As reported last month, the Royal Bank of Canada’s (TSE RBC:TO) mandatory regulatory filings for the second quarter of 2021 were rife with the major requirements including several best-case/worst-case scenarios that help the banking giant illustrate how much risk the company is exposed to.

The single largest surprise was a section stating that home prices in Canada could see reductions by as much as 30% within 12 months, under certain conditions. This means the average price (as of mid 2021) of $713k could fall to as low as $500k. There is no data to indicate the spread of the impact over high, mid and low end price points. Historically, high end price points are relatively stable with the exception of the ultra high end, defined as over 10X the price of the average home. The real questions here are:

Can the princess fall as quick or quicker than they have risen; and Under what conditions will this happen.

Banks tend to make these predictions based largely on macroeconomic indicators like employment, consumer spending and economic growth. So for RBC’s worst case to play out, Canada would have to return to the economic turbulence seen in the first few months of the pandemic, with a colossal rise in unemployment, a prolonged recession and by June of next year.

A sudden drop to that extent — 29.6% — would be catastrophic for any recent homebuyers who were able to cobble together only a minimum down payment of 5%. Even new owners who put 20% down would find themselves short on equity, and if they felt pressure to sell after a price collapse, they’d have to do it at a loss.

At the same time, these are mere predictions based on a national average. Individual house prices in specific markets will likely react much differently. The best course of action for home owners is to contact a registered real estate agent and get sage advice from those in the business.

Real estate in Victoria BC is very different than the rest of Canada. For those interested in maintaining an accurate understanding of the general market, we highly recommend keeping up with the general Victoria MLS listings at Victoria BC Real Estate

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