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How Can Homeowners Prepare For A Recession

After two very strong years in the housing market, the signs of a cooldown are very apparent. Coinciding with real-estate strength has also been high inflation. While a number of global factors are contributing to our current situation, higher mortgage interest rates are impacting the housing market and giving rise to recession-like indicators. The luxury home market will certainly see the effects if even a mild recession takes hold. Understanding how these fluctuations in the market can affect you will help you determine the best course of action for you and your family – especially if buying and selling is on the horizon.

What is a recession?

The term “recession” is used frequently to describe any economic slowdown. Officially, it’s defined as two or more quarters of negative GDP growth. The nature of this potential, or current, recession – depending on the latest performance numbers – does come with its own nuances. Unlike previous recessions, including the one that occurred early in the pandemic as a result of global slowdowns brought on by the pandemic itself, this one isn’t being preceded by an unforeseen drop in consumer demand. The dynamics are significantly different now. The Bank of Canada’s interest rate hikes, in an attempt to slow an unsustainable inflation rate, have caused many to see this recession as an adjustment, or a correction, rather than the result of crashing markets.

How does a recession affect homeowners?

Couple looking at laptops

Homeowners can expect to see the real estate value of their homes erode to some extent during a recession period. How much housing prices go down is linked to the length and magnitude of the recession. Studies conducted by the Organization for Economic Co-operation and Development (OECD) found that, over four previous recessions, properties took an average hit of 6.1%.

Turbulence can be expected for those in the process of selling their home. The feverish pace of condition-free sales has come to an end, so sellers can expect their homes to be on the market longer. Buyers across the housing landscape will be proceeding with caution as they navigate economic uncertainty combined with rising interest rates.

Rising interest rates will significantly affect those who aren’t locked into a fixed mortgage rate – or who are facing mortgage renewal in the not-so-distant future. Depending on the dynamics of the mortgage, this can be a financial stressor for many families. Some mitigation can be achieved by taking a closer look at household expenses and developing a budget. Even the action of analyzing monthly expenses can reveal opportunities to become more efficient or even eliminate expenses that may be redundant or unnecessary.

What does a recession do to the housing market?

In general, and as expected, any economic downturn is likely to result in fewer homes being purchased and lower sale prices. In October of 2022, the Canadian Mortgage and Housing Corporation (CMHC) released their housing-market predictors based on rising interest rates and the onset of a recession. In their worst-case scenario, home values would drop 5% by the middle of 2023 and, perhaps more noticeable, would be home sales declining 34%.

How are luxury home prices affected in a recession? Is it a good time to buy?

Couple looking at laptop

Luxury home buyers and sellers both feel the pinch during a recession. This one, in particular, could bring additional stresses to the market. In previous recessions, interest rates have been lowered to help stimulate the economy. Given the efforts to put the brakes on spiraling inflation, that’s not a feasible option for the Bank of Canada.

The effects of a recession are typically stronger in the luxury-home market. The universe of buyers is substantially smaller and the investment is larger – resulting in a significantly longer sales process even in a non-recession market. These dynamics can amplify the effect. In late 2022, RE/MAX Canada released their 2023 housing-market outlook. Their findings reflect a cooldown in luxury home sales and expect that will continue throughout 2023 – a segment that will feel the pressures of the average residential sale prices in the Greater Toronto Area dropping by up to 11.8%.

There are benefits to buying in a recession. Prices are falling and inventory is staying on the market longer, giving buyers far more options than has been seen over the past two years. Overall affordability must be considered in a purchase. With rising interest rates, a lower-priced luxury home must still be evaluated carefully for long-term wealth management. If you were fortunate enough to sell your previous home before the real-estate market cooled, this could be an opportune time to buy.

Preparation is a wise investment.

Homeowners talking with expert

Having a sense of what is happening and what could happen to your particular situation is crucial to determining your next luxury-home market move. The recession-effect can also vary between major markets. Early indicators have shown differences between luxury-home sales in the GTA, Vancouver, and Alberta. Honing in on your current (and destination) market is important to fully understand what to expect. So far, experts are predicting this “recession” will be a market correction with a soft landing. Maintaining a watchful eye and a close connection with trusted real-estate experts will help ensure the right decisions are made during this less-than-stable time.

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