Canadian Real Estate Prices To See Double-Digit Drop, Delinquencies Climb: Fitch Ratings

Canada’s real estate downturn will continue next year, warns a credit rating giant. Fitch Ratings released its 2023 forecast calling even lower home prices next year. After 3-decades of strong price growth without correction, affordability has never been worse. When combined with high rates, weak demand is expected in the near-term as home prices adjust. The market cooling is also expected to produce a sharp increase in delinquencies. 

Canadian Real Estate Prices Are Forecast To Fall Next Year

Fitch Ratings is the latest firm to call falling real estate prices across Canada. Prices are forecast to fall between 5% and 7% in 2023, down  15% from peak to trough in nominal terms. Nominal terms being an important note to mention when inflation is so elevated. Prices are seen returning to growth in 2024, though lower than average.

“The fall will be driven by the continued rise in interest rates expected through 1H23, inflationary pressures, a stagnant economy and declining affordability, which will dampen demand,” said Susan Hosterman, Senior Director of North America for Fitch Ratings. 

The decline is substantial but much smaller than forecasts from other firms. Hosterman attributes this to strong support for the market. A supply imbalance, net immigration, and rising rents are amongst the reasons cited. However, they warn demand can be weak if the economy is stunted by measures to cool inflation.  

Speaking of higher interest rates, Fitch Ratings warns affordability has never been worse. Higher interest rates play a role, with the firm citing a five-year fixed rate at 6.5% (they need to find a better agent). Higher rates are only such a big issue due to astronomical home prices though. They note “persistently high home prices” haven’t seen a material decline since the 90s. 

Canadian Mortgage Delinquency Rate To Rise Sharply

Canada’s mortgage delinquency rate will rise sharply in the coming months. Fitch Ratings has forecast an 0.25% delinquency rate in 2023, up 11 basis points (bps) from this year. The increase is very sharp, considering that implies over 75% more mortgage delinquencies. The rate is still very low, and largely balancing the low rates typical of a bubble.

Yes, bubbles have low delinquency rates. There’s no reason to default if a home sells in just a few days, a point the firm emphasized. A borrower in a tough spot can sell and avoid a delinquent mortgage in a strong market. A lack of affordability and weak demand mean fewer people are willing to buy that property at this price. That is what typically leads to rising delinquencies.

Canadian homeowners are sitting on a mountain of equity that will help prevent too high of a rate. They can draw on, or borrow against, that equity if they’re in a bind with the cost of living. It also means they’ll be less likely to enter a negative equity scenario where a sale is forced by the lender.

Lenders have also been working with borrowers, as noted by the firm’s forecast. Banks have been providing amortization extensions to many existing borrowers. It will cost more, but it will lower the likelihood of defaulting due to higher rates. 

Fitch Ratings is the latest firm to forecast falling home prices and rising defaults. Firms like BMO, Oxford Economics, and RBC have all called more substantial price drops. This is likely due to more bearish outlooks held by those firms in contrast. Fitch sees larger price declines if the recession isn’t just a mild downturn.

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