The Pasta Bowl Recession OF 2023

RBC predicts a recession in 2023. The recession will be gradual, shallow and long before slowly easing up. The shape of the graph for this recession will resemble a pasta bowl.  The war on Ukraine, snail-paced supply chain, longer manufacturing timelines and increased labor costs are pushing prices up. It is similar to pumping more hot air into an already inflated balloon.

If you force more air into an already inflated balloon, then it will eventually burst. In the business world, that’s a crash, leading to a depression. It’s too early to know the extent of the fallout from COVID 2020.To stimulate the economy, the interest rate fell to almost ground zero. Many families took on large debts because of cheap money. These debts will become more difficult to sustain once interest rates rise.

The higher borrowing cost is a coolant for the housing market. In September, The Toronto and Regional Real Estate Board (TRREB) recorded 5,038 homes sold. That’s a drop of 44.1 percent compared to September 2021. New properties on the market dropped by 16.7 percent on a year-over-year basis. Real estate prices peaked in February 2022. As of August 2022, the average price has declined by 15.7 percent. 

If you look at a neighbourhood and there are many for sale signs, prices are coming down. If there are few signs, mostly sold, then, prices are going up. There is a shortage of affordable homes in the GTA. Homes priced around $800,000 are attracting multiple offers and are selling above their asking price. Despite interest rate hikes, inflation is not under control. The demand for affordable housing in the GTA is strong. The Canadian dollar is weak when compared to the US. As such, there will be more aggressive rate hikes. 

The pasta bowl recession is expected to start at the beginning of 2023. In a recession, prices fall to compensate for the increase in interest rate. A window of opportunity can open and buyers who are patient can cash in on good deals. 

RBC economist Nathan Janzen said that, "Central banks will be reluctant to throw in the towel on rate hikes before they are confident that inflation will slow sustainably. We expect the Bank of Canada to pause its rate-hiking cycle in late-2022 followed by the Fed in early 2023. But that's contingent on inflation pressures easing.” 

Rising interest rates has artificially reduced the demand for housing. With rising interest rates, low-income families are being forced out of the market. Homeowners with variable mortgage rates are feeling the pinch. Many are converting to a fixed rate mortgage. Those who are switching from a variable mortgage to a fixed rate mortgage should choose shorter terms such as two or three years. By then, the interest rate will slowly fall.  

The GTA population is exploding. The cost for rental properties has skyrocketed. An average two-bedroom condo, for example, in the GTA can rent for $2500 monthly. Over the last four years, home prices have doubled. When the appreciation in home value is paired with the high cost of rental, it’s a safe bet for investors.

Many Real Estate Investment Trusts are buying up residential properties. This, in turn, is depleting the stock of homes available for sale. When supply is low, demand increases and prices climb. 

Rising interest rate is bad news for anyone who has accumulated debts. Homeowners with high interest debts, such as credit cards, should consolidate it into a mortgage. Lenders can increase the loan amortization and reduce the monthly payment to an affordable level.

Prospective buyers can lock it a lower rate mortgage with a lender for three to four months. When the interest rate goes up, lenders will qualify the buyers, based on the new interest rate, for less mortgage. It’s important to make an offer pending financing.

HELOCS (home equity line of credit) are open mortgages at the current interest rate. They are similar to an overdraft protection. We pay interest only on the amount used. Homeowners can lock in their line of credit and safeguard it against interest rate hikes like a mortgage. A locked HELOC is also a safeguard against abuse.

In turbulent times, stay financially strong. Pasta bowl recessions are long. Home prices will drop. A window of opportunity will open for buyers. It would be a good time to invest in a rental property.  The demand for housing is high and will continue to climb over the long term.