Are We in a Recession? Canada’s GDP Declines for Second Successive Quarter

Edward Trapunski
by Edward Trapunski September 4, 2015 / No Comments

It’s official. Canada’s economy has slipped into a recession.

Technically, the definition of a recession is two successive quarters of decline in gross domestic product (GDP). Technically or not, this has been the slowest six-month period since 2008 and 2009, following the financial crisis in the United States.

Generally recessions trigger lower interest rates. But at 0.5 %, the Bank of Canada overnight interest rate is almost as low as it can go. This is the overnight rate set by the central bank at which major financial institutions can borrow and lend funds among themselves for one-day or overnight.

But the Bank of Canada rate is a short-term rate; while it may influence how much you will pay in interest if you have a variable-rate mortgage, it won’t affect it directly. However, many Canadians have a fixed rate for three to five years. The interest rates on these longer-term mortgages are based on the bond market, and for a more accurate indication on where interest rates on mortgages are heading, you are better off checking the price on a five-year bond.

The best rates for a five-year fixed-term mortgage RateHub shows right now is about 2.4%. That’s a good rate if you’re getting into the housing market, if you’re renewing your mortgage, or if you’re refinancing. These rates are tracking the price for a five-year Government of Canada bond fairly closely.

Will the low rates last?

Most economists are predicting a short recession and a continuation of the status quo. Some are saying that if you look at the economic numbers for July, the last month that has been tabulated, the recession is over already. But others are saying that the recession is the result of a systemic issue in Canada: it is so commodity-reliant and the manufacturing sector has drifted to jurisdictions where costs and wages are lower. As a consequence, the economy is not likely to recover so quickly.

The recession will have a bearing on other facets of buying a house besides mortgage payments. It can influence taxes and fees, the cost of utilities and, of course, property prices. If the recession is prolonged and puts people out of work, demand will go down, pushing the price of houses down, especially if people have to sell.

Earlier in the week, just before Statistics Canada announced the GDP numbers, both RBC and TD Bank separately released reports on the housing market in Canada. The TD report said that the decline in borrowing rates during the first half of 2015 will boost the demand for houses during the early fall but will have less of an effect later in the year. Both RBC and TD see a divide in demand between the hot markets in Toronto and Vancouver and more restrained conditions in commodity-dependent regions such as Edmonton, Calgary, Regina, and Saskatoon. Toronto and Vancouver both have a strong labour market, not as affected by the energy decline, and a steady inflow of migrants keeping the market buoyant. The low Canadian dollar made the Canadian housing market even more attractive for housing investment from other countries, especially for more luxurious homes.

What this means for real estate

The divide is especially acute for detached single-family homes. Condos in Vancouver and Toronto are more affordable because construction has been constant for nearly five years and, as a result, there are a lot of available units.

RBC is forecasting that 505,400 homes will change hands this year with prices set to rise by about 4.6%, with prices more affordable if you aren’t buying a house in Vancouver or Toronto. Therefore, you’re at an advantage outside these hot centres, although housing prices alone aren’t going to determine where you choose to live.

The recession also has an impact on new home construction, popular with first-time home buyers. According to the most recent report from the Canadian Mortgage and Housing Corporation, new home construction fell by about 4%. The report shows a drop of 5.9% in urban starts. Condos were down by 8.2% while detached single-family homes were down a more modest 0.8%.

Don’t be too worried about the reports showing a recession. This is a snapshot of how the economy has performed over the past two quarters. It’s looking back, not forward, but it can still offer a hint of lower prices to come, and it is one more measure you can use to make financial decisions about home ownership.

Flickr: woodleywonderworks

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