Should You Buy A House In A Recession.

With talk of recession and house prices falling, is it a good idea to buy a home? Well, if you want to know the answer to that, have a listen. 

Transcript

This podcast makes no representations. None of this constitutes advice that your home or property may be repossessed if you do not keep up repayments on your mortgage.
Hello, and welcome to not another mortgage podcast myself and Lewis Shaw, mortgage broker from Shaw Financial Services, joins me to talk about today's hot topic, which is should I buy a house in a recession. It was confirmed, of course, earlier this week, or if you're listening in the future, back in February 2023, the UK did slip into recession. And it, of course, then raises a huge heap of questions for any potential homeowners. Lewis first and foremost, hello.
Hello, how are we getting on long since we've done this, it is a very
long time good to be back. Always good to talk mortgages and money. And it's more important than ever, isn't it? We've had a cost of living crisis, of course, recently. All sorts of issues abroad that are affecting things here in the UK as well. And this is, of course, a very poignant question at the moment is prominent in people's minds, particularly first time buyers or people looking to move into a bigger or more expensive property? Should I buy a house in a recession? Now? I assume, Louis, there's not going to be a one word answer to this. No, there's
not no. It all depends, as with most things, as with most things that relate to buy your home and mortgages, etc. Always the answer is it always depends. Now, there are obviously risks. For for buying a home in the recession, of course there are the main one is for people worried about negative equity. So specifically, first time buyers if you've got a smaller deposit, so for example, 5%, and you buy a home, if house prices declined, then you could face being in negative equity. Now, that's not necessarily a disaster. Because well, if you need to move home it is. But if you're going to be there for the long term, long term, then of course you find because you only realise any losses when you come to sell. And we know that over a period of time the housing market generally tracks your goods, excluding things like the global financial crash, etc. So if negative equity is a concern, then of course you could hold off, you could save up a bit bigger deposit to minimise that risk. Or if you're planning on being there for quite some time, five plus years, then maybe it's not going to be too much of an issue. Now, of course, one surefire way of of trying to eliminate the risk of negative equity is to negotiate really hard. So if the house is on the market, for let's say, I don't know 250,000 pounds, and you can negotiate it to 230,000 pounds, of course, then you're automatically building in a bit of a buffer from that negative equity potential potentially happening in the future.
I mean, on that point with with negative equity, obviously, if you're selling the property is bad news, but for the majority of people, when they're selling a property is because they're buying another property. And again, the majority of those are upgrading for once for a better phrase. So in that respect, does it make it more affordable? Because if if the property and you use the example they have a property that's a quarter of million pounds, if it loses, say 10% equity during a recession, but your property is only worth half as much 125,000 And also loses 10%? You're actually saving 12 and a half 1000 pounds comparatively, if that makes sense.
Yeah, I get a call from there. Yes, that is that is true. However, negative equity is where the balance of the loan exceeds or is equal to the value of the home. So for example, you could buy a home for 150,000 pounds. And let's say you put a 10% deposit down. So your mortgage would be 135,000 pounds, if you then came to sell it in, say a couple of years time. And the property was worth 130,000 pounds, it could be that the mortgage value is equal to the property value, and you actually have no equity. So that's where the real worry is. The likelihood of that is, I think, relatively slim, especially over the longer term. Certainly you wouldn't want to be buying a home and trying to flip it in two years to have made a profit at the moment. That if you're buying to live there and to get on with the life and you're going to be there for five years plus, then I wouldn't be too concerned about negative equity, on the assumption that you don't overpay. Now of course, we can't predict the future. So of course you have to make your own mind up that you have to live somewhere. So you're either paying a mortgage, or you're paying rent is the likelihood. So it depends which way you want to go you know if you if you are really nervous about the R word, then maybe hold off until things potentially improve. If you're, you know, paying through the notional rent, then you might as well kind of take the jump and, and get on with it.
So I suppose what we're saying here is, if you're a first time buyer, it's probably going to be better to risk the neck negative equity than than paying rent financially over the course of if it is less than five years, five years or more not worry. If you're already in a property, and you're thinking of moving to something more expensive, probably hold off for a couple of years, maybe?
Possibly, it depends. It depends on everyone's individual circumstances. I mean, so one of the big things in recessions is that people can lose jobs. So if you're at risk of redundancy, if you if the company where you're working isn't doing very well, and you, you're worried about the security of your job, then it's probably a good idea to start looking at buying a home, if you're in a really secure job. And there's no risk of that, then, of course, carry on as you were. But again, in those circumstances, everyone's going to be different, everyone's going to have their own set of individual circumstances. So it just depends on where you are on that spectrum.
