In general, during an economic recession, the demand for real estate tends to decline due to a decrease in consumer confidence, rising unemployment, and declining income. This leads to a drop in housing prices and a slower pace of new construction projects. In this blog, we’ll discuss what past recessions tell us about the real estate market in Pakistan.
However, the real estate market is complex and affected by various factors, such as government policies, interest rates, population growth, and infrastructure development. In some cases, real estate markets may recover quickly from a recession, while in others, the recovery may take longer.
It is also worth noting that the COVID-19 pandemic has had a significant impact on the global economy and real estate markets. As a result, the situation in Pakistan's real estate market may be different from previous recessions, and it is crucial to examine the current market trends and data.
How do you define a recession?
The definition of the term has recently been the subject of intense discussion. A recession, according to one relatively straightforward definition, occurs when an economy experiences two consecutive quarters of negative growth, or when the gross domestic product declines for two consecutive quarters. That did take place in 2022. Yet, most experts argue that more than one indicator is necessary to identify a true recession.
More than most other sectors, the real estate industry is known for its ups and downs. I have been successful in every market, through good times and bad. Additionally, real estate agents must quickly learn to ride the wave and determine how to remain successful as the market rises and declines because that is the nature of the game.
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Regardless of whether we enter a recession or not, one of the best ways real estate agents can get ready for any potential consequences is by looking at the most recent economic downturns and their relationship to the real estate industry. Moreover, some economists are predicting that we're heading for another recession, and we're definitely in a shifting market.
December 2007 to June 2009
The Great Recession is what many people think of when thinking about an upcoming recession because it is the most recent recession and because of its severity and duration. Compared to the four prior recessions, this one saw the largest decline in home prices, which is not unexpected given that the crisis was sparked by the collapse of the housing market. In addition, numerous high-risk loans were issued as a result of subprime mortgage tactics, which were then followed by unprecedented levels of defaults.
Housing prices increased until they reached their peak in 2007, even though these subprime lending practices were first observed in 1999. But in 2008, the bubble eventually burst, and prices fell as well.
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Will a recession cause a drop in housing prices?
Even though the cost of financing a home usually rises when interest rates are rising, actual home prices may fall. Demand typically slows and house values decline during recessions or times of higher interest rates, according to Miller.
In addition, fewer buyers and a decline in desire reduce competition for the same supply of homes. Sellers lose the edge they experience in a roaring seller's market like we've seen recently when that competition dries up. Moreover, they will probably have to accept less than what they initially requested. At least less than what they might have received in a more active market. While that's unfortunate for sellers, it might be advantageous for aspiring purchasers.
What will take place next?
It is obvious what will happen with the housing market during an economic downturn after studying the most recent recessions. Of course, whether or not the housing market crashes along with the economy will be heavily influenced by the reasons for the recession.
However, as long as conditions remain favorable for buyers, the housing market can endure or even thrive. As long as you're ready to adapt to the circumstances and keep prospecting for clients, you can succeed in any market.
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Advantages of Recession
Less competition
During a recession, many people find themselves in a difficult financial situation and are unable to purchase a new house. Moreover, for those who can still afford it, the market becomes less competitive as a consequence.
Lower prices
As there are fewer buyers, there are less likely to be numerous offers and bidding conflicts for available properties. The price of homes may decline as a result.
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Lower rates
The Federal Reserve frequently cuts interest rates during a crisis to boost the economy. This can lead to more favorable terms for borrowers taking out mortgage loans.
Final Thoughts
Sometimes it makes sense to purchase a house during a recession. But only if you're lucky enough to maintain your financial stability. With fewer qualified buyers and less rivalry, home prices may also decline as the Fed attempts to aid the economy's recovery. Moreover, in any economic downturn, there are still a lot of dangers, especially given the potential for mass layoffs. So, dragging it out might be the wiser course of action if your financial situation is less than ideal.
