What does a recession mean for homebuyers?

A recession usually signals volatility in the housing market. While experts agree the current market is unlikely to lead to another Great Depression, it is likely to continue impacting home prices. For some, it will mean a loss; for others, it may even create an opportunity. Here is what you need to know about what a recession could mean for homebuyers.

What does a recession mean for homebuyers?

The housing market is not always in danger of collapsing during a recession. For instance, experts agree about the unlikelihood that the current market will lead to a crash on the scale of the Great Recession. In fact, it is possible that a recession will lead to opportunities for some potential buyers to climb onto the property ladder.

One of the reasons for this is that the federal government usually attempts to stimulate the economy by lowering interest rates. When this happens, major banks tend to follow suit by lowering mortgage rates. With a lower mortgage rate, you would end up paying less for your house in the long run. And depending on how low the mortgage rate goes, you are also likely to earn significant savings.

Another benefit is that there are usually fewer homebuyers during a recession, meaning homes stay on the market for longer. To make their properties easier to sell, owners usually drop their listing prices. You could even end up securing your dream home with a lucky bid at an auction.

Learn how to get the best mortgage rate in Canada in this article.

Will a recession drive down house prices?

Typically, recessions drive down house prices. One reason for this is that poor economic conditions usually mean there are fewer potential home buyers with disposable income. Home prices often drop when demand for properties drops, and any income generated from real estate stalls. While this is a common scenario, it is not always a foregone conclusion. During a recession, house prices can experience volatility in either direction, by rising or falling.

Historically, financial experts have not done a great job predicting future crashes to the housing market. For example, for most of 2020 and 2021, home prices spiked significantly. However, when the federal government then hiked interest rates, the calculations for home buyers changed and home prices depressed. Rising interest rates force homebuyers to save money on their property purchases, where possible.

If house prices drop during a recession, potential homebuyers could get a better deal on a home. This is due, in part, to the increasing number of homeowners or foreclosures being forced to sell their properties in order to stay financially viable.

What are some tips for buying a home during a recession?

Regardless of whether Canada is in a recession or not, it is always critical, when buying a home, to ensure you are prepared. One of the best ways to be prepared is to get your finances in order. You will need a steady household income and solid job security. In the best-case scenario, you will also have a good credit score. Knowing all the costs associated with homeownership such as home insurance, taxes, and maintenance is also critical.

Working with a knowledgeable real estate agent who is familiar with the area is another good idea, whether in a recession or not. A knowledgeable real estate agent will know home values and tell you if the list price is accurate. They will also know if there is a lot of competition for a property or whether the homeowner is in a hurry to sell.

What happens to homeowners during a recession?

In Canada, recessionary periods can devalue property by 6.1% on average, according to data from the Organization for Economic Co-operation and Development (OECD), which studied the price of houses over four recessions. In real terms, that means a decline of $6,100 per $100,000. The long-term growth rate of price appreciation suffers the more recessions the economy has to endure.

In the worst-case scenario, during a recession, an average Canadian home could cost the average homeowner about three years of salary in losses. On average, however, the loss endured by an average Canadian homeowner would be equivalent to one year’s worth of salary for an average-priced house.