What Could a Recession Mean for the Canadian Housing Market?

With the cost of seemingly everything rising and wages remaining stagnant, there has been a lot of buzz over whether or not Canada is in, or heading towards, a recession. After a tumultuous few years for the housing market, what effects would a recession have on home prices?

Worrying about the effects of a recession is more than understandable. Whether you already own a home or are looking to buy or sell, everyone should know how a recession could affect their housing situation. If you waited to sell your home over the last two years, you might have missed the best selling conditions as the real estate market begins to shift in favour of buyers. Read on to learn what a recession means, how Canada’s housing market could suffer from one, and tips for those planning to purchase or sell a home in the near future. 

Is Canada in a recession?

Canada is not in a recession– for now. The Canadian economy grew by 3.3% in the last quarter. This slight growth is better than shrinkage but still didn’t meet the Bank of Canada’s forecasted growth of 4.0%. Inflation was at 7.6%, down slightly from 8.1% in June, the highest inflation rate in forty years. All of these figures signal a slow decline in the economy, which is affecting interest rates and the housing market. This hit on the economy is leading to rising interest rates and reduced consumer spending. Although the numbers aren’t looking the best, it isn’t time to panic yet. If a recession does happen, it will likely begin in 2023.

What does a recession mean for the real estate market?

Recessions typically impact many areas of citizens’ lives, and the real estate market is no exception. A housing market crash after a recession is the worst possibility for anyone looking to buy or sell a home. An example of this scenario is the housing crash of 2008 following the financial crisis in the States. Job loss, steep unemployment rates, and soaring mortgage interest rates often accompany a recession. All these factors combined mean that a large portion of the population is unable to buy a home. 

Of course, when fewer people are looking to buy a home, sellers are forced to lower home prices due to decreased demand. A price drop could be a problem for people who recently purchased a house and are looking to sell. Many homes were sold at an inflated price in the last few years thanks to increased property values due to the limited housing supply. If these homes are sold for a lower price after the recession, homeowners will actually be losing money on their investment.

Will the housing market crash if we go into a recession?

Don’t give up hope yet. There is still a chance that things will even out for the housing market. We have learned a lot from previous housing market crashes and can hopefully manage to find new solutions to post-recession housing issues. Recently, the Canada Mortgage and Housing Corporation (CMHC) published models outlining possible outcomes for the housing market if interest rates continue to rise and a recession begins. According to the CMHC model, the worst predicted outcome would be a 5% decline in home values by mid-2023, with home sales decreasing by 34%. The difference between Canada’s potential housing crash and the 2008 subprime mortgage crisis in the US has less to do with a recession and more to do with predatory loans. Many US homeowners during the 2008 financial crisis were already paying for mortgages they couldn’t truly afford or mortgages that were bigger than the actual value of their homes due to accrued interest. Once the recession hit and many Americans lost their jobs, it became totally impossible for many people to pay their mortgages and keep their homes. In Canada, the CMHC mortgage stress test protects homebuyers from ending up in a situation like the American subprime mortgage crisis. The mortgage stress test calculates your ability to pay for your mortgage, even in the case of extreme interest rate hikes and loss of employment. Things may get more complicated for the housing market in the coming years, but they shouldn’t reach levels seen in the US during the 2008 crisis.

What would a recession mean for home buyers?

A recession will affect all homebuyers, but especially first-time buyers. Mortgage lending companies will raise their interest rates significantly, meaning many people will have an even harder time qualifying for a mortgage, if they can even afford it. Other homebuying practices could also start to change, including lenders requiring applicants to have a more significant down payment to offset those higher interest rates. Lenders may also be stricter when considering applicants’ employment situations. If you have fluctuating income or are self-employed, you may struggle to find a lender that will approve your mortgage application.

That being said, your dream of home ownership should still be possible, especially if you have a dependable income and have been preparing by saving for a down payment. Saving can be difficult with the rising cost of living, but any other funds saved now could come in handy if you have an emergency that causes you to miss a mortgage payment.

What would a recession mean for home sellers?

Recessions are one of a home seller’s worst fears. Home values decrease, usually meaning a loss of profit for the seller. In extreme cases, houses may even sell for less than their original price, meaning the seller actually lost money on the home, also known as negative equity. Home sellers may worry about a reduction in their home values, which may result either in a drop in the profit from a home sale or in the dreaded negative equity situation. If you don’t have much of your mortgage paid off yet, you may be at increased risk of a negative equity scenario. Whatever your situation, home sellers should expect the end of a seller’s market and a drop in the prices we have seen in the past few years. 

Again, no need to panic just yet. A recession is still unlikely in 2022, and the housing market is still more or less stable for the time being. Home prices are declining, but not at a worrying rate. Since the prices of homes have been overinflated the last few years, it should take several years before we have to worry about home prices dropping significantly below pre-pandemic levels.