Buying property in a recession
To buy or not to buy – that is the question! Whether you’re looking for your first home or hoping to expand your investment portfolio, understanding the ins and outs of the economic cycle can be a daunting prospect. Here, we explain what a recession is, the advantages and disadvantages of buying during a recession, and leave you with some top tips to guide you in your decision making.
What is a recession?
It’s a term you’ve undoubtedly struggled to miss in the news over the years, but what exactly is a recession?
A recession is a sustained period of significantly reduced economic activity – conventionally spanning two consecutive quarters (six months). It is usually characterised by a negative Gross Domestic Product (GDP). That is, the value of the goods and services produced in a country grows smaller. Other indications may be rising unemployment, reduced consumer spending, a decline in industrial production and tightening credit markets.
What is a property recession?
“Property recession” simply refers to all the ways a recession might impact the property market specifically. Among other things, its typical consequences are declining property values, decelerated sales, and delays in construction.
So, with that in mind, is buying a house in a recession a good idea?
What are the advantages of buying a house in a recession?
Lower property prices
As demand decreases, so typically, do prices. According to the Land Registry, the 2008 recession in the UK saw house prices drop by 15.6%. This isn’t always the case – the recession during the Covid-19 pandemic saw asking prices increasing as the government introduced the furlough scheme and a stamp duty holiday.
Reduced competition
Uncertainty around job stability and tightening lending standards may see fewer buyers searching the market, leaving those who are home hunting with more negotiating power.
Potential long-term appreciation
A recession is a temporary economic downturn and so buyers may benefit from property values increasing as the market recovers. According to the Nationwide House Price Index (HPI), the recovery from the 2008 recession saw prices increase by 81% by 2022.
Rental income
Unlike property prices, rental values tend to stay high. As such, investment buyers may benefit from the
rental income opportunities available on recessions buys as demand increases and tenants are reticent to move.
What are the disadvantages of buying a house in a recession?
Tighter lending criteria
Mortgage lenders and banks may tighten up the criteria they use to assess affordability. This means buyers will need to demonstrate increasingly healthy credit scores, income, savings, and expenses. Buyers may also find mortgages increasingly expensive as interest rates rise.
Income uncertainty
Rising unemployment rates and potential job insecurity can make buying a home during a recession risky.
Fewer options
Reduced competition and prices can see less opportunities as sellers take properties off the market to “wait out” the downturn.
Difficulty selling
Whether it’s your current home or a recession purchase, selling may be difficult for all the reasons buying is advantageous during a recession. As demand and competition decreases, selling at your desired price point may be more challenging.
Longer time to build equity
While there is the potential for long term appreciation – it may take a long time! Buyers will have to be able to wait for the market to recover to see a return for their investment. On top of this, a declining economy may slow down home improvements and economic uncertainty may make additional payments towards mortgages difficult.
Our top tips for buying in a recession
Unfortunately, there is no absolute answer for whether you should buy a house in a recession. Investment buyers, who may benefit from rental income, may find a recession a more lucrative time while first time buyers might feel the pinch of tighter lending criteria more. Homebuyers will have to consider their personal circumstances as well as the market at the time when weighing up the advantages and disadvantages.
If you are set on buying a house in a recession, here are our top tips to help you:
- Do your research
Research the housing market to get an idea of how the economic conditions have impacted local prices, inventory, sales, and mortgage interest rates. Investment buyers might also research areas with higher rental demand.
First time buyers might be more interested in understanding which areas have been more resilient to price changes and how far this impacts their plans. Prospective buyers should also have a good idea of why they’re buying – flipping - buying a property with the intention of selling it on quickly - is unlikely to pay off while long term investments might.
- Get your finances in order
Research all the costs involved with buying a property and then save, save, save your deposit, set a budget, and tidy up your finances. Build a healthy credit history, track your expenses, reduce debt, and show evidence of income and job security. Securing a mortgage preapproval will also help to speed up the process and show your readiness to sellers and estate agents alike.
- Be prepared to negotiate
It’s a buyers’ market and motivated sellers might be willing to accept lower offers. For the most negotiating power, research other properties in the area, inspect the property for issues, find out more about the seller’s position and be ready and stick to your budget! Building a positive relationship with the seller and having your mortgage preapproval in place can help to speed up negotiations and avoid gazumping too.
And lastly…
Work with a knowledgeable estate agent: haart can help!
With our local market expertise and insights, network of trusted mortgage professionals and negotiating skills, haart can make the process of buying a house in a recession that much easier. Check out more buying tips, or why not pop in to one of our branches (we have over 100 nationwide) and talk through your options?