How to recession-proof your property when you buy, sell or invest
Buying a home is usually the biggest transaction in a person’s life, and should be approached with caution. This is particularly the case during a recession when prices can fall and finance becomes harder to obtain.
Here, we look at the risks of buying in a recession and ask whether economic woes have created an opportunity for first-time buyers and landlords to snap up bargain homes.
Should you buy a home if prices are going to fall?
Buying into a market in which house prices may fall comes with a risk of getting into negative equity, meaning your home becomes worth less than the amount you borrowed to pay for it. Even if you sell it, you won’t be able to cover what you owe your lender.
This risk mainly affects first-time buyers with low deposits, and is worse for certain types of property – new-build homes, for example, come with a premium that is not passed on when they are later sold. Lenders Nationwide and HSBC have restricted mortgages on box-fresh homes to reflect this. If you fall into negative equity, it only really becomes a problem if you have to sell up. House prices may well drop, but they will not drop forever, so you can wait to sell then.
Ultimately, the first question for anyone considering taking on or increasing their mortgage is their personal financial stability during the recession. If you lose your job and need to move house, becoming a forced seller when you are in negative equity could be ruinous. But if you can continue to pay your mortgage, you can weather the market.
If you’re buying with a larger deposit, then even if values fall, it's more unlikely for the property to become worth less than you borrowed. Then, the question becomes flexibility and how long you want to live in the property. Planning to stay for five years? If there’s a dip, values will likely have climbed again by the time you want to sell.
For those second-steppers looking to upsize, in theory, there could be a big upside to doing so in a recession. Even if the sale price of the smaller home is lower than you intended, the fall on the bigger property will be a bigger monetary saving.
Should you buy your first home in a recession?
The main issue facing first-time buyers at present is the lack of suitable mortgage deals. Loans for customers with a 5pc or 10pc deposit have largely disappeared since the start of the pandemic.
Banks decided to pull these loans from sale fearing that borrowers would default on their mortgages and house prices may fall, leaving customers owing more than the value of their house. Young people have been forced to turn to increasingly complex mortgages, often involving family support, to get onto the ladder.
What about investing in buy-to-let?
To a certain extent, the rental market can be counter-cyclical to the sales market. If more people cannot afford to buy or are worried about their financial security, they are more likely to rent.
But Britain’s rental market is divided: in London, rents have plunged, but they are rising in the rest of the country. In the year to June, rents in central London dropped by 7.4pc, according to Hamptons International; everywhere else, the picture is almost completely reversed. Rents rose by 1.4pc outside the capital. Ultimately, the most important factor to consider when investing in buy-to-let is the local employment market. Even if there is more rental demand in a recession, it will not push up prices if people are constrained by their finances.
Large university towns and cities with employment centres are likely to provide more stable income than those that have been disproportionately hit by the lockdown.
Many jobs are still protected by the furlough scheme, but it's possible to highlight early outliers that are suffering. In Luton and Crawley, for example, where the local economies are closely tied to airports, unemployment has already jumped by 5.2 and 4.4 percentage points between March and July.
Is it a bad idea to sell my property in a recession?
Back in May, when the English market was kick-started after lockdown, buyers tried to haggle aggressively for mega-discounts. Sellers who stood their ground reaped the rewards of the new “mini-boom”. Last month, 30pc of agreed sales were subject to bidding wars with three or more buyers, up five percentage points on last year, according to Hamptons.
The momentum in the housing market is forecast to continue for several months as buyers take advantage of the stamp duty holiday and pent-up demand from lockdown continues to move through the market.
But analysts are wary that the full economic impact of coronavirus on the property market has only been delayed. Unemployment is expected to spike as the furlough scheme winds down and there could be more forced sellers as the mortgage protection scheme ends. The Centre of Economic and Business Research has forecast a 10.6pc price drop in 2021. It may well be better to sell sooner rather than later.