To the untrained eye, the real estate market might seem random and unpredictable. As a result, when words like “inflation” and “recession” flash across headlines, home buyers start to back towards the proverbial fence. However, we’re here to remind you that real estate markets and the economy are cyclical. We have an annual real estate cycle that creates the same inventory and buyer patterns throughout the year and then the economic cycle, with stages that make predictable patterns but take years to form. Here we explain how the stages of the real estate cycle and economy work and how a recession is actually a good thing for home buyers.
Watching Annual Cycles
The four stages of the annual real estate cycle are very predictable:
- January to March: Buyers start to gear up, but most sellers mark their calendars to list in the spring. Inventory is lower, so prices are higher, putting sellers in a better position. However, in some cases, sellers might be open to negotiation if a lack of buyers has kept their homes sitting on the market longer than they hoped.
- April to June: This is the busiest time of year, with warmer weather motivating buyers and sellers. There are more buyers, so sellers still have an edge price-wise, but buyers also have more choices at this time of year.
- July to September: Prices even out in the summer as the mad dash to list dies down, and houses stay on the market a little longer. Buyers gain more leverage with price as sellers worry their homes might sit on the market into the fall. So summer is often the sweet spot for buyers who see a healthier inventory than January, less competition, and, therefore, more motivated sellers.
- October to December: Inventory drops along with temperatures. Houses lingering on the market might not be as exciting for buyers, but sellers tend to be more open to lower, reasonable offers that help them avoid relisting in the spring. There are fewer buyers and homes, making stage four an advantageous time for both sides, as long as sellers are okay with seeing prices closer to fair market value
The annual cycle gives you an idea of when to buy based on what is more important to you, lower prices or more choices. If you’re all about price, stages 3 and 4 are ideal, while if you’re more about choices, stages 2 and 3 are best. Stage 1 can offer some benefits if you aren’t overly picky. While low inventory can push prices higher, there are also fewer buyers, which means you can find sellers willing to negotiate.
Looking for more homebuying resources? Read these blogs next:
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Watching Economic Cycles
Next, here’s how the economic cycle impacts real estate:
- Expansion: This is a sellers’ market where the economy is doing well, unemployment is low, and home buyers are out in droves. Low vacancy rates are pumping up the competition, pushing prices higher. While inventory feels low, it’s more about the number of homebuyers. This is the most challenging stage for buyers because competition is fierce, and bidding wars become the norm.
- Hyper-Supply: This is a buyers’ market with tons of homes, but not many buyers out there. House prices drop with less demand, and too many homes can lead to lost jobs in the home-building industry as construction slows down.
- Recession: In real estate, recession is actually a balanced market. There are tons of homes to choose from, fewer buyers to fight with, and therefore lower prices. Whether you’re buying a home or an investment property, opportunity has arrived. Investors are ready to pounce because rent covers expenses while they wait out the recession and then watch their equity grow as the economy recovers. On the downside, there’s a higher risk of job loss and higher interest rates during a recession.
- Recovery: As we recover from a recession, we continue to enjoy a balanced market. However, while you might think this is the time to buy, although the market is more balanced, people feel financially secure, which means demand is rising. Therefore, as recovery progresses, your window of opportunity gets smaller and smaller. Although you’ll see interest rates drop, you have to time it right. You want to leverage negotiating power while inventory is high, but before dropping interest rates lure more buyers onto the scene.
A recession offers a balanced market ideal for real estate investors and homebuyers working with a more flexible budget.
Where We Are Today
With inflation rising at alarming rates, the government had to do something to keep those rates manageable. And how did they do that? Drum roll, please: They increased interest rates. Increased interest rates discourage consumer spending and, in turn, reduce debt. They also lead to recession because less spending means less revenue for businesses. In real estate, higher interest rates spook buyers who worry about higher monthly payments. Higher interest rates today have seen both inflation rates and housing prices drop. Which is good. Therefore, if you’re more flexible budget-wise and have a reasonable down payment available, you can balance out the higher interest rates with lower housing prices. Also, when you renew your mortgage, you’ll see your interest rates drop, so your mortgage payments become lower, and you’ll build equity faster.
Where We’ll Be Next Year
Considering the government’s only recourse to overcome inflation is to increase interest rates, experts still predict a recession in Canada by the end of 2022. However, they also expect it to be modest, with recovery by the summer of 2023. This is good because the longer recession lasts, the more jobs we tend to lose as more businesses feel the pinch. But if it is a short recession, we aren’t quite as threatened by that risk. Buyers should prick up your ears as housing prices are predicted to drop by as much as 15% by the second quarter of 2023. If this is true, it’s perfect timing based on the annual real estate cycle. Prices will be down by about 15% when they are already at their lowest point as things cool in the summer, so prices should be very attractive.
Take a look at the past to learn more about the future! Read our blog about the past 10 years of the Toronto real estate market here.
The Bottom Line
What we’re seeing right now is the perfect trifecta of lower housing prices, fewer buyers, and sellers open to negotiation. There are many positive scenarios when buying in or around a recession:
- You can see things even out between your interest rates and the lower purchase price to keep your mortgage manageable.
- Lower prices mean your down payment goes further so you can buy in a better neighborhood or buy a larger home.
- Buying now secures higher equity because you pay less, and prices will rise as we come out of the recession.
- When interest rates drop during recovery, come mortgage renewal time your mortgage payments will become more affordable. If your mortgage terms allow, you can save this money for a lump sum payment at the end of the year to pay down your mortgage faster.
You can also consider waiting until housing prices are just about to rise, and interest rates have dropped during the early stages of recovery. This is another great scenario as you’ll have lower mortgage payments and still enjoy building equity faster. It’s all about your budget, and the risks you’re willing to take.
If you’re looking for the best Toronto real estate team to guide you on your real estate decisions, call The Christine Cowern team at 416.291.7372 or email us at firstname.lastname@example.org. We’d love to work with you!