Top 5 Reasons to Invest in a Recession
We all know the world is an uncertain place right now, with economies in freefall, house prices all over the shop, the job market in tatters & a recession now official. You’d think it’s the worst time to buy property, right?
Wrong! You see, it’s exactly in volatile times like this, that risk-averse people pull out. Even those with relative job security & money in the bank, adopt a “wait and see” approach, leaving a much smaller pool of buyers & way less competition for properties for sale. This creates what is called a buyers’ market.
In my live webcasts, I often talk about the property clock (diagram below that spells it out pretty clearly). It neatly illustrates the principle that if you buy & hold property, it’ll inevitably do a full cycle / rotation of the clock over a 7 to 12-year period. There will be property booms & slumps along the way, but at the end of the day, providing you’ve bought smartly, you’ll come out the other end with a good capital gain.
Superannuation operates on exactly the same principle. There are good years & bad years, but over time it all averages out to a decent nest egg at retirement.
Where most property markets are at right now, even those that are proving fairly resilient to the impacts of Covid, is hovering around the slow down / slump stage. You can see that in the latest housing figures released this week by CoreLogic RP Data below.
Some markets are faring better than others – in fact, many regional areas are outperforming their capital city counterparts – but it’s fair to say property prices across the board have taken a hit as a direct result of the pandemic. And keep in mind there’s no “one property market”. Australia is made up of thousands of suburbs & regional areas, and micro pockets within those areas, that all perform differently, irrespective of what’s happening with the general economy & property outlook. Your job is to find the gems.
While you’d need a crystal ball to know how things will progress from here, many property experts believe this is a temporary price correction & that confidence will spring back once COVID-19 is in the rear-view mirror. Record low interest rates & Australians’ confidence in bricks & mortar as a secure investment will certainly help.
If you’re cashed up, job secure and ready to roll, here are 5 reasons why buying in a recession can have a definite upside.
1. Vendors Are More Negotiable
Let’s face it: when times are tough, everyone has to be a little more flexible.
At the height of the scorching-hot property booms in cities like Sydney, Melbourne & Hobart, vendors would have laughed at you if you’d put in an offer 10% below asking price or asked for a 6-month settlement or the keys to go in and start renovating with just a deposit down. Wind the clock forward & those tables have turned. When buyers are scarce & cautious, sellers are much more flexible in doing whatever it takes to get a sale across the line. They’re also more realistic with their asking price. Depending on your objectives (cheaper price, longer settlement, etc), this can definitely work in your favour.
2. Less Buyers = Less Competition
In a boom market, you need to pounce at the speed of lightning when a good property comes along, or you risk losing out. In a slow market (with fewer buyers around), you’re not so pressured to immediately seal the deal. In fact, delaying tactics can often work in your favour, especially if the property has been sitting on the market for a while, which is often the case during a recession. You’ve got more time to crunch the numbers, do proper due diligence on the property so you’ve covered all bases. The vendor may have already committed to another property & wants a quick sale? Maybe there’s been a divorce & both parties want out? Roof needs fixing? House needs re stumping? All of these things give you leverage to negotiate a better purchase price, especially if you know there’s no other hungry buyers in the wings. Do so, but not to the point where your taking plain advantage of someone less fortunate. Only you can decide where you ethically sit on that matter.
3. Maximum Opportunity For Capital Growth
If you’re buying somewhere around the bottom / slump stage of the property clock, chances are high you’ll be buying your property “at market value” or “below market value”, rather than an over-inflated price in the recovery or boom stage of the property cycle. When the market eventually rises, you’ll be the first to benefit. Just like the share market, when you buy low & sell high, you make the maximum gain.
In times like this, smart homeowners & investors, will buy often buy a property below market value then tackle a quick cosmetic renovation as a means to manufacture instant equity immediately, whether it’s your own home or an investment property. With rents falling back ever so slightly in many locations due to Covid, it’s a sure fire way to increase the appeal of your rental property, often scooping yourself a better asking rent & quality of tenant.
4. Tradies & Retailers Are More Competitive
In tough times, tradies just aren’t as busy as they are in boom times, where they can pick & choose jobs they want to take at their price. Retailers are now also suffering the effects of low consumer confidence during this recession. This means you’re likely to get a much more competitive price on labour & materials when doing your reno. These help drive your costs down which ultimately increases your overall profit.
5. You’re Buying For The Long-Term
This is the most compelling reason to buy in a recession. If you look at the graph below, you’ll see the performance of Australian property over the last 40 years. During that time, we’ve weathered the GFC, a recession, the Asian financial crisis & the fallout from major catastrophes like the bombing of the Twin Towers. You can see the peaks & troughs that correspond with these events, but the ultimate trajectory is up and up. A Sydney house you bought for $65,000 in 1980 was worth close to $1.2m by 2019.
At the end of the day, it’s hard to find another investment that’s going to give you this rate of return & degree of certainty. People will always need a roof over their heads so demand for housing will always be there. History tells us, you never know the bottom of the market until it’s come & gone, so sitting around waiting for the property market to bottom out is a risky move.
Fortune favours the brave … if you feel you’re in a strong position to buy & the right property comes along, a recession can actually be an opportunity to jump in while others sit on the sidelines and let opportunity slip through their fingers.
To learn How To Earn Renovation Rockstar Profits, join me this Sunday from 3.00 – 5.00pm (Sydney time) for 2 hours of free and awesome property content.