Key economic indicators suggest that our economy will strengthen in 2018. But what if the unexpected happens and we slip into a recession next year?
It’s been 26 years since our last recession, and another one has to arrive sooner or later. What would it mean for real estate if a recession arrived sooner than we expected — say, in 2018?
Of course, conditions will vary from market to market, but as a general rule, we can say that a recession will produce the following:
• More listings
• Fewer buyers
• Greater agent turnover
Recessions cause redundancies, which cause mortgage arrears, which cause foreclosures.
As banks seize properties to recoup their loans, more stock will hit the market, putting downward pressure on prices.
This can lead to a vicious cycle if some owners, who were thinking of selling in a year or two, get spooked and decide to sell now, thereby adding more stock to the market and putting further downward pressure on prices.
More housing supply will lead to less demand, as buyers get spread more thinly around the increased number of listings.
Buyers will also get put off by the gloomy economic news and the weak market. Even though consumers are encouraged to buy cars and holidays when prices for those items are falling, they get discouraged from buying shares and property when their prices are falling.
A reduction in buyers will place further downward pressure on prices, continuing the vicious cycle.
Greater agent turnover
A rising tide lifts all boats, but, as Warren Buffett says, it’s only when the tide goes out that you discover who’s been swimming naked.
When the market is strong, every man and his dog wants to become a real estate agent. Often, these newcomers seem like naturals, with relatively low days on market and high selling prices. But once the market weakens, it becomes obvious that their success was not the result of skill (good marketing and negotiating) but luck (the strong market).
The result? Their income drops and they flee the industry. Only good agents are able to survive a downturn.
Be prepared for a rainy day
Now that you know a recession is coming sooner or later, what should you do to prepare?
If you’re an agent, two options might be to work on your pipeline and ensure your personal bank account has enough of a buffer to survive a lean year.
If you’re a principal, it might make sense to look for efficiencies and to build up cash reserves in your business bank account.
The one unknown is what a recession might mean for interest rates. Normally, rates go down when times are bad, but with rates already at historical lows, it’s hard to see how they can fall much further. For example, if we look at the 4,200-plus home loans on RateCity, the average variable rates are 4.67 per cent for owner-occupiers and 4.93 per cent for investors — and it’s possible to get loans in both categories with a “3” in front.
So, if a recession does hit in 2018, don’t rely on falling interest rates to get you out of trouble.