Regular life has all but suspended. As events continue to evolve almost hourly, what we don’t know seems to be increasing. The only certainty is indeed the uncertainty of the coronavirus impacts on all parts of our economy and whether another recession could hit. Dow sees worst point loss since 1987 with a huge free-fall in markets on Tuesday, 17th of March. As this crisis evolves, important financial indicators for homeowners include employment rates, real estate agents and buyer’s willingness to attend open houses and whether sellers are interested to sell. Read more to find out how a recession can impact the economy and how to prepare for a recession so that your finances are recession-proof.
Impact on the Economy
Fiscal and monetary policy coordinated responses across countries is being implemented to increase cheap borrowing and cash. In a typical economic shock, demand is generally shocked, and policymakers find it comfortable to deal with it. The coronavirus impacts are resulting in a disruption in supply thereby creating a supply shock simultaneously. The absence of workers producing less out and interruptions to supply chains is adding more fuel to the fire. Economic policy is not able to cure people or reduce the spread of the virus, so instead, it focuses on easing the friction. How far can those policies sustain our industries? U.S. President Donald Trump indicating that the crisis may last until August.
Impact on your property value
High-end properties at times of crisis are not usually a necessity and generally will take more time to sell. Buyers who have funds to invest in high-end real estate often have huge investments in the stock market being exposed to the severe reductions in stock value. During a recession, buyers are looking for their necessities at a competitive price. For property aligned to the average property price, the conflicting factors of potential job cuts (if that takes place) and cheap credit, on the other hand, will need to be played out. As the government provides intervention to soften the reduction in property values, and strong job cuts may dampen the level of confidence thereby impacting property prices.
Impact on your budget
The United States, Europe, Canada and other countries in the world have cut their benchmark interest rates (i.e. cash rates) by substantial proportions to reduce the cost of borrowing, we can expect interest rates to be at record levels. The Council of Financial Regulators (CFR) which includes the Reserve Bank of Australia (RBA) has stated the regulatory response to the economic threat posed by the coronavirus (COVID-19) outbreak.
Impact on your job security & the silver lining?
While there will likely be layoffs, many economists don’t expect them to be widespread, but rather concentrated in certain industries. Jobs in the tourism, hospitality, and travel industries are at the forefront bearing the economic impacts and uncertainty. Other industries like manufacturing with a strong reliance on a supply chain that is being disrupted by the virus may also take a hit. Based on the assumption that employment remains somewhat healthy, we should see the property market hold steady without the need for homeowners to sell their properties in huge proportions as a result of being unable to pay off their debt. Thanks to APRA and other relevant organisations overseeing the banking industry and creating strict credit requirements to obtain housing finance.
Your recession checklist: How to prepare for a recession
As the probability of a recession increases, the best risk mitigation action to take would be reviewing your financial situation.
1. Review your minimum cash reserve
Reserve is required to cover our rainy days. The necessary amount is generally based on how many months you would like a cash reserve to last if you experience loss of income and unexpected expenses. Loss of income takes place in the form of loss of a job, default of any debtors, change in investment income including rental income and particularly dividends. The primary objective of a cash reserve is to cover cash flow for a temporary period, instead of forever.
Situations in which your cash flow is strong and unlikely to be impacted, you may consider a 6-month window for absolutely worst-case scenarios. However, if cash flow is an area of uncertainty, you may require a healthy level of the reserve to cover a minimum of 12 months or at a point in which you can safely sell your current property at a price larger than the current debt owing.
2. Review your current cash flow and budget
Home debt is usually the biggest expense per month. Yes, interest rates are at record low levels with not all banks adopting the rate cute. If Australia does enter into a recession, thousands can be lost in property value and meeting loan repayments could be difficult. The most effective expense reduction is your biggest expense. Competition in the mortgage market is at record levels with enticing refinance offers with the process taking 5-6 business days. Remember, the time in the refinance process will protect you in the future and save you money instantly. Ensure you have a finance professional by your side at this delicate time of huge uncertainty.