RECESSION AND REAL ESTATE

What Happens To The Housing Market In A Recession

BY REALESTATE.COM.AU

In the current economic climate of rising interest rates, rising inflation and supply chain issues many Australians are uncertain about making their next move when it comes to property.

And while a future recession is by no means confirmed, it can be helpful to understand how it could impact the Australian housing market.

Here are some potential outcomes that could be likely to occur in the Australian housing market should economic uncertainty take hold.

1. HOUSE PRICES MIGHT DECREASE

Some analysts foreshadowed that property prices could fall by as much as -30% if we experienced a severe recession. However, as Australia looks likely to avoid the worst impacts, a figure of -10% or below is now more widely forecast.

2. THE GAP BETWEEN PROPERTY PRICES CAN ALSO REDUCE

If all property prices fall by the same percentage, then the more valuable the property is the more it should fall. For example, if a home worth $1 million falls by 10% it loses $100,000 and is now worth $900,000. If a home worth $500,000 falls by 10% it loses just $50,000 and is now worth $450,000 – making the gap between the two properties $450,000 rather than $500,000, which is great news for someone looking to trade up.

3. THE RISK OF NOT BEING ABLE TO PAY YOUR MORTGAGE INCREASES

One of the biggest risks during a recession can be losing the ability to pay a mortgage through things like job loss or salary cut.

Always look to build a home loan buffer and limit yourself to borrowing only what you can genuinely afford to repay.

4. PRICES COULD FALL FURTHER

If you buy in a recession, there is always the risk that prices could fall even further.

That said, Australian property prices usually tend to rise in the long run, especially in capital cities. So if you’re prepared to spend some time owning your property, you’re likely to come out ahead.

5. DIFFERENT PROPERTY MARKETS REACT DIFFERENTLY

It’s always worth remembering that, despite the data, Australia’s property market isn’t really one market at all. Prices don’t move in unison between states, cities, or even suburbs. Different types of property – i.e. apartments vs houses – also rise and fall at different speeds.

That means some properties are likely to weather a recession better than others. In fact, some suburbs and property types may even rise in value while others fall.

6. INTEREST RATES CAN CHANGE

The RBA can use interest rates to stimulate the economy or to stifle it. During periods of low economic growth – such as during a recession – the RBA usually chooses to keep interest rates down to encourage borrowing and boost economic activity.

The current environment of rising interest rates has come about as they try to react to rising inflation and a hot property market, which has meant that borrowing rates peaked dramatically during 2021, and are not as high in the current market.

Should you sell your home during a recession: Pros and Cons

PROS

1. CASH IN ON CURRENT EQUITY

One of the outcomes of the pandemic restrictions was that many households weren’t as able to spend their incomes, which resulted in huge levels of household savings.

Add to this the increase in property values seen across 2020-2021 and you’re looking at a considerable amount of equity.

If you were one of the lucky households that managed to get ahead during the lockdown years you could find yourself in an enviable position when making your next move on the property ladder.

2. PAY LESS IN CAPITAL GAINS TAX

Capital gains are made when a property accrues value, but if that doesn’t happen or the value drops by the time it comes to sell (and you sell it for a smaller amount) then you won’t have to pay so much in tax.

3. TAKE ADVANTAGE OF HIGH DEMAND

There’s a lot of talk about the drop in borrowing capacity, but not as much has been said about the continued rise in demand for property in Australia.

Demand is currently around 46% higher than pre-Covid levels (comparing data from the first week of October versus the week of 19th Jan 2020).

This means that, if you’re prepared to meet the market as a seller, you’ll find plenty of willing buyers.

4. HAVE MORE OPTIONS AS A BUYER

For those looking to buy and sell at the same time, you might find yourself scoring a good deal on the home you buy next as others, who might not have as much deposit, are scared off.

5. HISTORICALLY, PRICE DECLINES HAVE BEEN SHORT-LIVED

Putting the current economic climate in perspective, historically price dips – while not uncommon – tend to be short-lived.

Most people stay in their homes for many years, and it can take them a long time to find the perfect one so taking a long-term view is important.

CONS

1. IT MAY BE HARDER TO GET AFFORDABLE FINANCE IF IT’S REQUIRED

One of the outcomes of the number of interest rate rises lately is that home lending activity has slowed down dramatically as people’s borrowing capacity fell.

Banks increased their interest rate buffers to 3% in October, which effectively tests borrowers’ ability to pay back the same principal against a much higher interest rate.

2. YOU MIGHT NOT BE ABLE TO SELL FOR AS MUCH

Depending on the local market conditions and property type on offer sales prices have softened since the frenzy of 2021, so in this post-peak period sellers can expect their homes to sell for less than what they would have previously.

3. THE PROPERTY COULD TAKE LONGER TO SELL

Similarly to sales prices, this buyer’s market is seeing days on market levels rise as they no longer feel rushed into purchasing the first thing they see.

4. YOU MAY HAVE TO BE FLEXIBLE WITH YOUR SALE CONDITIONS, CATERING TO A BUYER’S MARKET

One of the cards sellers have up their sleeves when it comes to making a good deal on their property is the settlement terms they offer.

If you can be flexible then do your best to create an easy option for sellers by negotiating a settlement term, providing access for inspections, and even providing property reports up front.

5. YOU MAY NEED TO DO MORE TO APPEAL TO BUYERS

A side effect of the supply chain issues brought about by Covid and the war in Ukraine is that building supplies aren’t as reliable as they were previously.

This has dampened the appetite of buyers when considering purchasing a home to renovate versus a home that’s ready to move in.

For this reason, it’s more important than ever to take care in preparing your home for sale to make it as appealing as possible for buyers if you want to get the best price possible.