How to navigate the property market in a recession

Spring hit South Africa with more than just the promise of warmer weather this year. It also heralded the start of what may be the country’s first official recession since the global financial crisis of 2008 – 2009.

For those property owners who remember the effects of the previous recession on the housing market, this may trigger some understandable concern. However, Tony Clarke, Managing Director of the Rawson Property Group, says there are valuable lessons to be learnt from the 2008 – 2009 crisis that could help homeowners better navigate the recession market this time around.

“It would be naive to expect the property market to escape any consequences of the contracting GDP,” says Clarke, “but that doesn’t mean homeowners are helpless to protect their investments going forward. The most important thing at this point is to understand and prepare for what may come. Luckily, we have some pretty good insights into that, having not only survived the last recession, but enjoyed some very healthy property growth since then.”

Preparing for the effects of a recession

CPI Inflation

According to Clarke, one of the first side-effects of a recession economy tends to be a rapid increase in the Consumer Price Index – particularly when emerging markets are taking a knock and the rand is under fire. As a result, consumers often find themselves navigating unexpectedly choppy financial waters with little to no disposable income to spare.

“A soaring CPI makes it a lot harder to cover basic expenses,” says Clarke, “not to mention contemplate new investments, or even properly maintain the ones we already have. The best way to prepare for this is to start economising as early as possible. If 2008 – 2009 taught us anything, it’s that if you only start cutting back once you’re already feeling the pinch, you’re probably too late.”

Increasing Interest Rates

Of course, saving is never easy during a recession, and having a prime-linked bond (like most South African mortgage holders) can complicate things further.

“Increasing the interest rate is the South African Reserve Bank’s primary method of curbing rampant inflation and stabilising the economy,” says Clarke. “Unfortunately, that means when a recession hits and inflation begins to skyrocket, interest rates – and therefore bond repayments – are likely to climb as well.”

During the last recession, the prime interest rate rose from 10.5% in mid-2006 to 15.5% by mid-2008. To put that in context, monthly repayments on a R1million bond would have climbed from R9983.80 to R13 538.81 in just two years.

“This kind of situation is why I always recommend buying a little below your maximum affordability so that you can absorb some unexpected interest rate increases if you have to,” says Clarke. “If you do find yourself struggling, and you’ve already trimmed your expenses to the bare bone, you may need to look at creative solutions like short-term letting to tide you over until your finances recover.”

Poor Property Appreciation

With low consumer spending power and high-interest rates, it’s no surprise that property buyers are usually few and far between in a recession market. This lack of demand typically causes house prices to stagnate or even decline, but Clarke says this is no reason for homeowners or investors to panic.

“Property is a long-term investment,” he says. “You have to ride out the occasional low to make it to the next high. The longer you can afford to hang on to your property, and keep it in good condition, the more freedom you have to wait out these downward trends and benefit from the inevitable upswing.”

Opportunities for buyers

In the midst of all the doom and gloom, a recession does offer some opportunities – particularly for buyers in good financial standing with a nose for a bargain.

“Buyers are going to be in a very strong negotiating position in the coming months, and this could prove to be a good chance to get a foot in the property market,” says Clarke.

“That said, I would strongly caution against overextending at this point, even if the value seems irresistible. Instead, I’d recommend buying on the easy end of affordability and taking advantage of the current low-interest rate to pay off as much debt as you can, as quickly as possible. It’s the best way to ensure that you’re in the strongest possible position in the future, regardless of what that future brings.”