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Should I Buy a House in a Recession?

This post was first published on November 14, 2022, and was updated on April 3, 2023.

As alarm bells continue to ring of an upcoming recession, and inflation remains historically elevated, you may be wondering: is the best time to buy a home?

While Canada isn’t immersed in a recession yet – officially defined as two consecutive quarters of GDP decline – analysts are confident one will materialize in the near future. In fact, according to a recent outlook report from Royal Bank of Canada, a recession is likely to be upon us in the second and third quarters of this year, as rising interest rates take their toll. While the economy continues to be “more resilient” than expected, household purchasing power and the housing market have both experienced deep declines.

“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,” write RBC’s economist team.

On one hand, a recession could open up new opportunities for you. If prices fall and the market relaxes, this could be your chance to buy real estate for less. On the other hand, you could find yourself in a very stressful situation if your income were to be disrupted.

So is it a good idea to buy a home during a recession? Let’s investigate whether you should take the plunge, or if it’s better to wait.

What’s happening with the housing market? 

The Canadian housing market has absorbed a steep correction over the last year, following eight consecutive rate hikes from the Bank of Canada, which kicked off in March 2022 and lasted until January 2023. 

That’s brought the benchmark cost of borrowing from a pandemic low of 0.25% to 4.5% today, and has significantly reduced purchasing power for would-be homebuyers due to a combination of higher mortgage rates and a tougher stress test. As a result, national home sales came in a whopping -40% lower than last year’s in February, with the average home price down -19% annually.

And some of the biggest signs of stress can be seen in the nation’s largest markets, such as the Greater Toronto Area. February data from the Toronto Regional Real Estate Board (TRREB) shows that while new listings are down -40%, that’s outweighed by a 47% plunge in year-over-year sales, with just 4,783 homes changing hands. That’s led to a sales-to-new-listings ratio of 46.8%; a balanced market, but one considerably softer than the conditions seen during 2020 and 2021.

With buyers losing their competitive spirit, homes are taking longer to sell. Properties now stay on the market for an average of 22 days, compared with just 9 days this time last year.

What are the advantages of buying a home during a recession?

 Taking a look on the bright side, a recession could lead to a long-overdue break for the country’s overheated housing market. A little more breathing room could create the conditions you’ve been waiting for. Some benefits of buying during a recession are:

  • Lower home prices. Home prices tend to fall during recessions as buyers become more hesitant and sellers become more motivated. An uptick in mortgage defaults could also put downward pressure on prices as lenders will be eager to convert foreclosed homes back into cash.
  • More homes to choose from. You may find there is more inventory to choose from when searching for a home during a recession, meaning you’re more likely to find one that meets all of your criteria. If you’re willing to put in a little work, you could also find a good deal on a fixer-upper as other buyers can afford to be picky.
  • You can take your time. Buying a home over the past decade has required fast decision making and tight deadlines, especially in hot markets like Toronto and Vancouver. You’re likely to find homes remaining on the market for much longer during a recession, affording you more time to decide whether to make an offer.
  • More favourable conditions of purchase. It’s almost impossible to buy a home with a conditional offer in a seller’s market. In a recession, you’re more likely to be able to make your purchase conditional on a home inspection, adequate financing, and sale of your existing home.

What are the downsides to buying a home during a recession?

While a recession may make it easier to buy a home than it has been, it also increases the risks of homeownership. The less equity you have in your home, the higher your risk will be. Some of the downsides to be aware of are: 

  • Higher risk of unemployment. While the risk of unemployment seems low in the current labour market, a recession could change things quickly. You may not be willing to stomach the risk of having a big mortgage payment due with no paycheque to cover it.
  •  It will be harder to sell your home if you need to. Selling your home is always an option if you find yourself in over your head. But it could easily take six months or longer to sell your home during a recession, which could be more time than you have to get out of trouble.
  • Prices may continue falling. While many analysts feel the “bottom is in” for home prices given the Bank of Canada has ended its rate hiking cycle, and buyers are likely to return to the market, never say never. If the recession is more severe than expected, it may take a long time before you can sell your home for the same amount you paid for it.
  • Prices and interest rates may continue to rise. While the Bank of Canada’s hiking cycle has effectively pulled inflation down to 5.2% from last June’s 40-year high of 8.1%, it remains well above the preferred target of 2%.  We could soon find ourselves in an unusual situation combining inflation and rising interest rates with a recession. If that’s the case, you could find your home becoming less and less affordable over time.

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How will I know when is the right time to buy a home?

Many have tried to predict what will happen in the economy and housing market over the course of history, and most have failed.

Take, for example, this NPR article from 2012 sounding alarm bells for a deep, looming recession that never materialized.

Or this entertainingly titled story from Business Insider, circa 2013, confidently (yet incorrectly) announcing “Canada Is Doomed.”

Or this 2015 PBS op-ed comparing our economy to Wile E. Coyote having already run off the edge of the cliff. (Meep meep).

None of this is evidence that a recession won’t happen. But if the experts can’t know what will happen next, neither can you. So your job is to wait to buy a house when it’s right for you.

You’ll know you’re ready to buy a home when:

  • You’re making enough money to cover the costs of homeownership. A mortgage is only one piece of the housing pie. You’ll need enough income to cover property taxes, utility bills, and ongoing maintenance. If you’re making enough money to comfortably cover the full cost of owning a home, that’s a good sign.
  • You’ve saved a sizeable down payment. While you can buy a home with as little as 5% down, saving a larger down payment is a good sign you’re living within your means and can take on the financial responsibility of owning a home. It also means you’ll have more equity in your home and will have more and better options in case you find yourself affected by the recession.
  • You have enough income to afford a higher mortgage payment if interest rates rise. You might be able to afford a home at today’s interest rates, but what will happen when it’s time to renew your mortgage? Ratehub’s mortgage payment calculator shows that a 2% rise from today’s best 5-year fixed mortgage rate of 4.39% would cause your payments to increase by 21%. If the prospect of a 21% higher mortgage payment doesn’t make you want to cry, you’re on the right track.
  • You have an emergency fund saved. If you can afford to do all of this and maintain a high interest savings account with enough cash to cover your costs for a few months should you need it, you’re in better shape than a large number of homebuyers.


The bottom line

There are benefits and drawbacks to buying a home during a recession, just as there are benefits and drawbacks to buying a home at any time. And in either case, there’s no way of knowing what’s to come in the future.

For that reason, the right time to buy a home is simply when you can afford it. If you’re making enough money to comfortably cover the costs, have enough savings to make a substantial down payment, and can stare down rising interest rates without breaking a sweat, you’re likely ready to buy a home no matter what’s happening. If you are interested in buying a home but unsure whether now is the right time, it’s always a good idea to check out Canada’s best mortgage rates and to speak with a mortgage broker, who can give you expert, personalized advice for free. 

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