Essential Knowledge Series
Everyone knows the world has been through a lot these past two years. And now, at the end of the pandemic - a potential World War 3.
Although this post involves the topic, we won't be discussing all of the atrocities taking place between Russia and Ukraine. For those people who are affected, we send our prayers and hope to see the end of the war as soon as possible.
As far as this current war goes, the economic effects on housing prices have yet to be seen, but we can still predict the impact.
Most people who have been following the Canadian housing market know about the recent Bank of Canada (BoC) interest rate increase. If you missed my last article discussing the rate increase, you can find it here. The major reason for the increase, and the expected increases going forward, is the inflation we've experienced in Canada over the last year. Although everyone in the world is experiencing massive inflation, I'll be focusing exclusively on the Canadian home market and inflation.
The question I will pose here is not how the war will affect the housing market, but rather how will the war affect the Canadian economy as a whole? In doing so, we can understand how the housing market will be impacted.
When looking at the history of the Canadian economy, we know that recessions are likely to happen every 10-15 years because of the cyclical nature of it being a capitalist economy. At the start of the 2008 recession, the most well-known major recession, there was massive uncertainty. The Canadian government along with the Bank of Canada (BoC) had a tough situation on their hands unlike anything they had seen in the recent past.
The U.S. economy was crashing due to the unethical and shady business practices in the American mortgage industry. As the old saying goes, when the U.S. sneezes, Canada gets sick. In 2008, Canada was hit with a significant amount of job losses due to the U.S. issues which led to lower liquidity in the markets. As a result of lower liquidity and other factors, bankruptcies followed all across Canada. The most well known companies needing to be bailed out or bought out were General Motors and Chrysler. Along with these bankruptcies, the oil prices that had been rising steadily until the end of 2007 suddenly took a major turn downward and many people lost their jobs in the energy industry as well.
All of these factors led to the BoC lowering rates to the 0.25% target overnight rate. Although rates were low, people feared what was happening with the U.S. housing market. As housing supply increased and demand decreased, home prices fell.
After a few years, the Canadian economy started to recover and home prices eventually began to rise again. Since 2008, home prices are up over 200% and continue to rise.
As you can see on the chart provided from the HouseSigma website, the median price in 2007 and 2008 had significant drops in Hamilton. The average days on the market from 2007 until mid-way through 2012 remained very high, even breaking the 100 day mark on a few occasions. Mid-way through 2012, the average days on market (DOM) finally subsided and has been decreasing ever since.
That brings us to the current year, 2022. The Ukraine war, along with the past two years of covid has led to many economical problems, although fairly different from those in 2008. Unlike 2008, the main issue around the world today is the supply chain and oil shortages. The supply chain issues were created by covid and employment shortages. The oil price increase and shortages are being caused by the U.S. producing minimal oil since 2020 and sanctions on Russia due to the war.
Knowing these things, the likelihood of a recession in Canada in the next couple of years is probable because of the high inflation and rising interest rates. This might cause Canadians to think twice about purchasing a new home. Less people looking to buy homes will reduce demand in the overall market and could cause home prices to decline.
In addition to a potential home price decline is the fact that the BoC is still likely to raise rates which will cause hardship for Canadians in the coming 12-18 months. Increasing interest rates will hurt Canadians more than ever because price increases will lead to consumers using more credit. As a result, the cost to cover the debt will increase and a positive feedback cycle will begin.
Overall, we're still in for a few rate increases but it's not as certain as it was before the war. Even with inflation being so high, the Bank of Canada has to rate the pros and cons of raising rates before they meet in April. If we are heading into a period of higher inflation and financing costs, it's likely that we'll see home prices decline over the next 12-18 months.
Whatever happens, let's hope World War 3 doesn't start, because at that point home prices going up or down will be the least of our worries.
Questions/Comments?
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