Buying A House During A Recession

While there are inevitably opportunities to snap up a bargain, there are some downsides when it comes to buying a house during a recession.

For many potential buyers, having an economy that is in recession isn’t a big problem, but it’s a trickier situation for first-time buyers.

That’s because they run the risk that house prices during a recession will go down further to leave them in negative equity. That’s when the homebuyer owes more on their mortgage than their home is worth.

For those who can afford it, when a recession does strike, you can sit back to see how prices fluctuate and how the market is going to play out.

Here, the Property Road team looks more closely at the question of whether you should be buying a house during a recession? And also, should you sell a property during a recession?

We bought our first property during a recession and benefitted from it massively. This article is, therefore, based heavily on our own experience.

What is a property recession?

For those who don’t know or who haven’t had to endure a recession before, this is a term to describe when the economy is contracting. This sees people spending less and employers shedding jobs.

However, for all property owners, a recession can see the value of homes falling.

That’s a serious situation if you don’t have equity in your home – that’s the profit or gain your home has made since you bought it.

This fall in prices might see your home being worth less than you paid for it – and that is called negative equity. You will either have to:

• Sit tight and ride the recession out until prices rise again;
• Sell at a loss.

Along with rising unemployment, household incomes take a hit – so paying a mortgage might be an issue. If it is, the mortgage lender might force a sale of your home to repay the mortgage debt. This type of forced sale is unlikely to be at anything close to your property’s market value.

Other issues for property in a recession

Along with falling property values in a recession, mortgage borrowers are also likely to see a rise in their mortgage payments. This is an issue because:

• Rising interest rates mean fewer buyers because mortgages become more expensive, which will, inevitably lead to lower prices because sellers will have to drop their asking price to sell;
• Lenders also tighten their lending criteria – so you might struggle to get a loan;
• For homeowners, there is also a risk that when you need to remortgage, for example when your current deal expires, your mortgage may be a lot more expensive and will become harder to service.

Has this happened before?

Oh, yes. In the financial crisis of 2008, England’s average house price fell to £159,340 from £188,657, Land Registry figures reveal. That’s a hefty 15% fall in prices in just 12 months.

However, potential buyers who are wary about buying in a recession, need to appreciate that just a year after this, average house price in England had jumped back up to £174,765. That’s still 7% lower than they were two years earlier, but the prices kept on rising.

This rise in prices would have helped ease any worries a homeowner may have had about falling into negative equity, that’s assuming that they maintained their mortgage payments and reduced their mortgage amount.

Property experts say that one way to ease any potential negative equity fears is to get a mortgage and then overpay it – if you can afford to do so.

Our experience of buying a property during the 2008/2009 recession

We’d been saving up enough money for a deposit so we could get on the housing ladder (and out of our rented flat with noisy neighbours!) for a few years when the 2008 financial crash happened.

Initially, we waited to see how things played out, however, by 2009 we had a decent deposit and the market seemed to have stabilised somewhat – even though we were still in a recession.

We decided that as first-time buyers, the recession was actually giving us a great opportunity to bag a bargain. Property prices had been falling for a while but we suspected the drop was nearing the bottom.

We were able to find a property that was much bigger than we thought we could ever afford. It had gone on the market before the recession for £125,000. However, without much interest and with the recession biting, the vendors had dropped the price to £115,000.

The only problem was our maximum budget was £100,000. Still, we enquired with the estate agent whether that budget might be enough and they confirmed that yes, because we were in a strong position (first-time buyers meant no chain!), it would be considered.

In the end, we loved the property and secured it for £97,500 – that’s a whopping discount of £27,500!

The downside was that mortgage rates were pretty high. We had to accept a rate of 5.69% but chose to fix it in for 5 years. That turned out to be a financial mistake as rates did soon drop – however, we were prepared to trade that off in return for the security of knowing we could afford the property for at least 5 years – even if mortgage rates rose further.

Buying during a recession was a massive boost to our house buying journey. We ended up with a property we simply could not afford a year or so beforehand.

When prices recovered (and more!) soon after we bought, we ended up with substantial equity that enable us to buy a much better property when we next moved.

I have no doubt that if it wasn’t for the recession and our fortunate timing as a first-time buyer, we would not be sitting in our dream home today!

Cooling house markets lead to ‘gazundering’

Most people who have bought a house in a rising market will come across the term ‘gazumping’. That’s when a house seller agrees to sell their property to another buyer for more money than the first buyer had agreed to.

• What is gazumping? Essentially, it means that you, as the buyer, have been outbid when buying a property you thought you were going to buy. This can happen after your offer has been accepted.

In a cooling house market, there’s a similar phenomenon, and it is called ‘gazundering’.

• What is gazundering? This situation sees the buyer lower their original offer in the weeks, or more usually, days before contracts are to be exchanged. This means that the seller has been gazundered.

