Many Canadian economists have speculated that the Canadian economy is at risk of being in a recession. This would appear to be very scary news considering that it has been widely reported that Canadians are carrying record levels of debt.

The question many have had is will this end up having a negative impact on the real estate market?

Look at urban centres like Toronto where it was recently reported that the average sale price of a single detached home has exceeded 1 million dollars. Will these markets stay hot?

Some speculate that urban centres may cool off while the “burbs” will heat up. One thing is for sure, when the economy falters and Canadians are struggling to maintain their housing payments with their other bills like payments to debt, some will look at downsizing. This may include moving a little bit further away to be able to buy more for less.

When Canadian families are struggling financially there may be less lower income families coming into the housing market, but folks moving to put cash flow back into their households can more than offset this.

In a strained economic environment you have to be even more diligent when pre-qualifying new clients. Why?

1. Pre market-crash of 2008 – mortgage financing rules were more lax so there are a high volume of people walking around who took out mortgages at 90-95% the value of their homes, amortized over 35 years and so have less equity.

2. People in debt generally turn to debt consolidation as a first measure before making the difficult decision to sell their home. This can result in 1 very large mortgage refinance or perhaps 2 or 3 additional mortgages behind the first mortgage.

3. When people have financial problems they can fall behind making monthly payments to things like property taxes, condo fees, income taxes and other bills leading to property liens – the homeowner may not even know is one has been registered.

What do the above 3 scenarios have in common? They can all result in there not being enough equity to pay you!

You can mitigate this occurrence by doing a basic preliminary background check on new listings:

1. Validate that your client is the legal homeowner
2. Look at the sales history of the property
3. Estimate the value by reviewing comparable sales
4. Review financial encumbrances like mortgages
5. Check for liens

An unstable or underperforming economy doesn’t necessarily mean a negative impact to the real estate market but what it does mean is that you have to be agile to adapt in conditions that may emerge as a result.

If you would like to be able to access a tool that enables you to perform the due diligence discussed in this article and more please visit www.geowarehouse.ca.