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.
While a future recession is by no means confirmed, it can be helpful to understand how it could impact the Australian housing market.
We discuss the potential pros and cons of transacting property and the Australian property market in general during a recession.
What is a recession
A recession is a sustained period of weak or negative growth in real GDP, accompanied by a significant rise in the unemployment rate, according to the RBA. A ‘technical recession is two consecutive quarters (six months) of negative growth in real GDP.
Other indicators that can occur alongside a recession are:
- Low household spending rates
- Investment by businesses drops
- The number of households and businesses that are unable to pay back loans rises
- A rise in the number of businesses that close down
What happens to house prices in a recession
While economic uncertainty is, by its very nature, hard to predict – here are some potential outcomes that could be likely to occur in the Australian housing market:
1. House prices might decrease
Recessions often bring about a fall in property prices. During Australia’s last big recession in 1990/91, property prices fell across the country. In the worst-affected capital city, Melbourne, they were down more than -6%.
This time around, 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 of the virus a figure of -10% or below is now more widely forecast.
If you’re a first home buyer, lower prices are usually welcome news. After all, if property prices were to fall by -10% across the board, that property that once was $600,000 would now be $540,000.
This would mean you’d need to save $12,000 less to have a 20% deposit for the property (which means $108,000 instead of $120,000). And, if you were borrowing the remaining 80% of the property’s value using a 25-year principal and interest home loan at 3.5% interest, your repayments would be around $240 a month cheaper.
2. The gap between property prices can also reduce
Falling prices don’t just benefit first-home buyers, they can also help people looking to step up the property ladder.
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.
That means the gap between the two properties is now $450,000 rather than the $500,000 it was before prices fell. That can be great news for someone looking to trade up.
3. The risk of not being able to pay your mortgage increases
Although there are many benefits to buying a property during a recession, you need to weigh these against the downsides. And, for many people, one of the biggest risks can be losing the ability to pay your mortgage.
After all, during a recession, businesses often struggle. That means more people tend to lose their jobs while others suffer a cut in salary. If this happens to you, you may face financial hardship.
To safeguard against this you should always look to build a home loan buffer. You should also limit yourself to borrowing only what you can genuinely afford to repay.
4. Prices could fall further
Timing the property market isn’t easy. Even the most astute observers can’t forecast the top or bottom of a property cycle with certainty. 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
Finally, 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.
For this reason, it pays to stay on top of the property trends and to understand, at a suburb level, where demand remains strong.
Visit the realestate.com.au suburb profile toolnow.
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.
Should you sell your home during a recession: Pros and Cons
| Pro | Con |
| Cash in on current equity | It may be harder to get affordable finance if it’s required |
| Pay less in capital gains tax | You might not be able to sell for as much |
| Take advantage of rising demand | The property could take longer to sell |
| If you’re buying and selling at the same time you’ll likely have more options as a buyer | You may have to be flexible with your sale conditions, catering to a buyer’s market |
| Historically, price declines have been short-lived | You may need to work harder to get the house up to scratch |
5 pros of selling a house in a recession
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. In fact, according to treasury estimates, we amassedmore than $120 billion in additional savings during an uncertain 2020 with much of that being put into paying off loans and offset accounts.
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.
Find out what your potential equity could be using our equity calculator.
2. Pay less in capital gains tax
If there’s a silver lining to be had in an otherwise uncertain situation it’s the fact that if you sell your property for a smaller amount, you won’t pay as much when it comes to tax time.
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 then you won’t have to pay so much in tax.
Find out more in our capital gains explainer.
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.
According to Megan Lieu, economic analyst at REA Group, 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, as long as 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
If there’s one thing economists have collectively agreed on with regard to the property market over the years it’s that, on the whole,most property typestend to increase in value over the long term(ie 10+ years).
So, putting the current economic climate in perspective, historically price dips – while not uncommon – tend to be short-lived, according to PropTrack economist Paul Ryan.
Mr. Ryan explained that 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.
“So, if their circ*mstances line up, it makes sense to jump on the property that’s right for them, regardless of market conditions.”
As with all major financial decisions, always seek independent advice from a trusted professional.
5 cons of selling a house in a recession
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.
This means those that could borrow one amount in January 2022 are now looking at getting approved for considerably less.
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, according to PropTrack’s July Property Market Report.
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.
Currently, according to economic analyst Megan Lieu, the average number of days a listing is live on the realestate.com.au buy section is 44. By comparison, September 2021’s average was 38.
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 have the opportunity to 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.
