What happens to your property prices during a recession?

Many of you are probably wondering what a recession implies for the housing market and home prices. There are concerns that the UK is about to enter a recession as a result of an unexpected decline in economic growth for the second consecutive month, so we decided to write a piece outlining a few essentials from a property standpoint. Feel free to contact our estate agents in York, who can help you with any queries regarding buying and selling properties at the right time within the right budget. 

But let’s first understand what a recession is in order to proceed with that. 

What does that mean? 

When a country’s GDP (Gross Domestic Product) declines for two straight quarters or six consecutive months, the economy is said to be in a recession.

The GDP has now dropped in both March and April by 0.1% and 0.3%, respectively. City economists have cautioned that the first consecutive monthly declines since early 2020 increase the possibility that the economy could decline significantly. 

The situation is being exacerbated by rising energy prices, rising inflation, and the war in Ukraine.

What impact does the start of a recession have on home prices? 

Not every person suffers negatively when the economy enters a recession, and no two recessions are the same. 

According to financial data, economists, and financial analysts, the UK will experience its longest decline since the financial crisis of 2008. The BoE’s monetary policy committee predicts a sharp decline in real household post-tax income in 2022 and 2023. While this is happening, consumption growth is anticipated to decline.

The anticipated recession will be the first in the UK since the peak of the COVID-19 pandemic in 2020, however, it is not anticipated to be as severe as the financial crisis of 2008. The shift towards remote working at that time encouraged both homebuyers and movers to seek out housing arrangements that gave more room, which led to an increase in property costs. Since then, a stamp tax holiday and cheap borrowing rates have caused the home market to flare up. However, a recession is predicted to tone down the market.

The main threat a prospective homeowner faces in a recession is losing their job. Recessions frequently encourage buyers to enter the housing market since property prices normally decline, provided that income remains stable. If it does occur as predicted by experts, it would result in lesser deposits needed and reduced overall borrowing amounts. However, it should be emphasised that in this case, growing mortgage prices must be considered.

According to real estate website Rightmove, first-time homebuyers may very probably see their monthly mortgage payments increase to an average of 40 percent of their gross pay, which would be the highest amount since 2012. This may cause the typical monthly mortgage payment for property owners to increase from £813, which it was at the start of the year, to over $1,000. This information is predicated on the average asking price for first-time homeowners, which is estimated to be  £224,943. 

The present property market will further put a strain on prospective homebuyers who are saving up funds to buy a new home while struggling with a cost-of-living problem. This is in addition to the forecasted skyrocketing inflation.

Falling home values are another effect that the crisis will have on the UK housing market today. There is a chance that the value of your house might wind up being lower than what you acquired for your mortgage ultimately putting you in negative equity. On the other hand these dropping prices would be a huge benefit for prospective purchasers. 

These concerns wouldn’t apply to you if you’ve owned your house for a longer period of time because your home’s worth would have increased more than your mortgage. However, if you just purchased a home and took out a 95 percent mortgage to do so, you can experience a decline in property value below the amount you paid for it.

During a recession, should you purchase property? 

For first-time purchasers, things might be a little bit more challenging, so you might profit from waiting and watching how the market develops over the coming several months. As the crisis deepens, banks will also pay more attention to your circumstances and lending standards will definitely tighten. In order to limit borrowing now and spare people future anguish, the chancellor may even announce a drop in the income multiples granted by banks if the recession continues to worsen.

Financial stability on a personal level is yet another key factor. Do you own the required savings? Does the future of your employment appear to be secure? it would be foolish to completely disregard these facts. 

During a recession, should you sell your property? 

The same criteria applies while deciding whether to sell real estate during a recession: is it necessary to sell? The Brexit discussion over the past several years talked a lot about “need-to-moves,” and selling your home during a recession follows a similar logic: If you must relocate, do so. If you don’t, don’t do it. 

Whether there is a recession or not, there are still fees associated with selling property, so you must first make sure transferring is in your financial comfort level.