The Royal Bank of Canada (TSX:RY) today downgraded its forecast for Canada’s housing market, which is being battered by rising interest rates.

Vancouver, Toronto and Victoria are the cities likely to suffer the most, according to the bank’s assistant chief economist Robert Hogue.

The bank now sees home resales to fall nearly 23% this year, and 15% next year across the country. Those declines would come with the national benchmark home price falling 12% from its peak by the second quarter of 2023.

“We expect local outcomes to vary widely with the priciest, more interest-sensitive areas facing larger declines, and relatively affordable markets showing greater resilience,” Hogue said in a research note.

Vancouver would be an area that the bank considers pricy, with buyers who are more interest-rate sensitive.

His revised outlook follows the Bank of Canada on July 13 increasing its benchmark interest rate by a full percentage point, to 2.5%. That prompted banks to raise prime rates on mortgages. RBC, for example, raised its prime rate to 4.7%, from 3.7%.

Hogue said that the raised rates “will no doubt speed up the market’s cooling phase in the near term.”

He said he expects the Bank of Canada to hike its benchmark “overnight” rate another 75 basis points, to 3.25%, by October.

“It’s a big bite for borrowers to swallow,” he said, adding that the rise is enough to “spoil or delay homeownership plans for many buyers,” particularly those in BC and Ontario.

He expects a cumulative 42% plummet in home resales between early 2021 and early 2023, which would exceed peak-to-trough declines in the previous four national market downturns.

Hogue listed the peak-to-rough home resale decline as being :

• 33% in the 1981-1982 correction;
• 33% in the 1989-1990 correction;
• 38% in the 2008-2009 correction; and
• 20% in the 2016-2018 correction.

The expected 12% Canada-wide home-price correction in this downturn is also steeper than what happened in the previous four market disruptions, Hogue’s research shows.

His estimate for BC is for home re-sales to fall 45% peak to trough, with benchmark prices falling 14%.

“The average price of homes sold in Canada, for example, could tumble by 17% or more, on a quarterly basis, in part due to a shift in the composition of sales toward lower-priced markets and housing categories – as buyers seek more affordable options,” he said.

“The average price is already down 8.6% between the first and second quarters of this year.”

RBC Downgrades Forecast for Canadian Housing Market by Glen Korstrom | BIV