What are the pros and cons of buying a house in a recession?

 A recession may feel like a volatile time to purchase a property. Home prices appear to rise and fall at the drop of a hat. If you are savvy enough, however, it could be your best bet to finding a great deal. Here are the pros and cons of buying a house in a recession—and everything in between.  

What is a recession?
A recession is traditionally defined as consecutive quarters of negative growth. Prior to declaring a recession, the federal government will wait for the second quarter of statistics. In recent times, such as the beginning of the COVID-19 pandemic, when economic collapse was looming, an unprecedented number of corporate bankruptcies and unemployment claims seemed inevitable. At that point, a recession was almost a guarantee, with a new recession—as well as housing market fluctuations—likely to be a casualty of market disruptions.

Is it a good time to buy a house?
Experts historically have done a poor job predicting future housing market crashes. For most of 2020 and 2021, for instance, housing costs increased dramatically; however, the federal government then hiked interest rates, therefore changing the calculations for buyers and depressing home prices. Rising interest rates force homebuyers to save money on their home purchases where possible.

Generally, purchasing a property during a recession could get you a better deal on a home. The reason for this is the number of owners or foreclosures who are forced to sell their properties to stay financially viable rises, which therefore leads to more properties becoming available on the market and lower housing prices. But because the current COVID-19-related recession is unique, each potential homebuyer is in a somewhat unprecedented financial situation. For instance, if you work in tourism or hospitality, your financial positioning will be very different from someone who is able to work from home and earn a regular, steady paycheque without any disruptions.

What impact does a recession have on house prices?
Recessions usually depress prices in almost every market—and the real estate market is no exception. Poor economic conditions typically mean there are fewer potential homebuyers with disposable income. When demand for properties drops, home prices go with it, and income generated from real estate stalls. This scenario is common, but it is still merely a general rule. It is also possible that during a recession housing prices do not rise or fall at all, but experience volatility in either direction.

The pros of buying a house during recession
Do not fret. There are pros of buying a housing during a recession. The following are some definite benefits that you can consider:

Lower prices. There are usually fewer homebuyers during a recession, which means that properties remain on the market for longer. It also means that sellers are more likely to drop their listing prices, making their property easier to sell. This scenario could mean that you find your dream home with a lucky bid at an auction, for example.

Lower mortgage rates. During a recession, it is common for interest rates to be lowered as a means of stimulating the economy. Major banks often follow suit—including by lowering mortgage rates. That means with a lower mortgage rate you will wind up paying less for your home in the long run. It is also likely to give you significant savings, depending on how low the mortgage rate goes.

Seller concessions. A property that sits on the market a long time usually makes sellers skittish. You can take advantage of this by requesting concessions like asking the seller to pay for closing costs, for example.

The cons of buying a house during recession
Buying a house during a recession also comes with its downsides. Some things that you should consider when deciding to purchase a property in the middle of a recession include:

Job uncertainty. During typical recessions, unemployment rates can skyrocket, with a lot of jobs on the chopping block, or at least in danger of cutbacks. As the COVID-19 pandemic showed with the hospitality industry, your job situation can change quickly, no matter how secure you think your position or industry. It is also important to keep in mind that your mortgage is one of many costs that come with owning a home. To avoid a situation where you are forced into a foreclosure, ensure first and foremost that you have job security.

Banks are less likely to lend money. Economic uncertainty can impact anyone’s job—and banks understand this. For fear of having to foreclose your home, lenders are less likely to approve mortgages in this economic environment.

Title issues. Title issues could potentially impact your property purchase if the current owners you are buying from go deep into debt. It is important, for this reason, to ensure your title company’s search is thorough.  

Possible difficulty selling your home. Selling during a recession could be a problem if you need to sell your current home before buying a new one. Due to the recession, you could get less money than you expected, or your house could languish on the market, depending on your location.

Source: Canadian Mortgage Professional

Rent prices in Toronto rose by fastest pace on record

 GTA rent prices rose by “the fastest pace on record” in the second quarter of this year with the average one-bedroom unit being leased out for nearly $2,200 a month, a new report has found.

Urbanation Inc. say that rent prices rose for the fifth consecutive quarter due, in part, to “near record-low unemployment, and a sharp reduction in home purchasing power as interest rates increased.”

The market research firm says that average condo rents in the GTA were up 5.9 per cent from the first quarter of 2022 and 16.7 per cent year-over-year.

The average cost for a one-bedroom unit was $2,182 per month in the second quarter, while two-bedroom units were rented out at an average cost of $2,862 per month and three-bedroom units were rented out for $3,740 a month, on average.

Urbanation says that vacancy rates in the GTA also plummeted, dropping from 5.1 per cent one year ago to 1.4 per cent today.

“Driving that growth is really just demand and supply moving in the opposite direction. On the demand side we have seen a reacceleration in population growth, we have a near record low unemployment rate and also a very strong deterioration in home ownership affordability with prices remaining near record highs, interest rates rising very quickly and a lot of first time buyers being shut out of the market,” Urbanation President Shaun Hildebrand told CTV News Channel on Tuesday. “So there has been a confluence of factors that have boosted demand at a time when supply just isn’t keeping pace. In fact, in the second quarter we recorded the lowest number of rental construction starts in the GTA that we have seen since we started tracking the data back in 2015.”

According to the latest data, Toronto rent prices are now approaching their pre-pandemic level across most property types.

Studio apartment rent prices are down about one per cent from the second quarter of 2019 while units with dens saw gains of between 6.4 per cent and 9.4 per cent over the same time period as renters sought out additional space while working from home.

Urbanation says that condo rental inventory also dropped to a record low of a third of a month’s supply in the second quarter, which could foreshadow further increases in the cost of rent particularly in the core.