Yes, and as always, we have to point out everybody's circumstances are different. And of course, the market is turbulent at the best of times, it changes, it's very difficult to predict accurately sometimes. And it is a case of just doing what is best for you at the time. Now, obviously, another aspect of this, and we've talked about today with data of equity and so on is falling house prices. How does that come into the equation when it comes to the circumstances that we've been discussing?
So there's been a lot of noise about this in the press, understandably, that house prices are coming down, and there's no question about it, house prices have come down. Now, it's regional, it varies. You know, depending upon where you are in the country, we understand it. significant parts of London have seen pretty steep falls, however, there are parts of Northern Ireland or parts of the Northeast where they've continued to rise. So are we at the bottom of those house price falls, I don't know. I suspect we're probably not far off them. But we can never ever predict the bottom. Most people can never predict the top. So the thing is, don't overpay you want to avoid getting into any kind of bidding wars, ideally. So you don't want to be overpaying on the property. You want to be negotiating pretty hard, and ensuring that everything is definitely affordable for you. Because we've seen, as you mentioned, the cost of living crisis, mortgage rates increasing. A lot of people that's come as a nasty shock to many people that have seen their mortgages go up by hundreds of pounds a month. So you have to factor those things in if you're going to buy a home. Because of course, the last thing you want to happen is that in a couple of years from now, if interest rates are even higher than they are currently, then you don't want to be, you know, worrying about Oh, my word, am I gonna be able to actually afford to live? You know?
Absolutely. So, obviously, we mentioned about job security a moment ago, if you are at risk of risk of a redundancy during the session, because redundancy is another our word we'd like to talk about, what would your advice be.
And certainly, if you are at risk of redundancy, then a mortgage lender isn't going to prove a mortgage is that is the short answer to that. Now, if you're if you've been told to go to be made redundant, and you've got another job lined up, great. If that's the case, then you're going to want to start your new job, probably pass any probationary periods, etc. Now, that's not always necessary. There are lenders that will take a work contract as evidence of your income. But just from a personal point of view, so whilst there are lenders that would give you a mortgage on the basis of a job contract, just from a personal perspective, you probably want to make sure that you've settled that it's the right job for you to understand whether it's going to be sustainable, and you're then going to be able to, you know, be able to manage your mortgage. So if you're at risk of redundancy, then unfortunately, by your home is out until you've got another secure job.
Obviously, we were recession as well. We're talking specifically here about house prices and how it will affect you. But a big aspect of buying a new house isn't just whether you can afford to buy the house in the first place. It's whether you can afford to run it as well. So if somebody was buying a bigger house during a recession, they've got to take into account as well that council taxes can be more expensive and utilities can be more expensive. And if there is a recession and money is tighter, they can be factors which could end up leading you to a position where you've struggled to keep up with repayments and ultimately lose the home as well.
Yes, yes. So there's a, there's a saying isn't the a small house has a large mouth. So you do have to take into account that, you know, if you're buying a bigger home, then yes, your utility utility bills are going to more expensive, your home insurance is going to be more expensive, your council tax will likely be higher, along with a higher mortgage payment, your insurance costs. So personal insurance. So for example, life insurance, critical illness, cover income protection things, those types of things, they're going to be more expensive, because if you're borrowing more money, then of course, you're going to need more protection, and therefore that cost is going to rise. So it's not just your right, it's not just a mortgage, everything else. So you have to factor in all of that. And then leave space as a buffer. Because of course, things can come out of left field. Boilers can break down cars can go wrong, you might need a new cooker, whatever it might be. So you don't want to be pushing it to the limit. Definitely not certain certainly not with the economy's in such a volatile state as it is.
So it's fairly standardised, what would be your top tips for buying a house in a recession.
Top tips would be negotiate hard with an estate agent on the on the purchase price. Be very clinical with your budgeting. So factor in so when you're kind of going through a budget planner, So factoring in all your costs. So we've got utilities, water, mobile phones, food, heating, all that other kind of jazz, plus, you know, how much money do you spend on car insurance on fuel on? How much money do you spend at Christmas? Take all those things? How much do you spend on holidays, add those all those all those up, divide them by 12. and allocate those in as well. So you just taught and then when you've done all that, add, increase everything by 10%. And then you should be able to be in the right place with regards to budgeting. So negotiate hard, be very clinical about budgeting, and ensure that you're factoring in all the other costs that you might not have thought about. Other than that, obviously, the job securities is a major one, which is pretty much obvious, I would think to anyone. But other than that, I wouldn't be too much too worried. You know,
Louis, really interesting. I have to say going into this when the the topic was should I buy a house in a recession? I thought it was going to be pretty doom and gloom pretty well. It's a hugely risky thing that it's not advisable and so on. Very interesting to hear. Actually, it's not as boring as it might sound. It's just about that extra bit of caution which we need to exercise. Let's thank you for your time.