While there are inevitably opportunities to snap up a bargain, there are some downsides when it comes to buying a house during a recession.
Here, the Property Road team looks more closely at whether you should be buying a house during a recession, and what to consider.
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?
Recession is a term used to describe when the economy is contracting. So rather than growing, the economy shrinks, as measured with the Gross Domestic Product (GDP). This sees people spending less and employers shedding jobs.
For the property market, a recession means that the value of homes is falling.
This is largely due to a drop in buyer demand. During a recession people have less money, employment becomes less secure and wages tend to rise slower, if at all.
Making such a big purchase as a property becomes less appealing or no longer affordable. Once demand has reduced, people who rely on selling their homes to finance their onward purchase find that they will get less.
Many homeowners will decide to stay put and ride out the storm rather than making a loss or having to settle for an inferior next home.
The housing market is now in a property recession and until the economy picks up, it will stay there.
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Things to consider when buying a house during a recession
Buying a property is probably the most expensive purchase you ever make in your life. So it might sound like a good idea to buy your dream home during a recession. After all, you could snap up a bargain.
But there are also risks, which you should be aware of. So here are the things to consider before you throw yourself into house hunting.
1. Not all recessions are the same
While there are clear criteria of when a country’s economy is in recession – in the UK it’s if the economy shrinks for at least two quarters in a row – the causes can differ. And with different reasons why a country slips into recession, come different consequences.
So not every recession will behave the same way. And not all recessions are as deep or last as long as others. Which will also have an impact. That’s why it’s important that you try and understand the recession you find yourself in, so that you know what to expect.
To explain this further, we will look at two examples.
The recession of 2008/09
In 2007, many banks lent money to people who couldn’t really afford the loans. This was risky and led to banks failing, most prominently Northern Rock in the UK and Lehman Brothers in the US.
It developed into a global financial crisis with governments spending a lot of money to bail out some of the banks to prevent negative impacts on their customers.
This led to countries, like Portugal and Greece, to struggle and needed to be bailed out by the EU (of which the UK was still part then). Many countries, including the UK, went into recession.
Unemployment rose, with many people losing their jobs and only recovered in 2015. At the same time, wages didn’t keep up with inflation any more, which means many people saw their salaries shrink in real terms.
Inflation started to rise, reaching 5.2% in September 2008. Interest rates were already at a high level when the economic crisis began, at 5.5%. After a further rise to 5.75% in July 2007, the Bank of England (BoE) started to cut the interest rate in December 2007.
The housing market had slowed down by then with prices falling, and the credit crunch caused mortgages to rise. This caused the BoE to further cut interest rates further, despite rising inflation.
By March 2009, the interest rate was at its lowest point at 0.5%. However, mortgage rates didn’t follow this downward trend. The financial situation meant that banks just didn’t have the money to lend. As a result, some people struggled to access funding to buy a home or only had expensive options.
Recession 2023
In comparison, the recession in 2023 was much different. It was caused by high inflation which in turn was caused by the COVID pandemic and the war in Ukraine.
At the peak in 2022, inflation stood at 11%. To counteract this, the BoE raised interest rates, which peaked at 5.25% in 2023. This combined meant the country was in a cost-of-living crisis, which ultimately caused the recession as people just didn’t have money to spend.
It was also a time of strikes by nurses, doctors, railway workers and teachers, which further impacted on the economy and contributed to its shrinking.
The rise in interest rates was swiftly followed by a rise in mortgage rates, making affordability for many buyers a huge challenge.
However, this didn’t have the same impact on the housing market as the 2008/09 recession. That’s partly due to this recession only lasting for a short time, as the UK was only in it at the end of 2023. It was also not as deep.
House prices only fell by 1.4% in 2023, which is a far cry from 15% in 2008. One reason for this was that unemployment didn’t rise much and wages kept up largely up with inflation due to labour shortages.
And while rising mortgage rates did slow down the property market, not by as much as in the previous recession.
So as you can see, it’s important to understand the recession you are in, its consequences and also the condition of the property market.
2. Property values tend to fall
When a country is in a recession, the property market slows down because many people feel the pinch and decide to stay put. As a result of this drop in demand, property values fall.
This is great news for any buyer who can still afford to buy. But you should keep in mind that it might take a while for property prices to recover. They might even continue to fall after you have completed your purchase.
If you are thinking of staying in your new home for the next 5 to 10 years, it’s not really a problem. The chances are that by the time you come to resell, the market has recovered, and you can sell your home for more than you bought it.
The ideal point to buy a property in a recession is at its peak. So just before the economy starts to recover and prices might go up again. Sounds easy? Well, the thing is, you only know that the peak has been reached afterwards.
