Thursday, 16 July 2015

Could This Recession Lead to Higher Home Prices in Toronto?

Technically speaking, Canada is in a mild recession. We're not talking 2008 here. The money systems of the world are not at stake. It's more of an embarrassing surprise, like discovering you had your fly open all day. You may not have been truly aware that something was happening until someone presents the data.

To believe that Canada is in a recession right now, may make you a traditionalist of sorts. If you define a recession as two consecutive quarters of negative growth, then yes, we are in a recession. Some consider a recession to be a pronounced negative change in the economy for a sustained period of time. And if you accept that definition of a recession, then we're likely not it one since the change we are seeing is not so pronounced. So, for the sake of argument, let's define it the first, traditional way - a recession is two consecutive quarters of negative growth. I think this may be how the Federal Government is looking at it.

Usually, when the word "recession" is talked about, mediated and printed enough times, home prices start to fall. People may lose their jobs or fear they will lose their jobs. Consumer spending slows down, unemployment goes up, and Canadians feel they need to be more careful with their money.

I don't think that's going to be the case in this so called recession from the perspective of Toronto. In fact, this recession may cause home prices in Toronto to go up even more.

How you ask? Doesn't this defy the logic of what recessions do? Well, I think there are some good reasons why this recession would put upward pressure on property prices, instead of downward.

1.  LOWER INTEREST RATES: When the fear of a recession starts, and folks start to feel more careful with their money, the government tries to stimulate their desire to buy. The Canadian government has lowered interest rates yet again to help boost us out of the recession. So, for those buyers who are looking now, they will be paying less in interest, and they will be able to afford even more.  This leads to more buying and more competition with buying houses.

Alberta and its abundant resources seems to be the biggest reason why we're heading into a recession. And prices of homes have fallen there. Oil and other resources in Alberta and in other provinces like Saskatchewan and Newfoundland are not as successful as its been in the past few years. Though there is a good possibility that Alberta will come roaring back to life, Ontario does not seem to be as damaged by the resource slump. If Alberta continues to slump, there is a good chance we may see some net migration out of Alberta to Ontario just like in 1986 to 1988. Back then, when the oil prices fell, many Albertans moved to Ontario to send home prices higher here in central Canada. If Albertans return again, we'll see more competition with new migrants from the prairies competing for our housing stock.

Lastly, the falling dollar caused largely by falling oil prices in 2015 have made manufacturing-loving Ontario a lot more appealing. Now, businesses in Ontario and BC could sell their products abroad more cheaply. Now that the Feds have lowered our interest rates, the dollar will go down in value again. It makes for a more expensive trip to Hawaii or New York, but it makes the Ontario economy happy. It will also make foreign investors more interested in buying real estate in Canada while the dollar is so cheap.

So yes, we may be technically in a recession, but this recession is different from the last one. If you live in Toronto and most of Ontario, it will trigger more demand for housing and higher prices instead of the usual sad slip in prices. This may be a good or a bad thing, depending on how you look at it. Some feel consumer debt is already too high in this country. Adding to it could only put more stress on the debt levels of Canadians. If you are a buyer, it's both a good and bad thing. You will have less interest on your mortgage and you may be able to qualify for a higher amount, but home prices will be more competitive and higher. For sellers and homeowners, it will be good. Sellers will have a better chance of making more money off of their assets and homeowners will, once again, see gains in the value of their home and their net worth.

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