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What Happens To House Prices In A Recession?

Estimated reading time 10 minutes

It’s natural for house prices to deteriorate during a recession, just look at what happened during the 2008 financial crisis or the early 1990s recession.
It is expected that we will be hit by a recession before the end of 2020 or early next year due to the Coronavirus Pandemic.
A good time to sell a property is before a recession, if you can anticipate when that will be.
Experts predict that people will choose to continue renting, or even living at home, rather than buy during a recession, so what buyers there are will be able to push property prices down.

In This Article

What Is A Recession?
How Does A Recession Effect House Prices?
When Will The Next Recession Be?
Is A Recession A Good Time To Sell A Property?
How To Sell Your Property During A Recession

It’s natural for homeowners, potential sellers and buyers to ask what will happen to house prices in a recession. With the coronavirus pandemic apparently coming to an end, can we anticipate a housing market crash? The effects of a recession on the housing market are fairly predictable, but should you sell your house before a recession? Will it be a deep recession, like the 2008 deep recession? What kind of recession will it be – a property recession, an economic recession, financial recession or business recession? Unfortunately, it’s too early to say how house prices will be affected by a recession. The problem is a lack of new pricing information, without which it’s difficult to predict trends. This has led to many, consulting cash house buyers in order to get a quick sale and complete the process before the value drastically reduces.

What Is A Recession?

One common question is how do we know when we are in a recession? Normally, we can expect the country’s economy to grow, with everyone getting slightly more wealthy as a result of the growth in the value of goods and services reflected in GDP (Gross Domestic Product).¹ If that value falls, we start to enter recession, and when this carries on for several quarters it is known as a recession. A particularly bad or long-lasting recession is known as a depression.² Recession normally leads to a fall in the number of jobs available, reduced pay and lower dividends for shareholders, and a reduction in tax revenue for the government, which then has to cut benefits, public services and public sector wages. All this has an inevitable knock-on effect on the housing market. So are we in a recession yet?

How Does A Recession Effect House Prices?

With most of the western world seeing falling GDP in the first quarter of 2020, and nothing but bad news for retail and manufacturing since, it’s pretty clear that we are already on our way to a recession, which will more than likely be confirmed before the end of the year. The Office for National Statistics³ announced a fall in UK GDP of two percent from January to March, but 20.4 percent in April, the largest monthly contraction on record. This first full month in the coronavirus lockdown was of course followed by an equally locked down May, and it wasn’t until mid-June that restrictions on estate agents eased, and later in mid-June, non-essential shops were allowed to re-open. It will be some time before we can assess the effects of recession on the housing market, and longer still until it is likely to recover. The government has tried to shore up the housing market by extending its mortgage holiday for a further three months, so anyone having trouble making their payments will not have to make a repayment until at least September. However, this is unlikely to be enough to have any impact on the inevitability of a recession. Experts suggest that most of the factors are in place to lead to a market crash later in the year.

The number of jobs lost or furloughed suggests that many businesses will close permanently, and rising unemployment is bad for the property market
Buying a house is the biggest financial commitment most of us will ever make, and a lack of financial security will make people wary of commitment
Only historically low interest rates⁴ are preventing another deep recession or depression

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When Will The Next Recession Be?

Some economists believe that if the Bank of England continues to put money into the economy, the inevitable result will be a rise in inflation, and a resulting rise in interest rates to try to keep inflation at 2 percent. This will inevitably lead to a collapse in the housing market, because owners will have enough difficulty servicing their current debts without committing to further expenditure. When the recession ended in the third quarter of 1991, it took five and a quarter years for house prices to recover and exceed the pre-peak high. If recession history teaches us anything, it is that house prices tend to fall when the economy shrinks as a result of falling output, and this has a knock-on effect for unemployment or higher borrowing costs. This may in turn lead to more people being forced to sell because they cannot service debts. In general terms, the history of the last 50 years shows a positive trend in house prices, but there are some deep lows, and in the short term we can expect lower rates of nominal house price growth compared to the long result. So if we can expect a dip in house prices towards the end of this year, now may be the best time to sell – we are unlikely to see a big increase in forced sellers in the near term, while mortgage interest rates are at their lowest level ever, and mortgage payment holidays and government support for business means we can’t expect any big movement in house prices just yet. Checkout Our "How To Sell Your House When Separating Or Divorced" Guide. Read More

Is A Recession A Good Time To Sell A Property?

