Canadians should brace themselves for the ongoing housing market correction to last approximately one year, according to a new report from RBC Economics.

After another aggressive rate hike from the Bank of Canada, RBC downgraded its housing market forecast and is now predicting a 23% drop in home sales this year, followed by a 15% drop in 2023. With demand weakening and affordability stressed, the national benchmark home price is now expected to drop more than 12% from peak to trough by the second quarter of 2023.

If the above comes to fruition, it would mark the steepest correction of the past five national downturns.

Although a more severe and prolonged slump "cannot be ruled out," RBC expects the correction to end in the first half of 2023, with some markets stabilizing more quickly than others.

"We expect local outcomes to vary widely with the priciest, more interest-sensitive areas facing larger declines, and relatively affordable markets showing greater resilience," the report, written by RBC Senior Economist Robert Hogue, reads.

The average home sale price in Canada is already down 8.6% between the first and second quarter of 2022. Hogue notes that on a quarterly basis, the average price could fall by more than 17% as buyers look to lower-priced markets and housing categories to be able to afford a home.

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Although many Canadians are just now appreciating how steep the market shift could be, Hogue says the first signs of a correction began to emerge back in March, soon after the Bank of Canada's first rate hike. Now with multiple raises implemented -- the most recent of which was a surprising 100 basis points -- and even more expected to come, the RBC report says that policy interest rates will become restrictive by the fall. This will particularly affect markets in Ontario and British Columbia where affordability is already extremely stretched.

"By the time the Bank of Canada is done, RBC’s aggregate affordability measure could easily be at it worst-ever level nation-wide, with Vancouver, Toronto, Victoria and other expensive markets leading the way," Hogue writes. "We see demand coming under increasing downward pressure in Ontario and parts of British Columbia as a result."

RBC's forecast projects a 45% drop in 2022 home resales in British Columbia and Ontario, cumulatively, followed by a 38% tumble in 2023. This will set the stage for a home price index drop of more than 14% from quarterly peak to trough in both provinces.

Canada's other provinces won't be hit quite as hard, with resale activity projected to cumulatively decline just over 20% this year. But buyers there will still be affected by higher mortgage stress test qualifying rates, shrinking their buying power.

Declining sales and falling home prices may be a cause for concern for some homeowners, but Hogue argues that "the unfolding downturn should be seen as a welcome cooldown following a two year-long frenzy that put a huge financial burden on many new homeowners and made ownership dreams harder to achieve."

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