What happens to the property and real estate market in a recession?
Recently, with Covid 19 there has been a lot of talk and uncertainty about New Zealand’s economy going into a recession and so what does that mean for the property and real estate market…. Well it means a few things.
What happens to the real estate market during a recession?
During a recession there is a high probability that the value of property, both commercial and residential, will drop. The big question is, by how much and for how long? No one truly knows the answer to this, but we can take some cues from recent history and by looking at the current state of the New Zealand housing market.
A recession is typically recognised as two consecutive quarters of economic decline. So it’s a little early to call the current market as in a recession, however, most economists agree that this will in fact happen.
A few key things traditionally have happened to the housing market during a recession. The reserve bank, and therefore banks, reduce interest rates. Both buyers and sellers tend to sit on their properties and hold out for general confidence to grow again. Banks tighten their lending criteria and reduce the amount of low equity or high risk loans on their books
Across the board banks and market commentators are predicting that house prices will fall within the next quarter up to 1.5% with the general feeling being that the market could fall further than that. This is compared with the previously forecasted 5.5% increase in sales prices.
We have already seen across countries who have been dealing with COVID-19 the short term market impact. Real estate listings are down as much as 60% in China and Europe. While this seems like an obvious reaction to social distancing measures, how long will this last. It will depend on how different governments react, provide stimulus and are generally able to kick start their economies again.
Should you look to buy property in a market downturn?
There are plenty of reasons to buy a house in a market downturn. The most obvious is that prices are lower. As to how much lower, it’s yet to be seen. As prices drop, buyers can either look to set expectations higher, or look to consolidate and reduce debt by staying within their previous range but paying less.
We can also expect less competition in the market for buyers. While this isn’t directly linked to lower prices, it could mean some of the stress is taken out of the house hunting process and ultimately less offers have to be made before you can secure a house. Over the last few years it’s not uncommon to hear stories of buyers making half a dozen offers or more before having one accepted. In a market downturn, with less buyers actively hunting, it provides an opportunity to those that are looking to have a bit more time to make an offer.
Another reason to buy in a market downturn is that previously unobtainable locations could be opened up. This could be a tourism hot spot where homes rarely come onto the market, or the more desirable suburbs in town. One of the key outcomes of the last decades housing market increase, is buyers having to move outside of their desired areas in places like Auckland and Wellington.
What do the banks and lenders generally do during a recession?
In a recession, banks would like to consolidate their risk and protect themselves. In New Zealand the reserve bank is doing everything within their power to keep banks lending, including extending deadlines for the new regulations around holding increased capital and lowering interest rates. We can therefore expect banks to follow the interest rates down and offer some of the best mortgage rates on record. How low will these mortgages rates go? Some banks have already dipped below the 3% mark. Many will be watching with keen interest as to how low we can see these go. If New Zealand follows Australia, rates in the low 2% range are within sight.
What can you do to get the best sale price for your property if you have to sell during a market downturn?
Don’t be completely turned off selling your home during the next 6-12 months. We have seen a pretty constant increase in the housing market over the last 10 year which was in part driven by a higher demand than supply. It’s unclear at this stage as to how much this demand will drop. How many people with a deposit saved up had given up due to prices continuing to rise?
We can expect to see the demand equation change due to external factors such as the drop off in tourism. With less visitors to NZ, many AirBnB and short term rental properties might come back onto the market and be picked up by first home buyers or property investors looking for long term rentals. Additionally we might expect immigration to slow down for a period of time which will further increase the supply of housing.
We don’t really understand how this supply and demand question will balance out over the next few months, but it’s possible that any decrease in the market is driven by uncertainty. Remember, New Zealand is currently in a housing crisis. Families are living in their cars and in motels subsidised by the government. The housing crisis is not likely to be solved by this recession.
Real estate agents are continuing to report enquiries are flowing in on current listings. There are buyers out there, the following months will show the true level that house prices will fall.
One of the key messages being spread amongst real estate experts in NZ is that you should focus on your own position rather than trying to time the market. That’s not to say you should blindly buy and sell. But don’t be caught up in the swings the market is sure to go through over the coming months or even years.
Find your real estate agent with Aframe. If you are looking to sell your home, or just get the best advice on the current market situation, Aframe can find the best local agents to help you.