RBC economists say that the benchmark price of homes in Canada may fall up to 10 percent in 2022.

The drop is expected as the Bank of Canada is anticipated to further increase its interest-setting rate by an additional 1.25 percent.

This would mean that the central bank’s key rate would have risen from the current level of 1.5 percent to 2.75 percent by October this year.

In its last announcement of an increase on June 1, the Bank of Canada indicated that “interest rates will need to rise further” in order to tame raging inflation.

To recall, the national home price index fell 0.6 percent month-over-month in April 2022.

As the Canadian Real Estate Association previously reported, that was the first monthly decline since April 2020.

The drop came in the wake of the first round of interest-rate hikes this year by the Bank of Canada, which happened in March.

The central bank has since increased its key rate two more times in April and June.

RBC economists released a macroeconomic outlook Tuesday (June 7), and part of that post includes prospects for the Canadian housing market.

Chief economist Craig Wright and colleague Nathan Janzen wrote that the “cooling” observed so far in the real-estate market is “not enough to warrant a pause in the Bank of Canada’s rate-hiking cycle”.

Wright and Janzen noted that home resale prices in April 2022 were “still up” 24 percent compared to the same month last year.

“In Canada, roughly one-fifth of consumer price inflation has come from higher home-buying costs as high incomes and low interest rates sent housing markets roaring through the pandemic,” the economists stated.

As of April, there were already “signs that at least that pocket of inflation pressure is easing”.

It’s a “sign that interest rate hikes are already having an impact”.

“We look for home resales to decline by 13% in 2022, and for benchmark prices nationally to decline in the 5% to 10% range from peak-to-trough,” Wright and Janzen predicted.

The two noted that interest rates are “still too low”.

Although the Bank of Canada had already increased its rate from the pandemic-low of 0.25 percent by 1.25 percent more, Wright and Janzen noted that that “still leaves the rate at just 1.5%”.

“With inflation running hot and labour markets looking extremely tight, the path to a more neutral rate (which the central bank believes is in the 2% to 3% range) is one of little resistance,” they wrote.

“We look for further hikes to come to leave the policy rate at 2.75% by October.”

Wright and Janzen noted that the 6.8 percent year-over-year increase in inflation in April 2022 was the “highest since the Bank of Canada adopted an explicit inflation target in 1991”.

“And it almost certainly climbed again in May on higher gasoline prices. Much of the inflation pressure is reflective of global factors that the Bank of Canada can do little about,” the RBC economists stated.

Now, Wright and Janzen wrote, the question is whether 2.75 percent will be enough to rein inflation.

“The longer inflation remains elevated, the more risk that higher inflation expectations become entrenched – and that would make it much more difficult job for central banks to return price growth to target,” they stated.

The RBC economists continued, “Bank of Canada officials have been clear that getting inflation back under control is taking precedence over economic growth concerns – signaling clearly that the central bank is willing to hike rates higher if necessary, even if that risks pushing the economy into recession.”