A recession isn’t a good time to sell a property – a good time to sell a property is before a recession, If you can anticipate when that will be. Nobel Prize-winning economist Robert Shiller⁵ predicted a recession in 2020 even before the coronavirus pandemic, and argues that this will usher in a buyer’s market, not a seller’s. Shiller predicts that people will choose to continue renting, or even living at home, rather than buy during a recession, so what buyers there are will be able to push property prices down. American economist Daryl Fairweather says: “Homebuyers have more options and more negotiating power during a recession because there are more people out there trying to sell homes than there are people trying to buy homes when the economy is weak. That's why dream homes are more likely to retain their value. During a recession, homebuyers won't have to settle for a condo or a home with fewer bedrooms or only one story. So those less desirable homes will drop in value more than a single-family home with two stories and multiple bedrooms.”

How To Sell Your Property During A Recession

So, the housing market may look tough for sellers in the next recession, but if we look at recession history it will probably not be as deep of a recession as the 2008 recession. We won’t really know the long-term results until the coronavirus lockdown is fully lifted, the economy is back in gear and we have some sense of the impact on pricing. It seems likely that while government measures continue to support business, price levels will probably remain as they were in March. Any downward pressure on prices could certainly trigger much reduced market activity. But experts say that there is a large cushion of housing equity to absorb the impact of house price falls, perhaps five times higher than the £1,000 billion odd held in outstanding mortgages. The likelihood of negative equity⁶ is low while 15 percent deposits are common. But, as peer-to-peer lending expert Stephen Moss says, “The current state of the market may bring cause for concern to many but at present, it sits in limbo and any impact of the current pandemic will be easily rectified once normality returns. "However, the real worry is that any prolonged period of national lockdown could bring about a recession and it is at this point the market could begin to struggle. "We know from market data on previous recessions that such an event will cause property prices to drop and with current market conditions and values most similar to that of the previous recession, this could mean a drop of ten per cent and upwards. "Not only this, but those taking such a hit will be looking at a lengthy recovery time before their property regains its current value, a recovery that could stretch until 2025 or longer. "That said, a decline in property values would be the preferable option when you consider that for tens of thousands of homeowners, the reality could be the repossession of their home.” If you are wondering what your options are when it comes to selling your house quickly during a recession cash house buyers could be the preferable option. We guarantee to buy any home no matter the circumstances or condition of the property. Give us a call on 0207 459 4546 or use our contact form today to find out more about what options you have when selling a house quickly during a recession... * With Gaffsy cash buying you can access a super quick exchange and completion service that will prevent your debt from escalating. * If recession hits and you have the need to sell, the team at Gaffsy can get your house sold fast. Contact us, and lets get you moving. * You will also benefit from our experience of purchasing homes under threat of repossession alleviate worry cost and stress. Whilst avoiding costs such as agents’ fees, estate agents’ charges, solicitors’ fees, clearance costs, utility charges, mortgage payments and cosmetic repair costs. * Get the ball rolling with a valuation and avoid your house being repossessed. Sources

"Gross Domestic Product (GDP)". https://www.investopedia.com/terms/g/gdp.asp. Last accessed 23^rd Jun 2020.
"Depression (economics)". https://en.wikipedia.org/wiki/Depression_(economics). Last accessed 23^rd Jun 2020.
"Gross Domestic Product (GDP)". https://www.ons.gov.uk/economy/grossdomesticproductgdp. Last accessed 23^rd Jun 2020.
"Statistical Interactive Database - Official Bank Rate History".https://www.bankofengland.co.uk/boeapps/iadb/Repo.asp.Last accessed 23^rd Jun 2020.
"Robert J. Shiller". https://en.wikipedia.org/wiki/Robert_J._Shiller. Last accessed 23^rd Jun 2020.
"Negative equity: what it means and what you can do about it". https://www.moneyadviceservice.org.uk/en/articles/negative-equity-what-it-means-and-what-you-can-do-about-it. Last accessed 23^rd Jun 2020.