RBC Expects Housing Market to Cool in 2015

By Andrew Rickard | August 28 2014 09:01AM

In a report released on August 20, RBC Economics predicts that growth in Canada’s housing market will slow next year because of rising interest rates and increasingly strained affordability.
"We forecast home resales to edge slightly lower by 0.9% to 463,100 units nationwide in 2015 following an increase of 2.1% to 467,200 units in 2014; and home price gains to moderate to just 1.1% next year from 4.3% this year," reads the report.

RBC expects the Bank of Canada to raise interest rates in 2015, and that government of Canada five-year bond yields will more than double to 3.30% by the end of 2015 from the current level of about 1.50%.

"While continued growth in household income will provide some offset, we expect rising rates to erode housing affordability, which is already stretched in some markets across Canada. Affordability issues thus will become a greater obstacle to home ownership as the interest rate normalization unfolds," says RBC.

These downward pressures will lead to a cooling, and not a crash, says RBC. Steady immigration rates and a generally upbeat macroeconomic environment are expected to fuel demand in the housing market and prevent a freefall. However, RBC warns that should the economy falter and there be a surge in unemployment, a harsher outcome is possible.

"Canada’s housing market is in a fairly vulnerable position to withstand an unanticipated shock — household indebtedness is near record-high, property valuation is stretched in many markets and interest rates have limited room to drop further to offset any shock," concludes the report.