Usually, September is one of the busiest months of the year for Toronto-based realtor Alexander Croney.
The week after Labour Day marks the start of the fall real estate market. It’s when home sales activity typically ramps up after summer vacations and before the holiday chill sets in -- but, Croney tells STOREYS, this year is very different. “It’s kind of like we came to a full stop,” says the Blue Door Realty Group agent, estimating his workload is a fraction of his mid-September norm.
As Canada’s housing market undergoes a widespread correction -- triggered by rising interest rates -- the spillover impacts are extending far beyond realtors (and the homebuyers and sellers they represent). “There’s certainly a lot of spinoff that happens on every single real estate transaction,” notes Christopher Alexander, president of RE/MAX Canada. “Lawyers get paid, municipalities and provinces make money on taxes, a lot of times people go out and buy appliances, TVs, and furniture and all those things,” he tells STOREYS.
Because so many sectors are sensitive to changes in the real estate market, experts are warning of several significant negative impacts for the Canadian economy if, as is widely expected, the housing correction continues through the fall.
A Recession in 2023?
On a year-over-year basis, national home sales plunged 29.3% in July, while the average price fell by 5%, according to the latest data from the Canadian Real Estate Association (CREA). Anticipating the housing correction to only deepen as the mercury drops, Marc Desormeaux, principal economist at Desjardins, expects Canada to enter a recession next year, albeit a “technical” one.
“We think it’ll be a short-lived and shallow one,” Desormeaux says, defining a technical recession as “two consecutive quarters of contraction in GDP.”
Adding to the risk of a housing-influenced recession is the fact that the Bank of Canada last week hiked its overnight rate, which impacts borrowing costs, for the fifth consecutive time this year -- and policymakers suggest they aren’t done pulling the lever yet.
“Housing has become a bigger piece of the gross domestic product (GDP) in Canada and if this area really slows down then the knock on effects will touch other areas of the economy,” Edgard Navarrete, a regional economist for Central 1 Credit Union, stated in an email.
Between the midway point of this year and 2023’s first quarter, the housing correction is going to trim between 1 and 1.5 percentage points from Canada’s GDP, TD Economics projects in a report. This will happen “as residential investment declines and consumer spending is hit by falling home prices,” according to the report.
Developers Hitting “Pause” on Housing Construction
Early signs suggest the pace of homebuilding is falling off, sparking concerns about what even a temporary pullback means for affordability. “The long-term demand is not going away,” says Dave Wilkes, president and CEO of BILD, which represents the Greater Toronto Area’s construction and development industry.
Given that, Wilkes worries about fewer homes being built amid a housing shortage as he expects a “quieter fall” than usual for new project launches. In Ontario alone, 1.5M homes need to be built over the next decade to address the affordability crisis, he notes, citing the Housing Affordability Task Force report. “We need to double production in order to achieve those goals,” Wilkes explains.
A new national survey from real estate consultancy Altus Group suggests some developers are beginning to shelve would-be condo projects because of higher interest rates. Some 33% of developers polled for the survey say pausing new condo or rental projects is among their responses to the changing interest-rate environment.
“I can tell you: projects are being delayed,” Colin Johnston, President of research, valuation, and advisory for Altus Group, says in an interview with STOREYS. “Nobody really wants to go out and say, ‘I’m cancelling a project,’ but they can drag their feet a little bit; there can be a little bit of delay,” he says, adding, “Definitely we have seen a pause in that regard.”
The issue is doubled-edged, Johnston explains. Higher interest rates make both financing condo construction and taking out a mortgage to purchase a unit more expensive.
Labour Market Faces Uphill Battle
“With less demand, with less potential to make sales, new homebuilders are going to have to rethink their investments, their hiring practices, how much capacity they need, [and] how much labour they need,” says Navarrete. “That’s unfortunately going to have some adverse spillover effects for certain sectors: construction, it’s going to affect the finance, insurance, and real estate industry, et cetera, et cetera.”
More broadly, following an autumn housing slump, Desjardins forecasts Canada’s total employment growth will track at 0.7% in 2023, still positive but down from 3.7% this year. “Our expectation is that overall, as economic growth slows, as the housing market downturn contributes to that outlook, we’ll see far more modest job creation across the Canadian economy,” says Desormeaux.
The correction might already be taking a toll on multiple sectors of the labour market. Canada lost a total of 40,000 jobs in August, and Desormeaux highlights that a quarter of them were in construction. Employment in the information, culture, and recreation sector is weakening, too, another possible effect of the housing downturn. “That could be because of a pull-back in consumer spending related to higher inflation and more elevated housing costs,” Desormeaux notes.
Despite Challenges, a Crash Remains Unlikely
Although the prospect of a housing slump through the fall poses strong headwinds for the Canadian economy, none of the experts STOREYS spoke to say a crash is in the cards -- at least for now.
“Is a crash on the horizon? I am not calling that at the moment,” says Navarrete. “What is happening is that some hot air is being let out from the market,” he adds.
Desormeaux isn’t calling for a crash either, partly because of Canada’s post-pandemic immigration targets, which aim to add 1.3M permanent residents by 2024. “That’s a positive for housing demand, and we think it will provide tailwinds for the housing market, particularly in big centres like Toronto and Vancouver,” he says.
Nonetheless, over the next few months he’ll be keeping a close eye on the job market and inflation as well as the global backdrop with the European economy and China’s difficulties with ongoing COVID-19 lockdowns.
Experts also note that home prices have a long way to fall before sinking to pre-pandemic levels. Even facing the latest declines, Canadian home values are up 21.8% from February 2020, according to Central 1 analysis of CREA data.
“The residential market is just coming back down to earth after a very crazy period during the pandemic,” says Navarette. “Now, if the Bank of Canada continues to raise interest rates even higher, as they signalled this [past] week to control inflation, we may have to have another conversation.”