With the cost of living crisis, inflation hitting a 40 year high and the repeated warnings amid a pending global recession dominating the headlines. Some could say the warning signs are here in full view, leaving analysts with a feeling of ‘deja vu’ from the months leading up to April 2008.
Perhaps one of the most significant questions currently on the lips of sophisticated property investors? ‘When is the recession coming?’.
Over the course of this blog, I will tackle this question as well as give you tips you can apply, to increase your chances of success in property, in the event of a spiralling house price index.
When will the recession start?
Tackling this question with a straight answer is even tough for the smartest Economists and City Analysts. Before I give my opinion on this, let’s first look at the true meaning of a recession and what you can apply right now to better your position in the event of a recession.
What is a recession?
A recession is a macroeconomic term that is typically defined when there is a significant decline in GDP for a minimum of two quarters. (GDP can be tracked using websites such as: https://www.oecd.org/economy/weekly-tracker-of-gdp-growth/)
The graph above clearly shows a significant drop in the GDP in March 2020 due to the Coronavirus outbreak, which continues to recover over the following two months. It was the role of the Government to uphold the UK economically as the pandemic started to take effect, which as we can see, improved the GDP in Q3 of 2020 somewhat.
The Office for National Statistics reported in April 2022, that the Public sector net borrowing excluding public sector banks was £18.6 billion in April 2022, the fourth-highest April borrowing since monthly records began in 1993. The question is, how long can the Government uphold us economically before we start seeing two consecutive quarters of decline?
The straight answer is, we don’t know.
Similarly we didn’t know exactly when the 2008 recession started before it happened, but my aim for this blog is to get you best prepared whilst we’re still unsure on when the recession will take full effect.
See below three pieces of advice you can apply now
Flip now or hold for 5+ years
House prices are currently sat at 12.1% up from last year, a seller’s market you could argue. However what if house prices turn south tomorrow, is flipping a good model right now? That all depends on what you’re selling, the location, demand etc. However the sooner you sell, the more chances you’re giving yourself before your beloved investment starts to decline in value.
If you’re looking to sell in 2-3 years, I’d strongly advise against this – unless you’re willing to accept a lower price in 2-3 years than what your asset is worth now. If you want to sell in 2-3 years, sell now to gain the highest price and sit on the cash as the house prices fall.
What if you want to sell in 5+ years? Then it doesn’t matter if the house price index goes up, down or sideways. All that matters is the value at the time you transact that property.
In brief, think either very short-term, or medium-long term. Selling in a few years from now will not yield you the best result in my opinion.
In most cases, property investors refinance up to 75% LTV sometimes to get some cash in the bank or to improve the interest rate. However I would advise decreasing leverage when a recession looming. Most fixed rate mortgages cap the overpayments at 10% of the mortgage balance, however if you can afford to save some rental profit over the course of the fixed rate, you can make an unlimited overpayment upon refinancing to a new lender when the mortgage product ends. Decrease leverage now, thank yourself later.
Keep Cash Reserves High
One of the key effects of a recession is high unemployment. Therefore it’s imperative to withhold a higher-than-usual amount of rental profits to reserve in the event your tenant loses their job. There isn’t a maximum to how much you should save, however the more you reserve, the less risk you’ll experience in the event of voids in a recession.
I hope you find this useful. If you’re an investor looking to recycle cash into the property market, please book a call here to continue the discussions.