Cottage Q&A: Should I buy a cottage during a recession?

Predictions of a coming recession have been thrown around a lot lately. Most experts say Canada will be hit in 2023. To many Canadians, though, the Bank of Canada’s aggressive interest rate hikes, record-high inflation, and the current cost of living crisis make the recession feel like it’s already here.

For potential buyers looking to wade into the cottage real estate market, talk of a recession could make you second guess your choice. What will this do to the market? Is it actually a good time to buy? Before you panic, take a read through our guide. We’ll break down everything you need to know about buying a cottage during a recession.

What is a recession?

Even economists have trouble pinning down exactly when a country slips into a recession. The rough definition is that a country has entered a recession when it experiences two consecutive quarters of negative GDP growth. GDP increases when a country has a strong, productive labour force. That’s why a recession is often marked by high levels of unemployment.

Currently, the economy is coming off a high from the COVID-19 pandemic. While certain industries did suffer, demand in many, such as the cottage real estate market, skyrocketed. Thanks to low-interest rates and high savings, people were looking to spend. That, however, resulted in a high inflation rate and increased interest rates. These two factors lead to another recession marker: low spend.

How would a recession impact cottage prices?

Where they stand now, cottage prices remain high, says Haliburton realtor Shirley Rule. “In August, in Haliburton, the prices were actually up from a year ago, quite a bit. Now, the number of properties for sale is down by 40 per cent, but the sale prices were up,” she says. “And September seems to be holding its own compared to last September.”

According to Royal LePage’s 2022 Recreational Property Report, the average price of a waterfront property in Canada is expected to increase by 13 per cent this year to $640,710. Rule adds that despite the drop in sales volume, she’s still seeing demand, with multiple offers being placed on well-priced cottages with appealing shorelines that don’t need too many renovations.

This is a good sign that the market isn’t collapsing. But it still needs to be taken into consideration that cottages are a discretionary purchase. If a recession hit, the financial strain would likely cause sales volume to drop further and leave properties sitting on the market for longer. If this happened, it’s possible prices would start dropping to ensure the properties continued to sell.

But Rule points out that, unlike homes, there are only so many waterfront properties available at a given time. The limited supply could prevent a significant price drop. “There’s always going to be people wanting them at some point,” she says.

What are the pros of buying a cottage during a recession?

The pandemic brought a sellers market to cottage country. Not being able to vacation abroad, people started buying cottages as a way to escape urban centres. This increase in demand limited the supply of cottages available, driving up prices. According to Royal LePage, in 2021, the average price of a waterfront property jumped by 21.5 per cent.

But as borders have reopened and the Bank of Canada continues to hike interest rates, affecting mortgages, cottage demand has slowed. Rule says the market is starting to balance out again between buyers and sellers. If a recession hit and demand slowed further, power could shift to the buyer.

With less competition and cottages sitting on the market for longer, it gives you more leverage as a buyer. You can negotiate on price and include conditions with the sale. During the pandemic, demand was so high that buyers risked losing the sale by adding conditions, such as a home inspection. “It’s starting to get back into that now where a lot of our sales are conditional,” Rule says.

Cottage Q&A: What does selling “as is” mean?

She also advises people to be smart with their timing. Look to buy in the fall, Rule says. People who don’t want to take care of a cottage over the winter are looking to offload the property, increasing supply. Plus, summer’s over, so not as many people are thinking about buying a cottage, limiting demand. If you’re set on buying a cottage during a recession, fall is a good time to snag a deal.

What are the cons of buying a cottage during a recession?

A recession does, unfortunately, come with cons. Despite having your heart set on buying a cottage, you could experience some form of financial instability, such as losing your job. This kind of instability makes money lenders, such as banks, nervous. They don’t want to risk you defaulting on payments.

That’s why Rule stresses that you need to be certain you’ll qualify for your mortgage before putting in an offer. “The banks will ask for an appraisal. If the appraisal comes in lower than what [you’re] paying for it, then there are going to be issues,” she says. If this happens, the bank is unlikely to loan you more than the appraised value.

Mortgages are also difficult to qualify for right now. Rule says that the high qualifying standards of the current mortgage stress test are a major factor in slowing down sales volume.

Typically, during a recession, the Bank of Canada will lower interest rates to help stimulate the economy, as it did at the beginning of the pandemic. But currently, we’re coming off of a 39-year high inflation rate and the bank’s policy interest rate is sitting at 3.25 per cent, the highest it’s been since 2008. This means you’ll qualify for a lower mortgage amount than you would have a year ago, and your monthly payments will be higher.

There’s a chance that if we enter a recession, the inflation rate may drop and the bank can once again lower interest rates, allowing buyers to get better deals. But as it stands, experts are predicting interest rates to continue going up in the short term.

Regardless of whether we do enter a recession, Rule predicts that the wheels of the cottage real estate market will continue to turn. “There are still buyers out there who are eager to get something,” she says. “But they’re also being very picky about what to get. They want to make sure they’re getting what they want. You can’t blame them.”

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