With the drastic increase in interest rates since the beginning of the year, the spectre of a recession is becoming more and more likely. Already, the surge in mortgage rates has begun to have an impact on property prices in Quebec, which have been teetering since peaking in April. It is therefore time to make predictions about the extent to which prices will fall in the coming months. We will soon make our predictions, as we will soon publish our forecast scenario for 2023.
In the meantime, keeping in mind that no two recessions (or end of cycle) are alike and that the past is no guarantee of the future, we find it interesting to look back at the evolution of residential real estate prices during past recessions.
Real estate brokers have been compiling statistics on the average selling price of residential properties since 1980. In those forty-two years, we have gone through three recessions: 1981-1982, 1990-1992 and 2008-2009. Before we go through them one by one, let’s be honest: the average price of residential properties has never fallen by more than 3% in any one year, even during a recession. Not even enough to write home to your mother. In fact, it’s important to remember that the biggest drop in real estate prices in the last 42 years in Quebec didn’t even occur during a recession. It was in 1995. Prices fell by 3.4 per cent.
The 1981-1982 recession
This period was characterized by a highly inflationary environment. To combat an inflation rate that exceeded 12%, the Bank of Canada raised its policy rate to just over 20% in August 1981. A month later, five-year mortgage rates peaked at 21.5%. Canadian real GDP fell by 5.4% from the fourth quarter of 1981 to the third quarter of 1982. The recession pushed Quebec’s unemployment rate to a peak of 16.4% in March 1983. Meanwhile, in the residential real estate market, the average price went from an increase of 10% in 1981 to a decrease of 3% in 1982. The following year, the average price rebounded by 12%.
The 1990-1992 recession
In response to an inflation rate of 5.5 per cent in early 1990, the Bank of Canada raised its policy rate to 13.65 per cent in June 1990. A month earlier, in May, five-year mortgage rates were at 14.2%. A long recession ensued, which lasted from the second quarter of 1990 to the first quarter of 1992. Although the decline in GDP was not as severe, the unemployment rate still rose to 14.2% in March 1992. But even after the recession ended, economic growth was anemic because it was also a period of severe fiscal restraint, with both levels of government fighting fiercely against their budget deficits. Governments drastically reduced their spending and introduced new taxes (GST), so that the tax burden on taxpayers increased. The personal disposable income of Quebecers stagnated completely over the period from 1990 to 1997.
During this recession, residential property prices fell by 0.5% in 1992. However, it was after the recession, from 1994 to 1996, that property prices in Quebec recorded their greatest decline. In three years, the decline was 4.2 per cent.
The 2008-2009 Recession
Canada entered a recession in the 4th quarter of 2008 and emerged from it in the 2nd quarter of 2009. This time, the decline in economic activity was largely the result of the subprime crisis, primarily in the United States. On this side of the border, although the contraction in GDP was significant (-3.7% in three quarters) and the unemployment rate rose by three percentage points, this recession left much less of a legacy. This time, governments had the means to deploy economic recovery plans.
As for the Quebec real estate market, it proved to be very resilient. The average price of properties even increased by 5 per cent, 4 per cent and 8 per cent respectively in 2008, 2009 and 2010. It should be noted that five-year mortgage rates were only 6.5 per cent in November 2008 and declined rapidly thereafter.