Pros and Cons of buying a property during a recession
With interest rates at a record low, expectations of a plummeting property market, a projected recession, and a health pandemic – Is this the right time to buy a property?
As a buyer, the more important consideration should be your situation. When is it the right time to buy considering your circumstances? The below will guide you to decide whether it is the best time.
Buyers in the market
Individuals with changes to their income or are at risk of losing their jobs are likely to exit the property market. For buyers taking a wait-and-see approach, they are likely to be discouraged as well. In an uncertain market, those with secure roles will have an advantage.
As layoffs are predicted in these uncertain times, ensuring your job security is critical. Recession-proof industries such as health or food industries, where spending is necessary will likely have minimal redundancies; but unemployment is expected to happen in concentrated industries.
What’s your borrowing power?
Banks have different assessment criteria to gauge your maximum borrowing amount. Ensure your mortgage payments are easily managed with repayments being under the 28% mark of your gross income.
How will home prices be affected by a recession?
During a recession, property prices will naturally drop or at least not significantly increase in value. In the short term, if a recession were to happen, a property purchase could see a dip in value. At this stage, waiting and purchasing during the recession may mean a good deal for a buyer. Although waiting may seem to be a wise decision, housing supply may reduce during this period.
As an asset class, properties have performed well in the long term. In Australia, changes in dwelling values between January 2008 and 2018 have increased by an average of 41.80%; with Sydney and Melbourne increasing by over 72%. To see healthy growth, property investment generally should be a minimum of 5-7 years. Ideally, planning out the objectives of the purchase before purchasing will be the required duration.
The impact of the recession will have varying levels of an economic slowdown. Local market conditions by identifying diversification, employment and outlook for jobs are critical as they are strong drivers of housing demand. For instance, locations with somewhat recession-proof occupations such as healthcare should naturally see better local economic health.
Do I even want to buy a home?
How important is buying a property for you? Ensure there is sufficient cash flow to do all the other priorities in life like going on a holiday, buying a new car or saving for your children’s education. How important is purchasing a home versus other goals for you? (Click here to learn how you can save on taxes when borrowing with BFG to put towards other priorities)
Supply of homes
Sellers pressured to sell due to loss of jobs, relocation, deceased estates or other pressing reasons will consider selling. Others with flexibility in their position and do not need to sell or timebound are likely to see a low turnover of properties.
Analysts and the RBA are predicting a rebound in the second half of the year. Although a recession may be imminent, the recovery may not be far away. Eventually, people will start spending again, jobs will be regained, and things will go back to normality. With any investment, whether it shares or property, the level of risk is inherent. As the risk increase, the possible reward potential also increases. It comes back to your comfort level. How much risk are you ready to take on?