Brian O'Donoghue

A Bubble, Eh? Scotiabank’s “Very Pessimistic” Outlook Is Real Estate Prices Rise 10%

Here we go again with another prediction! Canadian real estate is so bubbly a large bank sees prices soaring in a downturn. Scotiabank (BNS) reported earnings today, filing the bank’s macroeconomic forecasts. These forecast scenarios help to determine outlook, and include a base case, optimistic case, and two pessimistic ones. Even in the bank’s worst-case scenario, they forecast home prices will still rise at a breakneck speed.

Let’s start with what the bank thinks is the most probable outcome — the base case. This involves everything carrying on as is, with no improvement or deterioration. In the base case, the bank has forecast annual growth of 16.6% from April 2022. In contrast, they had forecast annual growth of just 9.9% back in January. Higher rates have somehow accelerated their forecast. Which is a little odd since they’re also forecasting the higher end for interest rates.

The best case, or optimistic scenario, sees slightly higher growth than the base. Home prices are expected to show annual growth of 19.5%. This is a huge jump from the 12.5% prediction in January.

The worst-case scenario, called a “pessimistic scenario” involves another downturn. They split this one up into two, and the first one involves short-lived stagflation - (a mix of slow growth and high inflation). In this scenario, home prices fall. BNS doesn’t actually see prices falling in their worst-case scenario over the next 12 months. Prices are seen rising 11.4%, up from the 3% in January. Since the last forecast, a conflict broke out, inflation soared to a multi-decade high, and interest rates are climbing. Somehow this boosted their outlook.

Then there’s the “very pessimistic” scenario for BNS, in which things become unhinged. It involves high commodity prices, financial uncertainty, and supply chain disruption. But the point is this is a terrible economy in this case. BNS sees this driving home prices 9.8% higher, accelerating from the 3.5% drop forecast in February.

The strangely high forecast is at odds with their interest rate forecasts. BNS has one of the highest forecasts in the industry and has been outspoken about inflation. Somehow reducing leverage doesn’t impact their outlook.

Bank chief executives and finance chiefs stressed they still expect economies to grow as COVID-19-related headwinds ease. They noted that most households are in good financial health, as many stashed away extra savings during the pandemic, while unemployment remains low in a tight labour market. Businesses are borrowing to bulk up inventories as demand for products outstrips supply, and some sectors, such as commodities, are booming.

The pandemic housing boom is winding down. Economists forecast a 10-20% price correction?

Economists are predicting that Canadian home prices will fall as much as 20 per cent this year as higher interest rates begin to hit the country’s booming real estate market. Mortgage rates are expected to climb again as the Bank of Canada aggressively hikes interest rates to deal with runaway inflation. Economists expect higher borrowing costs will lead to a significant price drop in some of the hottest markets.

Toronto-Dominion Bank economist Rishi Sondhi forecasts a double-digit percentage decline in the national average home price over the March to December period this year. Bank of Montreal senior economist Robert Kavcic predicts a 10-per-cent to 20- per-cent drop in the home price index in certain regions. “When we speak of housing correction it’s not a question of if, but where, how much and for how long,” Mr. Kavcic said in a research note.“Suburban markets in Ontario look shakiest,” he said.

The housing slowdown has been triggered by a rapid increase in borrowing costs over the past few months. The Bank of Canada’s next interest-rate announcement is scheduled for June 1. The central bank is widely expected to hike interest rates by another 50 basis points.

Realtors have described a sudden change in buyer sentiment. Some homes are not fetching any offers and sitting on the market for upward of a month. That is in contrast to the first two years of the pandemic when homes drew dozens of bidders and sold for hundreds of thousands of dollars over the listed price.

We are still seeing multiple offers happening in certain areas of the city, but we are not seeing the same frenzy that was present in the early months of the year. Showings have dropped off and buyers don’t seem to be in hurry to buy.

Don’t forget what CHMC said back in March 2020:

“Canada’s national housing agency is predicting home prices could plummet up to 18 per cent and mortgage arrears could soar to 20 per cent”

CMHC president and CEO Evan Siddall points to unforeseen circumstances as the reasons for their forecast error. CHMC lost its credibility after their failed housing crash prediction.

No one really knows what will happen to the real estate market. No one has a crystal ball to predict the future. We know we are state of change, and we will all learn to adjust to the changing market.