So it’s possible to snatch up a bargain during a recession, but you have to be prepared for the value of your new home to fall further before it rises.
3. Mortgage rates might drop
During a recession the Bank of England (BoE) will try to get the economy going again by lowering interest rates. Although the BoE will only do this, if inflation isn’t high.
If the interest rate is lowered, it will achieve two things: it becomes less worth saving money, and it becomes cheaper to borrow money. People are incentivised to spend money which will help the economy to recover.
Mortgage rates will also fall as a consequence, making it easier for buyers to lend the money they need to buy their next home.
However, with economic uncertainty, lenders become a bit nervous, and so they tighten their lending criteria. This means that although the mortgage rates might have fallen, it might still not be easy to get a mortgage.
Especially first-time buyers with a small deposit might find that the cheap rates aren’t open to them. That’s what happened to us when we bought our first home during the recession of 2008/2009.
The smaller the deposit, the higher the risk to the lender. So to counteract this, they might put up the rate for those buyers.
If you are a cash buyer, all this won’t affect you, and you could get your dream home for much less than you thought. But still keep in mind that its value might go down further.
4. There are likely fewer options
With house values falling, many potential sellers might decide not to put their homes on the market or remove them until they can get a better price.
This means that your choice will be reduced, so you might have to be prepared for some compromises. Of course, that doesn’t mean you can’t find your dream home, but the smaller the choice, the more difficult it is to find what you want.
It might also take longer to find what you want, which is fine if you aren’t in a rush. But not so good if you want to move, let’s say, before the kids start school again.
5. You might fall into negative equity
There is a chance that the value of your home falls after you have bought it. Depending on how much and for how long prices continue to drop, this could cause issues.
Le’t say you fixed-in your mortgage for two years, because it was cheaper, which is usually the case. The value of your home has continued to fall and is still lower when it’s time to re-mortgage. With the house now worth less, you can’t find any mortgage deals that would reduce your monthly bills.
You end up having to pay more every month than before. That wouldn’t be ideal. Of course, it doesn’t have to happen like this.
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, just a year after this, the 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.
This is something we always do if we can afford it, as it means we can pay back the mortgage quicker, saving us money. But it also means that if the rates are higher when we need to re-mortgage, the actual monthly payments might not go up by too much, if at all.
6. Don’t rush into it
When the country enters a recession and house prices fall as a result, many buyers see a chance to snap up a bargain. So they make a snap decision that now is the best time to buy.
However, it’s worth slowing down and making sure that you’re ready for this step. It’s a big purchase and not one you want to regret making.
To make sure that it’s the right thing to do for you, here are some things to consider:
- Is your employment/income secure?
- What’s your financial situation? Can you afford to buy?
- Will you be able to get an affordable mortgage for the amount you will need? (if you need a mortgage)
- If the worst happens – negative equity, rising mortgage rates, etc. – will you still be able to make the monthly payments?
- Are you planning to stay for several years in your new home?
By thinking about these things you can ensure that you are ready to go.
7. The temptation of gazundering
In a recession, the housing market tends to slow down, which means it becomes a buyer’s market. This will increase the practice of gazundering. In short, it means buyers lower the asking price a few weeks or even days before exchange of contracts.
During a recession, when house prices fall, this can happen more often because the buyer is worried they overpay on their new home. Especially, when the conveyancing process stretches over several months.
But it’s worth keeping in mind that this could risk you losing money and your dream home. Selling a house is stressful enough, but even more so during a recession. So your seller might not look kindly on you trying to gazunder them.
Of course, there are valid reasons. For example, if your mortgage in principle expires before completion, and you can’t find a new mortgage deal that would allow you to pay the agreed price, it’s worth having a discussion with the seller.
Being honest and open is the best way forward here. However, if you just want to get a better deal or house prices have fallen since you have had your offer accepted, it becomes less acceptable.
After all, the seller would be reasonable in thinking that if you thought it was worth that much a few months ago why not now.
While the temptation to gazunder might be big, it’s something you should consider carefully. If you are planning to stay in your new home for years to come, the chances are, even if prices continue to fall, you will be able to sell it for a profit in the end.
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!
Know and understand the risks
There’s no doubt that there are potential property bargains to be had when buying a house during a recession, but there are also risks involved.
An uncertain economic climate can have an impact on many things, including house prices, mortgage rates, job security and income.
There are many things to consider before deciding to buy a property during such uncertain times. Getting a clear picture of the economic situation, your own financial condition and how the former could impact on the latter after you bought your new home, will help you to make the right decision for you.
That’s so important because if it goes wrong, it could create huge issues for you, especially financially.
However, 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 advice during our journey, planning our finances carefully to avoid mistakes.
