RBC sees sluggish start to Canada’s spring housing market

Canada’s largest bank is expecting a slow start to the spring housing market as higher interest rates keep many buyers out, despite a drop in prices.

“It’s sunny outside, but I don’t think just because it’s sunny, you’re going to see a real spring-back in mortgage originations,” Neil McLaughlin, head of personal and commercial banking at Royal Bank of Canada, said at a conference Wednesday.

The benchmark home price is down about 16 per cent in the past year in Canada, but at $704,000 (US$519,000), it’s still nearly 30 per cent higher than three years ago. Prices may have to fall further, or mortgage rates may have to drop, to get home affordability “back in check,” McLaughlin said.

There’s also not much to buy. The number of newly-listed properties fell 8 per cent in February compared with the month before, and the inventory of available homes dipped to 4.1 months, according to the Canadian Real Estate Association.

Laurent Ferreira, chief executive officer of National Bank of Canada, which hosted the conference, said there’s been a noticeable deceleration in consumer activity and business investment in reaction to higher rates. That was inevitable after the Bank of Canada rapidly hiked its overnight lending rate from 0.25 per cent from 4.5 per cent, he said.

“We are a little bit more cautious because the slowdown is there,” he said. “We are seeing it in our volumes, essentially. With inflation and rates, there’s still uncertainty around where all of this is going to land.”

In early March, the Canadian central bank kept its key rate untouched for the first time in a year, saying policymakers need time to assess how consumers are adjusting to higher borrowing costs. “I think the Fed should have put the brakes on as well last week,” Ferreira said.

Posted Canadian mortgage rates from Royal Bank and Toronto-Dominion Bank are about 5.5 per cent for borrowers who want to lock in their costs for five years. Variable mortgages, on which the rate fluctuates with central bank decisions, are more expensive than that.

What Bloomberg Intelligence Says 

RBC is the second-most-vulnerable lender to a correction in Canada’s housing market, given that its $422 billion of domestic residential mortgages and home-equity lines of credit make up 51 per cent of net loans, trailing only CIBC (54 per cent). About 78 per cent of RBC’s Canadian housing exposure is uninsured, and that exposure is 4.2x the lender’s 1Q CET1 capital. Yet the uninsured portfolio has a low loan-to-value ratio of 50 per cent, which provides a buffer to absorb house-price declines.

— Bloomberg Intelligence analysts Paul Gulberg and Himanshu Bakshi

source: https://www.bnnbloomberg.ca/rbc-sees-sluggish-start-to-canada-s-spring-housing-market-1.1902180