How the Economy Has Affected Home Buying Plans

Economists at the Royal Bank of Canada updated their Canadian economic outlook, forecasting that the country could be headed for a recession during the second and third quarters of this year.

As the Bank of Canada’s (BoC) higher interest rates travel through the system, and recent data suggesting that the economy could be slowing down (zero per cent growth in the fourth quarter), could the nation be on the cusp of a major recession?

Not necessarily, says the RBC. In fact, much like market analysts south of the border, the Canadian economy could be on the cusp of a mild recession.

“Against that backdrop, the most likely scenario is still that the U.S. and Canadian economies will both enter mild recessions over the middle-quarters of 2023,” the report stated.

But how will this weigh on consumers and, more specifically, prospective homebuyers?

How Has the Economy Affected Home Buying Plans?

A recent Ipsos survey found that consumer confidence declined for the fourth consecutive month in March, sliding from 47.5 to 47.3. At the same time, a separate Nanos Research poll discovered that there is a positive trajectory being seen in the Canadian real estate market and the broader economy.

So, what do industry findings show regarding the sentiment on the Canadian real estate market?

According to a study conducted on behalf of RE/MAX, more than two-thirds (72 per cent) of Canadians have revised their home-buying plans. Sixty-five per cent note that the housing market is moving faster than they could make an offer, up from 54 per cent during the hot pandemic-era real estate market.

Economic concerns are most pronounced among first-time homebuyers, the study found.

Close to half (42 per cent) of first-time buyers are put off buying a residential property because of concerns about the broader economy. Forty per cent of first-time homebuyers say economic uncertainty has become a barrier to ownership.

Despite the easing of home prices last year, more than one-quarter (28 per cent) of Canadians concede being unable to afford a down payment. This has forced many households to sit on the sidelines and wait for an opportunity.

Other reasons for being unable to purchase a residential property? Here is a breakdown of the top five barriers to homeownership:

• Economic Uncertainty: 46 per cent
• High Interest Rates: 44 per cent
• Not Enough Savings: 36 per cent
• Dislike the Neighbourhood: 34 per cent
• Language or Terminology: 31 per cent

Indeed, interest rates are the highest they have been since before the Great Recession, while the national savings rate is below the long-term average of 5.99 per cent. But a strong labour market and a central bank potentially hitting the peak of its tightening cycle could spell good news for consumers and homebuyers.

But the current cost of living is why housing affordability is still an important issue for a considerable portion of the national population. But while there is a discussion over advancing the objective of making housing more affordable for the typical Canadian, there is a debate over its definition.

The report noted that one-quarter of Canadians defined housing affordability as a property they can afford to meet their basic needs and maintain livability standards, including neighbourhood restaurants and green spaces.

That said, home-buying remains a priority for a little more than a third (34 percent) of Canadians “because it’s a good investment.”

In the end, it’s all about trade-offs for buyers, says Ken Greenberg, the former director of urban design and architecture of the city of Toronto.

“It’s not just about the cost of housing; it’s about looking at the full picture. And that’s where the trade-offs come in; that’s where people are increasingly looking at living in smaller spaces in great neighbourhoods. As opposed to saying, ‘It’s just how many square feet of home I can have at the cheapest price,” he stated in the report.

Fall Back and Spring Forward?

Looking ahead, economists and market observers purport that the upcoming and typically busy spring buying season could set the stage for how the Canadian real estate market performs.

“While we’re not seeing it in the sales or listings data just yet, I would expect homeowners are getting properties ready for the market, and prospective buyers are getting mortgage pre-approvals,” said Jill Oudil, the chair of the Canadian Real Estate Association (CREA), in a statement.

For Shaun Cathcart, CREA’s Senior Economist, this is a similar environment to 2019, when Canadians jumped at the opportunity to purchase homes in March, April, and May.

“Future sellers, many of whom will also be buyers, are likely biding their time until the optimum time to list and buy something else. For most, that’s in the spring. Will buyers jump off the fence to snap homes up in 2023 once they finally start to hit the market?” he said.

“They did in 2019.”