Recession and House Prices: What Happens to Aussie Property
With Australia going through significant economic hardships as a result of the ongoing developments of the pandemic, it’s looking likely that it will head into a double-dip recession. This has significant ramifications for various sections of the economy overall, especially the property market. In this article, the experts at Vision Property and Finance outline the ramifications of a recession on house prices and how it could affect you.
What Does a Recession Look Like in Australia?
A recession is classified as two consecutive quarters of negative GDP growth. GDP is classified as the total market value of goods and services produced in a country’s economy over a specific period of time. Historically, Australia has been successful in avoiding recession, having over 30 years without one. Australia even managed to avoid recession during the GFC, despite most other global economies experiencing one. However, due to the ongoing pandemic, economic activity shrunk to a point in 2020 where the economy has gotten smaller over two 3-month periods. This is shown below:
Why Is Australia Going Into a Double-Dip Recession?
Due to a resurgence in infections and increased restrictions across multiple highly populated states, many believe that the last quarter will have negative GDP growth. Depending on the level of economic activity over the next couple of months, Australia will go into another quarter of economic shrinkage and experience a double-dip recession.
How Does a Recession Affect House Prices?
The main effect of a recession on house prices is that it will cause interest rates to fall. This is the result of the government trying to encourage spending in the economy through monetary policy, which results in banks reducing their interest rates. Reduced interest rates increase investment into property from both first home buyers and property investors. Australia is currently sitting at its lowest interest rate ever at 0.10% to try and encourage spending, as shown below in the graph:
With the expectation being that this increased property investment will improve GDP, interest rates will be raised to control this GDP growth. If you are looking for low interest rates for your mortgage, it would be worth exploring the option of purchasing a property now rather than later. Get in touch with one of our property investment experts here.
A recession tends to lead to a decrease in consumer confidence, which leads to less money circulating around the economy. This can make those looking to sell their property hesitant to put it on the market due to fear of getting less of a return.
Overall, Lower Property Prices, However Different Markets React Differently
In general, less money in the economy = lower prices due to low competition. However, it is wrong to assume that the whole property market will follow this trend. More consolidated urban areas may experience different levels of demand than regional areas. Different types of property may attract different levels of investment.