Whispers of another recession are causing consumers across North America to brace for a repeat of 2008. Flashbacks to layoffs and foreclosures are making everyone nervous about financial prospects, including the real estate industry.
Table of Contents - Whispers of Stock Market Recession Make Now a Great Time to Own Real Estate Property
While economists don’t seem to think this recession will be as bad, at least not in Canada, it’s important to understand what could happen to your real estate investment if we entered another economic downturn.
Is Canada heading towards recession?
Over the summer we’ve heard rumblings of a global recession heading our way some time in the next year or two. Between the United States’ trade war with China and the United Kingdom heading into Brexit without a plan, international markets are bracing for impact.
What does this mean for Canada? According to economist Michael Gregory, head of U.S. economics at BMO Capital Markets, Canada will likely avoid a recession, pending a few factors.
Gregory predicts economic growth with likely slow because of the ongoing global trade issues. Americans and the global markets aren’t feeling the pinch from the trade war just yet, but Gregory believes the current protectionist policies will get worse.
Canada is currently experiencing a population boom, with more immigration meaning housing is in high demand. However, Canadians are experiencing record levels of personal debt, meaning if the country did enter a recession that consumers would be susceptible to financial troubles.
As a nation, Canada’s growing national debt is not of great concern, unlike its neighbour to the south. Six of 10 provinces have a budget surplus.
One of the big factors impacting how hard a recession hits Canada is consumer confidence, which Gregory defines as a number one risk. When consumers and businesses hear about a recession, they pull back their spending, in turn exacerbating the likelihood of a recession.
Canada and the real estate bubble
Some economists say Canada has been in a real estate bubble since 2003, with homes prices rising 337 percent at that time. Since 2010, the real estate market has grown even faster from foreign investment and speculation. Real estate accounts for 12 percent of the country’s GDP. Economists are comparing Canada’s housing economy to other real estate crises and are worried about current levels.
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The Canadian government has worked to slow growth to avoid a bubble burst. They levied the foreign buyer tax and speculation tax. The Fair Housing Plan is enforcing stricter rent control. The government is prioritizing first-time homeowners to make homes more affordable and thus bring costs down across the market. These efforts are fairly new and are only just becoming effective.
Home values won’t drop dramatically like the last recession
The Great Recession saw home prices significantly decline, but that likely won’t happen this time around. There are still not enough new homes to satisfy current demand. Millennials – who are about to surpass boomers as the largest living adult generation – are becoming ready for homeownership as they’ve reached the stage of starting families (and hopefully making a dent in their student loan debt).
One symptom of consumer confidence (or lack thereof) is that owners may postpone selling until they feel they can get a better price. Just the fear of a recession would drive the market so that there are even fewer homes available. Generally, the high demand for fewer houses means prices go up. However, would-be homebuyers may not be willing to buy if they are worried about their job security.
Economists predict prices may flatten, but not fall. Price cuts will be most severe in the most expensive neighbourhoods where the prices rose exponentially. But the market won’t see the same decline as during the Great Recession. Given the high demand for housing, the number of sales likely won’t drop.
Rentals will still be in high demand
Rent prices likely won’t decline substantially. The good news for property investors is that in the event of a recession, rental prices will likely continue to rise, albeit capped at provincial limits. The would-be homebuyers mentioned above who are nervous to commit to buying a home will continue renting, meaning investments will remain protected.
Only investors in luxury rentals may see trouble as nervous consumers take fewer vacations or look for cheaper alternatives.
New properties may be harder to come by in the future
If the economy does enter a recession, the building will likely slow. Building companies won’t want to start a new project if no one can afford to buy, or if they may be forced to abandon it. Tariffs on building materials like steel will become more expensive, meaning materials are harder to source and building is more costly.
If you’re debating between buying now and waiting out the recession, there may be even fewer new properties available for purchase.
Another foreclosure boom is unlikely
One of the most notable memories of the Great Recession was how many people lost their homes due to foreclosure. While this was a terrible time for families forced to relocate, investors were able to scoop up newly available properties at discounted rates.
Since the Great Recession, many consumers learned from the mistakes. But Canadian consumers do have high levels of personal debt, which may make it harder to continue paying their mortgages in case of layoffs. While no one wants mass foreclosures across the country, it’s something for real estate investors and landlords to keep in mind.
Investments are never a sure thing and are always risky in a sector like real estate which ebbs and flows. Understanding the current state of the markets and the potential risks will help you in making the right decisions for your portfolio.
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