Canadian Real Estate Prices To Fall Even In Optimistic Scenario: Scotiabank 

Canadian Real Estate Prices To Fall Even In Optimistic Scenario: Scotiabank 

Many Canadians are bracing themselves for a post-rate cut boom, but at least one big bank doesn’t see it. Scotiabank’s macroeconomic scenario forecast accompanying their Q1 2024 earnings shows they’re pessimistic on home prices. Even in their most optimistic scenario, the bank expects home prices to fall over the next year.  

Macroeconomic Scenario Forecasting

Modern accounting regulations require financial institutions to lay out a risk assessment. In order to assess risk, the institution will have to create estimates based on macroeconomic variables, one of which is home prices. Since these forecasts are used to estimate credit losses, they have to be realistic and cut through the BS. Consequently, they provide a candid view into how institutions actually view the market. 

Scotiabank divides these scenarios into four—a base case, optimistic, and two pessimistic scenarios. Let’s dive in!  

Scotiabank Expects Canadian Home Prices To Fall

The base case, or most likely scenario, shows the bank expects home prices to continue falling. A typical home (MLS HPI) is expected to fall 3.7% over the 12-month period starting Jan 31, 2024. Home prices are seen rising 2% over the remaining forecast period to follow, typically a 4 year period. Not exactly an end-of-the-world downturn, but may surprise those that see a price boost from forecast rate cuts. 

Home Prices Forecast To Fall Even In The Best Case Scenario

More surprising is the optimistic alternative scenario, where the economy outperforms. In this case, they still see home prices falling 3.2% over the 12-month period that follows. The rebound is stronger, with the remaining period forecasting 3.8% growth. However, still surprising to see their best case scenario is further declines for home prices in the near-term.  

Canada’s “Worst Case” Means Bigger Price Drops And A Longer Recovery

Unlike most financial institutions, Scotiabank gives two pessimistic scenarios—“a bad day” and “shit hits the fan.” Just kidding, they use the much less creative terms “pessimistic” and “very pessimistic.” Booo!

In the bank’s pessimistic scenario, a mild economic underperformance, prices are forecast to fall 7.3% over the next 12 months. A sharp correction is usually followed by a modest rebound, and that’s what they have here–2.8% growth for the remaining forecast period. A sharp decline, especially following recent drops, followed by price growth that would wipe out the losses over roughly 3 years, not adjusting for inflation. 

The very pessimistic scenario sees a slightly larger downturn and slower recovery. Home prices are forecast to fall 8.6% over the 12-month period, followed by 2% growth in the remaining period. A slightly longer recovery, and not likely to fit investor expectations. 

The takeaway here isn’t which of the scenarios the Magic 8 Ball will grant Canadians. It’s the fact that weak expectations have aligned in almost all outcomes. Unlike most investors on social media, Scotiabank is not optimistic about rate cuts bringing in growth—at least not in the near-term.