How could a recession impact the housing market?

Highlights

• A recession could potentially impact the US economy and aggravate the housing market slowdown.
• A recession can result in higher unemployment and reduced wages, which can affect the demand for housing.
• Some buyers can find it incentivising to buy a house during a recession, while sellers might avoid entering a falling market.

Fears of a recession have shaken economies across the globe, including the Australian economy. An economic slowdown looms as many worrying factors have taken shape worldwide. These include supply chain issues, lockdowns in China and soaring inflation. Meanwhile, recession talks have inevitably reached the housing market, where the risk of property prices crashing is rising.

Notably, the Australian housing market is witnessing a shift in buyers' behaviour. After remaining in a booming phase for around two years, the housing market has finally started to show signs of a slowdown. Sydney and Melbourne’s housing values have taken a downward turn, depicting the shifting dynamics of the housing market.

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Other regions have also seen a slowdown in housing values growth, highlighting the weakening conditions of the market. Rising interest rates partly explain the reason for a slowing market. However, the remaining uncertainty stems from the recessionary fears building in the backdrop.

Let us now understand what recession means for the housing market:

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Housing market and recession

The housing market, like most aspects of the economy, is affected by a recession. A recession is often succeeded with a decline in consumer and business confidence as households and businesses fear higher costs. A similar situation is visible in the present scenario, where consumer confidence has been impacted by fears of a potential recession hitting the US.

Meanwhile, the housing price slowdown has emerged on the back of multiple factors, including the sudden removal of fiscal stimulus, looming affordability concerns and tighter lending conditions. The market is also factoring in concerns around a potential recession.

To know the repercussions of a recession on the housing market, it is first important to understand what happens in a recession. Recessions are associated with job losses, pay freezes, lower wage growth and increased financial inequality. These aspects of the economy can seep into the housing market in one way or the other.

Just like a recession impacts the demand for goods and services, it can also hurt the demand for property. Although highly desired property locations may not be as affected by an economic slowdown or a recession, the less desired properties or less popular locations could struggle in auctions.

The Australian property market has observed an overall decline in demand for property, with the bustling cities of Sydney and Melbourne observing a slump in property demand. The price decline momentum is expected to aggravate as interest rates rise further and people delay big purchases, such as a house.

Is recession a perfect time to buy a house?

Homebuyers can find it incentivising to buy a home during a recession as property prices may fall from their peaks. CoreLogic data for June suggest that dwelling values in capital cities have moved past their peaks and are beginning to move downwards. This can compel many homebuyers to jump back into the market.

At the same time, a recession could force many buyers to sell their houses. Those who are unable to manage their mortgage repayments could be forced to leave their homes and shift to a smaller house or live on rent. This could simultaneously increase the properties for sale, giving a further downward shove to prices.

While this could be a boon for prospective buyers, those who have already bought houses at exorbitantly high rates may find themselves at a loss. Buyers who had purchased their houses around the peak of the housing price boom are currently locked in a market where their houses are rapidly declining in value. Add to this a rapid increase in interest repayments, and it creates perfect turmoil for most households.

Thus, as most prospective buyers wait for the price cooldown to move faster, many other market participants are already in a soup. The main issue is declining supply as owners have removed their houses from the market to avoid incurring a loss in a falling market. However, it is this lack of supply that may also help increase property prices in the near term.