As a real estate investor, you must look into what influences the overall economy has on the housing market. You have to understand that while several things impact house prices, the economy is one of the biggest of them.

The increase in house prices happens when people expect better financial standings in the future. This is what usually happens when people have higher income, which in turn means a booming economy. Furthermore, the more funds building societies and lending banks are willing to loan out, the more likelihood of increasing people buying houses, which increases house prices.

In 2016, several years before the coronavirus pandemic happened, 63% of the families in Canada owned the houses they were living in. Contained on a study released by Statistics Canada, it was also stated there that 43% of these homeowners had already paid off their mortgage. Homeownership has increased to 70%, showing an annualized growth of 0.7% from 2016 to 2021. 

Based on the latest demographic survey conducted by Royal LePage, this rise may be large because 48% of Canadians within the 25 to 35 age range now own their homes, with 25% of them having purchased these during the pandemic. According to the same survey, 84% of non-homeowners intend to buy a home in the future, with 68% planning to purchase within the next five years. Those who plan to buy a home within the year amount to 16%, while 14% expect to do so within one to two years. Those who plan to purchase a house within two to five years are at 39%.

Looking at all these figures, you’re probably wondering why the increase in homeownership when there is still a pandemic going on. Now, this is where the influences of the economy on the housing market come in, especially if you believe in the real estate adage of the broader economy affecting the housing markets.

Below are several points that will help you understand all of these better:

The greater the number of housing starts, the healthier the economy

There are two main sections to the housing market, and these are home sales and housing starts. Home sales are self-explanatory, while housing starts are traced through the total number of newly constructed residential projects started in any given month. People tend to purchase new houses when the economy is strong, while the opposite happens when the economy is weak. The number of housing starts indicates the health of an economy, and they also impact other related markets such as sales of land and raw materials, mortgages, and even employment.

The more the money supply, the better the home sales.

The overall health of the economy and the housing market greatly depends on the money supply. If it’s too hard to borrow money, the number of home sales and housing starts will decrease. On the other hand, if it is also too easy to get money, too many buyers will go into the housing market. This will create a domino effect, increasing house prices until a market correction happens or a market crash occurs. 

In a perfect world, economic activity should be aligned with home sales and housing constructions. However, this is not always the case.

A good economy means a good number of home sales.

Based on the previous point, it can be said that the rise and fall of economic activities and the overall health of the economy are tied directly with home sales. As soon as the economies take a downward turn, the money supply becomes restricted. 

This makes it harder to borrow money, which results in lesser home buyers going into the housing market. When lending requirement restrictions decrease the number of buyers, home inventories either go up or stay longer in the market. This means that the more homes available and the lesser demand for them will normally force house prices.

The slower the economy, the lesser the home sales

So, when an economy slows down, it brings the housing market down with it. This will result in the overall decline of the general economic activities and all housing-related activities. The housing prices will only get back to reflecting a buyer’s ability to pay when the economic cycle breaks and improvements to the economy starts.

Foreclosures reveal a market crash.

Therefore, it can be concluded that housing markets function differently depending on varying economies. A robust economy means a healthy housing market. When interest rates rise, home sales decrease. If people do not pay their loans on time, which usually happens with adjustable-rate mortgages during interest rate increases, there could be a hike in foreclosures. 

This leads us to the answer to why homeownership increased during the pandemic. During the pandemic, everyone pitched in to stabilize the economy, which allowed the housing market to thrive. Mortgage levels were decreased to very low levels, which benefitted people with variable-rate mortgages and new homebuyers. Canada’s major lending institutions also gave out mortgage payment deferrals, thus keeping the number of foreclosures to a bare minimum. 

Then, there was the policy statement released by the Bank of Canada in July 2020, which guaranteed zero interest rate hikes until up to 2023. The central bank’s interest rate was already at a historic low of 0.25% when they did this.

It also helped that they vowed to maintain this until the inflation target of 2% is reached and unemployment rates go down to levels before the pandemic. Plus, in the first quarter of 2021, Canada’s economy grew at a pace of 6.5%. 

This shows that the economy does influence what happens in the housing market. Understanding this will make you an informed real estate investor and one who could bring home the bacon despite the odds.

For More Information, Contact:

John (Adam) Watson, CEO, CanCap Mortgage Group Inc. 

Email:   Tel: 416-452-5281