Canada heading for hard landing, house prices to drop 30%: Oxford Econ

Canadians, buckle up and prepare for some turbulence in the months ahead. Oxford Economics has warned investors to prepare for a hard landing in the Canadian economy. The research firm attributes the coming shock to high debt, high inflation and rising rates. The resulting shock is expected to push house prices down about 30% from the peak.

Canadians should prepare for a hard landing

A hard landing is a recession that occurs after an adjustment in rates, trying to calm inflation. This contrasts with a soft landing, where rates rise but the economy only slows down – no recession. Tony Stillo, head of Oxford Econ, expects a moderate recession to begin in the fourth quarter of 2022. He attributes rate hikes, high inflation and weak global demand to the forecast.

Currently, they see a moderate recession within the next six months. Company models show a contraction of 1.8% from peak to trough, from Q4 2022 to Q2 2023. A recession of this magnitude would be considered moderate, so we are past the point of a soft landing or a mild difficult period.

Canada’s oversized debt will weigh on the recovery

Canadian households are too indebted to offer a flexible response. Due to excessive indebtedness, small increases in interest will result in a large diversion of income. The company projects that 8.2% of disposable income will be used to make mortgage payments in the second quarter of 2023, up from 6.5% this year. It is higher than the 2018-2019 debt cycle, consuming the largest share of revenue since 2009.

“Canada’s historically high household debt and house prices are making the economy much more sensitive to interest rates,” Stillo said. “Significantly higher interest rates will lead to higher debt servicing costs and a deepening of the significant housing correction already underway. Moreover, the reduction in real income due to stubbornly high inflation will further squeeze households and lead to cuts in discretionary spending and a period of deleveraging.

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

Real estate prices in Canada have fallen by more than 30% compared to last year

Canadian real estate prices are expected to undergo a sharp correction in housing. However, this will not return house prices to pre-2020 prices. “Our forecast of a 30% housing correction brings the benchmark house price back to its end-2020 level, as it does not erase only partially the pandemic surge of 50%,” says Stillo.

In this scenario, the benchmark house price would remain 7% above pre-COVID levels. “…potential losses in real estate wealth should be limited to recent buyers and largely unrealized for longer-term owners,” he said.

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

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