Lee Quaile
Broker of Record
There’s been a fair amount of contradictory analysis floating around out there this summer concerning whether Canada will follow our American cousins into an economic recession this year. A quick Google search will show you exactly what I mean, with headlines like “Canada’s economy is headed for a recession” and “Here’s why experts say Canada isn’t headed for a recession” located next to one another on the very first page of results.
While even the definition of a recession has become wrapped up in politics in recent months, I think one thing everyone can agree on is that the last few years have posed a series of unique challenges to economies both large and small – from household budgets to the international financial order. I’m sick to death of the term ‘unprecedented’ (as I’m sure most of you are too), but it’s tough to come up with a term that’s much more applicable to the pandemic-lockdown-inflation-y mess of the post-2020 world.
Throughout all the uncertainty, I’ve stuck with what I know best – real estate – and so, this week, I’d like to quickly summarize what a recession typically means for the Canadian housing market. Regardless of whether you believe we’re headed for recession or not, or even if we might already be in one, it’s good to know what to expect in case of any outcome – so that you and your family can make the most of the situation.
Unfortunately, a few key real estate-based indicators of an economy in recession are already in evidence in Waterloo Region. We know this by looking at the data released by WRAR earlier this month, which showed an increase in properties being listed, a decrease in the overall number of sales, an increase in the average time spent on market before a property sells and, finally, a decrease in the average value of a home sold in the last month.
Let’s break these indicators down a bit to see how they’re related to a wider economic recession. When an economy is experiencing negative growth, sales, service and hospitality-based industries tend to see a drop in demand for consumer goods and services. With many people employed in these sectors facing new financial hardship, a certain percentage will unavoidably need to sell property to stay above water, leading to an influx of new listings. At the same time, overall demand for this increased number of properties available for sale will fall, as buyers are prone to hang onto their money a little more tightly in an uncertain economy. As homeowners who are feeling the pressure to sell are forced to compete for a contracting pool of buyers, average sale prices will drop and the length of time a property remains on the market before selling climbs – all the inverse of the seller’s market we’ve seen the previous two years.
So, if you’re a buyer in a market that’s now tilting in your favour, how should you approach improved market circumstances with the understandable desire to be cautious in uncertain financial times? As with everything, it’s all about finding a balance between the pros and cons. On the plus side, a lower average sale price is the obvious advantage. In most market segments, you’re now looking at spending as much as 25% less for the same property today as you would have been spending back in January or February of this year. Also in your favour is the return of the conditional offer – a reasonable grace period in which to secure financing or order a thorough inspection of the property you’ve bid upon. As sellers are now being forced to compete for buyers rather than the other way round, we’re seeing conditions being accepted which would have been unthinkable earlier this year, when there was typically a ‘firm offer or bust’ mentality. These are both huge advantages for buyers.
But on the other hand, buyers are now being confronted by challenges of their own, not least of which is their own job security. Prior to pulling the trigger on a new home purchase, you’ll of course want to feel secure in your own financial situation – something that’s made more difficult for many people in a recessionary climate. Going together with this is the reality that banks are usually more hesitant to lend money in a recession, with portions of the job market being confronted by instability. And, while interest rates have historically tracked downward during a recession to encourage confidence and investment, in 2022 we’re faced with 40-year high inflation – a challenge that has forced the Bank of Canada to raise interest rates instead. Finally, there’s also the question of whether you’ll need to sell a property of your own prior to purchasing a new one. The same market conditions that could make it favourable for you to purchase a property might be working against you during the sale of the old one.
There’s a lot going on in August of 2022 – ‘interesting times’, indeed. But I’d like to close on a happier note, as I still strongly believe that Waterloo Region is better equipped to handle economic hardship than almost anywhere else in the country. Our diverse economy and workforce enabled us to come through the worst of the pandemic in much better shape than was originally anticipated, and the same advantages that our region benefited from in 2020-2021 will no doubt see us through 2022 as well. Local fundamentals are incredibly strong, and Waterloo Region continues to attract talent and investment from all over the world – something I don’t see being in any danger of coming to an end.
If you have any questions about the state of the market or housing in general, feel free to get in touch with me directly. Have a great week everyone.