Put simply, gazundering will affect the house seller, while gazumping affects the house buyer.

In a rising market, there are more buyers, so the competition is stiff to buy a house, but in a falling market, there are fewer buyers, which puts pressure on prices – and the buyer knows it.

That’s why the buyer will try to knock the seller down on the price, and if they are keen to sell, then they will probably have to agree. Or start the process of trying to find a buyer all over again.

Do sellers leave the market in a recession?

The answer to the question, ‘Do sellers leave the market in a recession?’ Is, ‘Yes’ and ‘No’.

One survey from bespoke estate agency eXp UK highlights that house sales in the UK in 2022 fell by 30% because the market began to cool as economic experts predicted a recession.

But that drop came after a two-year-long house-buying boom that occurred because:

• The Covid pandemic lockdown led to more people working from home, and they wanted larger properties and homes outside of cities
• There were still savings to be made with a stamp duty holiday.

This boom in house sales and prices masks what followed with a threat of recession.

Economic uncertainty will always lead to a fall in transactions, but eXp says that the huge surge in the house-selling market during the pandemic means that what followed was really just the UK’s home-selling market returning to its normal levels of activity.

This is a crucial point to understand for anyone thinking about buying a property in a recession – you need to appreciate the peaks and troughs in the UK’s house selling and buying market to know whether prices are set to plunge or whether there is simply a ‘correction’ underway!

Why house confidence is needed in a recession

For anyone looking to sell a property in a recession, or when the economic outlook is gloomy, then there’s no reason to blame potential buyers for being wary because TV news programmes and newspapers tend to focus on the negative effects of the economy taking a dip.

However, it is worth noting that since the pandemic ended, rising living costs and mortgage rates, coupled with weak consumer confidence, did combine to cool the housing market – but again, according to investment platform Hargreaves Lansdown, this was simply the housing market returning to its pre-lockdown levels and not a full-blown house price recession.

House sellers and buyers alike need to appreciate mortgage rates because these are increased to help control the economy – and can stave off a recession.

That means buyers and sellers need to:

• Keep an eye on mortgage rates because if they reach 6% or more, then there’s an almost immediate knock-on effect on prices;
• Higher mortgage rates will put off buyers – especially first-time buyers;
• Cash buyers are in a strong position to negotiate on price because the mortgage rate won’t affect them – but it might be an issue for a seller.

Having mentioned that high mortgage rates will affect first-time buyers, it is worth appreciating that a recession will lead to prices falling, and that could help a first-time buyer.

It might even mean they can afford to get onto the housing ladder sooner than they had planned.

Again, a careful understanding of where the recession is taking housing is needed – a financial advisor will have experience and expertise to share.

This drop in house prices will also help a shocking statistic from the Office for National Statistics which said in 2022 that the average home price was 8.7 times higher than it was for average wages.

And since most lenders will consider a borrower’s affordability at 4.5 times their income, that means first-time buyers, in particular, will need a very large deposit to get a mortgage.

What do sellers need to do?

In a recession, buyers become scarce because they want to see which way the market is heading before committing to a sale. The property platform Zoopla says that sellers can take some steps to secure a sale in a recession, including:

• Sellers need to ensure that their property is competitively priced;
• Understand what the buyer is prepared to spend;
• Do not have unrealistic expectations of selling their property quickly.

Also, depending on whether the economy improves or not, sellers may feel under even more pressure to reduce their asking prices further.

Buying a house during a recession

There’s no doubt that there are potential property bargains to be had when buying a house during a recession, but the buyer needs to be aware of:

• House prices falling after completion;
• Dropping prices create the prospect of negative equity.

A house seller trying to sell during a recession needs to be aware of:

• Dropping their price too much to find a buyer;
• Risk being gazundered so that their below-market price could be pushed down even further;
• Be prepared to wait for buyers;
• The buyer and seller’s chain risks more chances of being broken.

The bottom line when it comes to buying a house during a recession is that both parties need to beware that rising interest rates, the cost of mortgages increasing and the criteria for getting a mortgage tightening will affect prices and demand.

The situation could worsen for prices if a homeowner is forced into a quick sale because they can’t afford their mortgage or have been made redundant. A potential buyer may need to pull out of a sale for the same reasons.

It’s essential that anyone buying – or even selling – during a recession understands the risks, and it might be a good idea to speak with an experienced financial advisor to discuss the potential of buying a home when the economy is struggling.

There are bargains to be had if prices fall, but knowing when and where to buy will be crucial for a successful purchase.

Our own experience shows that buying a property during a recession can be a good thing, especially if you’re a first-time buyer. However, it’s not without its risks and we took lots of professional advise during our journey, planning our finances carefully to avoid mistakes.