You may have seen headlines like Canada added 60,000 new jobs to the market in June. Or Unemployment inched up to 5.5% in July. You may be wondering, what does this mean? And how does it affect the Real Estate market?
A large increase in new jobs, added to the labour market, often leads to more economic growth because employers now must compete to fill positions by offering higher wages. Higher wages then lead to rising inflation because businesses need to charge more to you, the consumer, for goods and services in order make-up for increased salaries.
More jobs in the market = higher salaries = higher inflation. This rise in inflation will instigate the Bank of Canada to take control measures, by raising interest rates to slow consumer and business spending, which helps to cool inflation.
Conversely, less jobs in the labor market and higher rates of unemployment often go hand in hand with lower consumer and business spending. More people without jobs = less spending. When spending and borrowing are low, the bank of Canada may stimulate the economy by decreasing rates to encourage people to spend and borrow.
Contrary to popular belief, this is also how higher immigration helps to cool inflation – more people to fill the jobs, means businesses have to compete less to fill positions, means wages decrease and the costs of goods and services decrease.
So, what does this have to do with the real estate market?
- During periods of high inflation, the elevated costs of borrowing discourage many home buyers from taking out a new mortgage to buy a home as it affects affordability and purchasing power.
- When the UNEMPLOYMENT rate is HIGH, often home inventory, or the number of active listings on the MLS, increases as homeowners may need to sell their home because they can no longer comfortably afford their payments. it’s important to note: We are not seeing this quite yet because unemployment is still relatively low. Which is one factor contributing to the historically low levels of housing inventory we see today.
- Homeowners who have locked in for 5 years at low low interest rates don’t want to sell or move right now because the increased cost of borrowing would likely cause financial stress. Another contributor to low inventory issues.
- Low inventory also deters homeowners from selling because they feel there is ‘no where to go’ or nothing to buy – more low inventory.
- Increased interest rates usually mean decreased housing prices, while lower rates drive prices up. However, even with the rate increases over the last year ( a hefty 500 basis points) we have not seen a significant decrease in home values, while initially home values did correct approximately 17%, we have recently seen a rebound in values over the past few months, mostly due to: you guessed it, the lack of inventory.
How do we get more inventory?
- Inflation to decrease and stabilize for a period, so rates can soften, encouraging sellers to list their homes and move again.
- Unemployment rates rise, forcing homeowners to sell as they can not afford payments as we discussed earlier.
- A recession which could be signaled by negative economic growth, less spending and investment, prices dropping, companies downsizing and layoffs – leading to higher unemployment rates, again forcing homeowners to sell. OR
- Inflation continues to rise as a result rates also continue to rise causing significant financial strain on households, forcing homeowners to sell their homes due to lack of affordability.
What do you think is the most likely scenario? Find us on Instagram to leave your predictions in the comments!