“During the first year of the pandemic a lot of people were fleeing their small units in the downtown area as working from home became more common. So those rents dropped very quickly. But with offices reopening, entertainment venues reopening, schools reverting back to in-class learning and just high commuting costs in general we have seen demand for the core outstrip demand for the 905 for the first quarter since the pandemic began,” Hildebrand told CTV News Channel.

Source: CTV News

Toronto new condo sales decline 19%, prices rise

 Sales of new condominiums in the greater Toronto area declined by 19 per cent sequentially in the second quarter of this year, while the average price per square foot reached a record high of $1,453, according to the latest report from real estate consulting firm Urbanation Inc.

A total of 6,792 new condo units sold in Q2 of 2022, plummeting 24 per cent compared to a year prior. Sales did however remain above the 10 year average.

The drop in buying activity caused 11,703 new condo units to remain unsold, marking a 36 per cent increase from the 18-quarter low in the first quarter of 2022. Despite this uptick, the figure is still a six per cent decline annually.

While new condo purchases slowed, the cost per square foot of these units surged by 20 per cent on an annual basis, reaching an all-time high.

Several driving factors were behind the price spike, including soaring construction costs, labour shortages and higher-priced projects, according to the report. Looking ahead, rising interest rates and delayed approval timelines for projects will likely keep the cost of new condos elevated.

“Prices are expected to hold firm amid low inventory and high development costs,” Shaun Hildebrand, president of Urbanation said in a press release on Tuesday.

“The strength in the rental market and shift in demand towards more affordable ownership options should provide support for condominium activity as the market works through the effects of higher interest rates.”

The supply of presale condo units reached the third highest volume of on record with 9,924 units to hit the market in Q2. The recent pullback in buying activity however has caused main way projects to cancel or delay future launch plans. 

The data shows there were 35,000 new condo units anticipated to come to market for the region in 2022. In the first half of this year, roughly 16,000 units have launched and 10,000 more are expected, leaving 10,000 units on hold.

GTA Home Sales and Listings Trend Downwards in July

 here were 4,912 home sales reported through the Toronto Regional Real Estate Board (TRREB) MLS® System in July 2022 – down by 47 per cent compared to July 2021. Following the regular seasonal trend, sales were also down compared to June. New listings also declined on a year-over-year basis in July, albeit down by a more moderate four per cent. The expectation is that the trend for new listings will continue to follow the trend for sales, as we move through the second half of 2022 and into 2023.

Market conditions remained much more balanced in July 2022 compared to a year earlier. As buyers continued to benefit from more choice, the annual rate of price growth has moderated. The MLS® Home Price Index (HPI) Composite Benchmark was up by 12.9 per cent year-over-year. The average selling price was up by 1.2 per cent compared to July 2021 to $1,074,754. Less expensive home types, including condo apartments, experienced stronger rates of price growth as more buyers turned to these segments to help mitigate the impact of higher borrowing costs.

“The Greater Toronto Area (GTA) population continues to grow and tight labour market conditions will drive this growth moving forward. Despite more balanced market conditions resulting from rapidly increasing mortgage rates, policymakers must continue to take action to boost housing supply to account for long-term population growth. TRREB has put realistic solutions on the table to address the existing housing affordability challenges. With savings high and the unemployment rate still low, home buyers will eventually account for higher borrowing costs. When they do, we want to have an adequate pipeline of supply in place or market conditions will tighten up again,” said TRREB Chief Market Analyst Jason Mercer.

TRREB is also calling on all levels of government to reassess and clarify policies related to mortgage lending and housing development.

“Many GTA households intend on purchasing a home in the future, but there is currently uncertainty about where the market is headed. Policymakers could help allay some of this uncertainty. As higher borrowing costs impact housing markets, TRREB maintains that the OSFI mortgage stress test should be reviewed in the current environment. Consumers looking to renew their existing mortgages with a different lender should not be subject to an additional stress test burden beyond what they would face with their existing lender. Given the importance of the housing industry as a driver of economic growth, a transparent process and sound rationale in the development and management of stress test guidelines are also of utmost importance,” said TRREB CEO John DiMichele.

“With significant increases to lending rates in a short period, there has been a shift in consumer sentiment, not market fundamentals. The federal government has a responsibility to not only maintain confidence in the financial system, but to instill confidence in homeowners that they will be able to stay in their homes despite rising mortgage costs. Longer mortgage amortization periods of up to 40 years on renewals and switches should be explored. With the benefit of hindsight, it appears that the Bank of Canada’s rate increases started too late. Now we are dealing with outsized increases to curb generationally high inflation. The federal government must enact measures which will assist buyers facing affordability challenges in an inflationary environment where costs are rising at the gas pumps, the grocery stores and everywhere in between,” said TRREB President Kevin Crigger.

“The provincial government, elected on a platform of bolstering housing supply and increasing housing affordability, must take swift action as it relates to significantly rising municipal government fees across the GTA, such as development charges which are largely borne by home buyers. City of Toronto Council should reflect on its recently approved 46 per cent increase to development charges, bringing the average cost of all government charges and fees to an astounding $350,000+ for every new detached house and over $180,000 for a new condominium. We do commend the City for providing an exemption from development charges for up to three additional units on single lots which will encourage more missing middle multiplex housing, but this exemption alone is not enough. Every level of government agrees that the GTA needs more homes. Governments must stop their reliance on significant charges and fees on new homes and unpredictable taxes on existing homes or we will continue to see a growing housing crisis that will eventually inhibit the growth of the GTA’s economy. With a municipal election this fall, governments will be judged based on the steps they take,” added Crigger.