RBC Forecast Presents Some Interestings Facts, Predictions

RBC’s recently released housing forecast for Canada includes a number of interesting points about the Canadian housing market, both currently and moving forward:
– An increase in interest rates over the next two years will cool Canada’s resale market and slow down home price growth, but won’t cause either to decrease below current levels.
-Essentially, while most reports focus on the negative effect that interest rate increases will have on the housing market, they fail to account for the simultaneous positive effect that an increasingly stronger economy will have. RBC predicts the two effects will essentially cancel each other out.
-Current real home price growth (that is, home price increases minus inflation) is in the 1.2-1.6% range, well below the 10-year average of 5.4-6%.
-While Condo construction has heated up in Toronto over the last decade, leading some to point to the growing number of vacant units as a sign of excess supply, the ratio of vacant units to total units is still below the 40-year average.
-The increase in condo investors has contributed to the rise in condo prices but has also increased the supply of rental units in Toronto, which had been in a state of excess demand for some time.
Going forward, it will be interesting to see how these various changes affect the affordability of housing in Toronto. On the one hand, interest rates increases have a direct negative effect on affordability. On the other hand, they also serve to cool off home price growth, and thus have an indirect positive effect on affordability. Then, of course, a strengthening Canadian economy will place upward pressure on home prices and harm affordability. The magnitudes of each effect will go a long way toward determining which direction affordability of housing in Toronto will go.