Home Buying

Will a Recession Restore Home Affordability? Here's What Experts Say

Will a Recession Restore Home Affordability? Here's What Experts Say

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    Home affordability remains an elusive dream for many potential homebuyers, especially in major cities like Toronto and Vancouver. The current economic climate has many prospective homebuyers questioning: will a recession improve home affordability? Let’s dive into this complex issue and see what the experts have to say.

    Key Takeaways

    • A severe recession is unlikely to restore home affordability, even in a worst-case scenario.
    • Population growth and limited home availability could keep prices high.
    • The long-term implications of the persistent lack of home affordability could threaten Canada’s economy.

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    According to Desjardins, a Severe Recession Likely Won’t Make Housing Affordable in Toronto

    A recent study by Desjardins Chief Economist and Strategist Jimmy Dean and Principal Economist Marc Desormeaux suggests that even a major economic downturn comparable to the 1990s recession would not make housing significantly more affordable in Toronto. This conclusion is based on the worst-case scenario that would see average home values in Toronto decline by 16% or around $185,000 by the end of 2024 and 30% or around $340,000 by the end of 2025. 

    However, if the unlikely scenario were to unfold and we did see a financial crisis like the 90s, this would only return Toronto’s price-to-per capita disposable income ratio to the elevated levels seen in late 2015. This data underscores that even in the worst case, a severe recession may not provide much relief for potential homebuyers in terms of affordability. 

    Population Growth and Limited Home Availability Could Keep Prices Up

    Sustained population growth and a limited supply of new homes could drive home prices well above their peak, further exacerbating the affordability problem for homebuyers. The more people who call Canada home, the more homes are needed, and there is a clear imbalance today between the number of people and available homes. The law of supply and demand dictates that prices will rise when the demand, in this case for housing, surpasses the available supply. 

    Housing is a dominant force in Canada’s economy and is one of the 8 major components, making up roughly 28% of the CPI basket share. As interest rates and rental prices increase, this contributes to increases in Canada’s CPI and inflation rates. Economic growth was 0.8% in Q1 and stagnant (0%) in Q2 of 2023, with housing investments declining under higher borrowing costs and lower demand. 

    GDP growth over time can be linked as a cause of inflation, and this keeps our inflation numbers elevated above the 2% inflation target set by the Bank of Canada (BoC). When this happens, as we’ve seen over the past year of interest rate increases, policymakers’ only course of action is to keep increasing interest rates to bring inflation down to meet the target, further adding to the unaffordability crisis.  

    How the Government Plans on Addressing Home Affordability

    Home affordability is a pressing issue, so the government has implemented numerous measures to tackle affordability. These initiatives introduced as part of Budget 2022 will prioritize making housing more affordable. Some of the measures include: 

    Launching a New Housing Accelerator Fund

    The Housing Accelerator Fund (HAF) will provide a funding incentive to local governments to encourage and speed up initiatives to increase the housing supply. This $4 billion initiative will provide funding to cities, towns, and Indigenous governments to fast-track the creation of 100,000 new homes across Canada as part of the National Housing Strategy. 

    Building New Affordable Housing

    The Rapid Housing Initiative will see an additional $1.5 billion invested to quickly build new affordable housing units with the goal to commit all funds by March 2024. This additional funding aims to create 4,500 new affordable housing units, with at least 25% of the investment going to women-focused housing projects. 

    More Flexible First-Time Home Buyer Incentive

    Recognizing the barriers first-time homebuyers face, the Government has extended the First-Time Home Buyer Incentive until March 21st, 2024. This initiative aims to lower borrowing costs for eligible first-time buyers through a shared-equity mortgage with the Government of Canada. 

    Tax-Free First Home Savings Account

    Announced last year by the government and launched earlier this year, the Tax-Free First Home Savings Account combines the benefits of an RRSP and TFSA. This account allows prospective first-time homebuyers to save $8,000 a year up to a $40,000 lifetime limit, with contributions being tax-deductible and withdrawals and any income earned on investments being non-taxable as long as the funds are used to purchase a home. 

    A Ban on Foreign Investment in Canadian Housing

    In an attempt to ensure that housing is owned by Canadians rather than foreign investors, the government imposed a ban on foreign investment in Canadian housing. The proposed ban began on January 1st, 2023, and prevents individuals who are not Canadian citizens or permanent residents and commercial enterprises outside of Canada from buying residential properties for a period of 2 years in Census Metropolitan Areas (CMA) or Census Agglomerations (CA). 

    Importance of Maintaining an Affordable Housing Market

    Maintaining an affordable housing market is vital for the economy’s health and the population’s well-being. When we have stable housing, people can do more to participate fully in society. A lack of affordable housing can lead to increased homelessness and social inequality. 

    A lack of affordable housing can also deter talent from moving to cities where their skills are required and pursuing jobs that will maximize their contributions to society simply because they cannot afford to live there. Businesses would be impacted as they can no longer retain talent, leading to labour shortages. Additionally, when Canadians spend so much of their income on housing, there is little left to spend, affecting every aspect of our lives and the economy. 

    Frequently Asked Questions

    Welcome to our Frequently-Asked Questions (FAQ) section, where we answer the most popular questions designed and crafted by our in-house mortgage experts to help you make informed mortgage financing decisions.

    Is a recession coming in 2023 or 2024?

    Economic forecasts can never be 100% accurate, but some economists still predict a recession in the coming years. However, this potential recession’s exact timing and severity remain uncertain. Some economists expected a mild recession in mid-2023, which didn’t materialize. There are renewed predictions that a mild recession may occur within the next year if we aren’t already in one

    Will a recession make home prices go down?

    While a recession could potentially lead to a drop in home prices, it is not guaranteed. Many factors can influence the impact of a recession on home prices. The main contributors that would lead to declining home prices are a steep increase in unemployment and decreased consumer confidence. However, those may be quickly counteracted by factors that lead to increased home prices, like sustained population growth and a limited housing supply, which could keep home prices higher.

    Should I buy a home during a recession?

    This question has no definitive answer since it depends on your individual circumstances. If your career and finances are secure, and you have capital and cash flow to qualify for a mortgage, then a recession could be the perfect time to buy if home prices decrease.

    Final Thoughts

    While a recession may result in lower home prices, other factors like sustained population growth and the limited housing supply could keep prices higher. There is no guarantee that if a recession were to occur, it would make homes more affordable, especially in major cities like Toronto and Vancouver. Government measures to improve home affordability are unlikely to provide an instant solution to the affordability crisis. 

    Despite this, it’s important to remember that every economic downturn is followed by a period of recovery that could drive prices even higher. Potential homebuyers should carefully consider their personal financial situation and the possible risks of waiting for a recession to purchase a home. 

    Contact one of nesto’s mortgage experts to see how you can prepare for your window of opportunity. 

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