sharply higher interest rates will raise debt servicing costs and deepen the large housing correction already underway. In addition, lower real incomes due to stubbornly high inflation will increase pressure on households and will lead to reduced discretionary spending and a period of deleveraging.”

The company’s calculations show that the typical mortgage will increase by an average of $162 (+11.3%) to $1,590 per month in the second quarter of 2023. It’s a sharp increase, but the total is less than the average one-bedroom rent due to inflation. It will be hard for homeowners to get sympathy.

Canadian real estate prices are down more than 30% from last year

Canadian real estate prices are expected to see a sharp correction in the housing sector. However, it will not bring home prices back to pre-2020 prices. “Our expectation of a 30% housing correction brings the standard home price back to its level in late 2020 because it partially erases the 50% pandemic rally,” Stelow explains.

In this scenario, the standard home price would still be 7% higher than pre-COVID levels. He said, “…the potential losses in housing wealth for recent homebuyers and largely unrealized for long-term homeowners must be contained.”

Poor home values ​​do not necessarily lead to defaults and realized losses. Most homeowners tend to pay off their mortgage during a downturn, because they still need a place to live. Liquidity is a bigger concern for investors, because the pool of buyers will be much smaller. It’s unlikely that a 30% price drop with a recession will bounce back to all-time highs very quickly.

Leave a Comment