So, if we aren’t already in a recession, economists admit that we’ll definitely see one in 2023. That means layoffs, asset depreciation, and tighter household budgets for Canadians. The biggest fear for homeowners has been the rapid rise in interest rates the Bank of Canada hopes will stabilize inflation which has been trending at around 7% in 2022. This has meant mortgage payments have been going up for existing homeowners, and new buyers are finding their budgets shrinking. On the other hand, due to the decrease in demand from rising interest rates, the housing market has cooled off in the most popular areas. The Greater Toronto Area and Greater Vancouver Area in particular have seen home prices decline since the beginning of the year, with prices in Toronto down 18% since the peak.

We predict that interest rates will continue to rise in 2022, meaning this trend will probably continue, at least in the short term.

 If you’ve been saving up for your first home, the doom and gloom in the news may be giving you second thoughts, so let’s look at the pros and cons of buying a home in a recession. 

Why you should buy a home in a recession

If you’re not letting the news sway you from your homeownership dreams, you’re in luck, because buying in a recession might end up giving you a big advantage. Currently the housing market in Canada is in what’s called a “buyers market.” What that means is, due to rising interest rates and cooling demand, sellers are facing more competition and buyers have more negotiating power. Rising interest rates have made mortgages less affordable and lowered demand for now, so sellers are having to accept lower offers and more conditions from buyers, that is, if they want their home sold any time soon.

First of all, properties are cheaper. As previously mentioned the average home price in major cities has decreased from their peaks, which means you’re benefitting from a discounted market. While it’s possible that your home may lose some of its value after you buy it, in the long term, Canadian real estate has always been a very lucrative investment for owners, and you don’t have to worry about buying at the top. 

A buyer’s market also gives you the opportunity to take your time and find the right home for you. Unlike the bidding wars of the past few years, sellers are not getting nearly as many offers on their homes. This means you’re facing less competition as a buyer, and don’t have to rush to put an offer in. Want to check out that other place before you put an offer on the one you’re looking at now? Go for it. Homes will likely remain listed for much longer during a recession.

Less competition also means you have more lee-way to put in any conditions you may be looking for. You might want to put in your offer that the sale is conditional on the sale of your existing home if you’re moving. That’s much more likely to be accepted in the current market than it was a year ago. Other common conditions include a home inspection and securing financing for your purchase. Remember a “pre-approval” doesn’t guarantee anything from your lender.

Why you shouldn’t buy a home in a recession

While the cooling housing market is a blessing for potential buyers, the reason for the decline is not. Demand for homes has gone down because Canadians are finding it harder to afford a mortgage with rising interest rates. Compared with the sub 2% rates of last year, current interest rates are likely to have your monthly mortgage payments up hundreds if not thousands of dollars. As an example, at the beginning of 2022, 2% rates were common, which would be $833 per month in interest on a $500,000 mortgage. In november, 5% rates are the norm which would lead to $2083 in monthly interest. You can calculate your full monthly mortgage payments here.

If your budget is tighter due to high inflation this year, you might not want to risk going with a variable mortgage as it could put you over the edge. That means you’re going to be stuck with a >5%mortgage rate for a while, and with the price of homes in Canada as they are, that’s a lot to be paying in interest. 

Another risk in a recession is the unfortunate event you lose your job. Unfortunately, unemployment is a hall-mark of economic recessions and we’ve already seen plenty of lay-offs in 2022. On the other hand, the Canadian government has been warning of a labour shortage for certain industries, so it’s difficult to say how many lay-offs we’ll be seeing in the next year. Ultimately, you’ll know best about your own job security. If you’ve got a safe gig with enough cash saved up for a healthy down payment, these factors won’t affect you as much.

The important thing is to plan, and make sure you can afford the mortgage you end up going with, along with a sizable emergency fund.

If you’re looking for advice on your specific situation, our mortgage advisors are available to help you plan your mortgage strategy, and get you into your ideal home, recession or not.

Key Points

• Buying a home in a recession means working with higher interest rates and a market with lower demand.
• On the plus side this gives you leverage over the sellers and properties are cheaper overall.
• On the other hand, higher interest rates means it’s harder to qualify and you’ll be paying more interest in the short term.
• The most important thing is to plan your finances carefully and ensure you aren’t overextending yourself in a recession.