How Does Unemployment Rate Affect Property Value?
Real estate has inherently always been tied to economic trends. Since very few people buy their homes outright in cash, the majority of Canadians will have to grapple with the consequences of the interest rates they choose for the entirety of their mortgage term.
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Real Estate and Economic Trends
In order to combat post-pandemic inflation, the Canadian government began raising the overnight rate in 2022 and continued until the latter half of 2023. Rising borrowing costs left many companies—who rely heavily on leverage to function — unable to fund their operations.
With interest rates in 2020 falling as low as 0.5%, many corporations had taken on immense amounts of cheap debt at variable rates, and were now unprepared to pay the exponentially higher interest fees.This encouraged many employers to begin cutting costs wherever possible, including through massive layoffs. Canadians saw major players such as Shopify and Telus laying off significant chunks of their workforce.
As unemployment rises, consumer spending drops. This has historically caused a ripple effect through the Canadian economy, reducing consumer confidence — and thereby — investment in housing.
Unemployment Rate and Property Values
The Canadian housing market has never been immune to the effects of rising unemployment. In December 2024, the unemployment rate in Ontario sat around 7.5% — marking a 20% year-over-year increase since 2023. The Toronto unemployment rate sat at 8.4% for 2024—about half of what it was in 2020, but still well above the trailing 10-year average.
As employment rates decline, consumer confidence declines, leading to reduced risk tolerance, reduced demand for housing, and ultimately, lower housing prices. Housing demand is driven by confident consumers with stable household income. In times of unemployment and high economic uncertainty, fewer Canadians are interested in making large investments, which includes housing.
How can investors mitigate risks associated with fluctuating unemployment rates?
There is no way to predict the future of the economy for certain. For instance, there was not a single Canadian economy projection in 2018 that could predict what would happen in 2020. With that being said, short-term economic indicators are likely to be more accurate than long-term projections. Keeping up to date with the news, and following key macroeconomic trends, is a great way to set yourself up for success.
“As a real estate investor, you can mitigate certain risks by diversifying your portfolio.”
Harris Javaid, Mortgage Agent Level 2
Another way to mitigate risks is through diversification. If you are worried about interest rates rising, invest in stocks that historically perform best when rates are high. This can hedge your bets to a certain extent, and provide some downside protection for your longer-term investments.
If you are looking for more specific advice on how to make the best real estate investment in a turbulent market, contact Clover Mortgage for a personalized consultation.
FAQ
How do high unemployment rates impact the real estate market in urban vs. rural areas?
High rates of unemployment affect both urban and rural areas, but to differing degrees.
High unemployment rates in Toronto, for instance, are likely to trigger a more pronounced shift in housing prices as there is a greater population in that area. A 2% increase in unemployment represents 200 job losses in a town of 10 thousand, but 20,000 job losses in a town of 1 million.
Can changes in unemployment rates influence mortgage interest rates?
As unemployment rates rise, consumer spending drops. Over time, the government may reduce interest rates to incentivize spending. This was seen when the Canadian government lowered interest rates sharply following the record rise in unemployment in 2020.
How does unemployment affect housing demand and supply dynamics?
Increased rates of unemployment decrease consumer confidence, which decreases the odds that Canadians wish to enter into new investments. As a result, demand for housing often falls.
What role does government intervention play in stabilizing property values during high unemployment periods?
The Canadian government can impact property values through interest rate adjustments or through policy to ensure that home prices do not fluctuate too much in either direction. On the one hand, property values should not drop too far, given that many Canadians rely on their home as their greatest investment and this would potentially disrupt retirement plans — leading to an increased need for government-supplied assistance.
On the other hand, property prices should not rise too high. If Canadians are already constrained by a lack of employment and a recessionary environment, high housing costs (be it mortgage payments or rent) will further disincentivize them from spending in other parts of the economy.
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