As a financial adviser, it’s crucial to stay informed about the state of the economy to guide our clients effectively. In this article, we will delve into the topic of economic recessions, what they entail, and how they can influence mortgage lending and the real estate market in New Zealand. Understanding these dynamics will help you make informed decisions during challenging economic times.
What is an Economic Recession? An economic recession refers to a significant decline in economic activity, typically characterised by a contraction in GDP (Gross Domestic Product) for two consecutive quarters. During a recession, businesses may experience reduced production, increased unemployment rates, and a decline in consumer spending. It is important to note that recessions are a normal part of the economic cycle and can have wide-ranging implications for various sectors.
Impact on Mortgage Lending: During times of recession, lenders tend to become more cautious and tighten their lending criteria. Here’s how a recession can affect mortgage lending:
- Stricter Eligibility Requirements: Lenders may require larger deposits, be extra diligent when checking spending and general servicing testing, and require more comprehensive documentation to mitigate the risks associated with economic uncertainty.
- Reduced Availability of Credit: As lenders exercise caution, they may become less inclined to provide loans, leading to a decrease in the overall availability of credit for borrowers.
- Increased Interest Rates: Economic uncertainty and potential financial risks can lead to higher interest rates on mortgage loans, making borrowing more expensive for homebuyers. Although at the time of posting this blog, the general outlook is for a stylising of interest rates and for them to come down within the shorter-medium term.
Impact on the Real Estate Market: The real estate market is closely tied to the overall health of the economy. Here’s how a recession can affect the real estate market in New Zealand:
- Decreased Demand: During a recession, consumer confidence often declines, leading to a decrease in demand for real estate. People may postpone or reconsider their purchasing decisions, leading to a slowdown in the market. There is also an election this year in NZ, where historically NZ can come to a standstill; this one may again be a close call.
- Lower Property Prices: Reduced demand coupled with potential financial constraints can result in a decrease in property prices. This can create opportunities for buyers looking for affordable properties or investment opportunities. We have seen regular property price declines and you have some conjecture now between economists around where property prices are going. Some recent news suggest we may have hit the bottom of the price drops.
- Longer Time on Market: With decreased demand, properties may take longer to sell. Sellers may need to adjust their expectations and be patient throughout the selling process.
- Impact on Property Investors: Economic downturns can impact property investors who rely on rental income. In times of recession, vacancy rates may increase, and rental prices may decline, affecting the cash flow of property investments.
Navigating the Challenges: While economic recessions present challenges, there are strategies to navigate them successfully:
- Maintain a Strong Financial Position: Building a robust emergency fund and managing debt responsibly can provide stability during uncertain times.
- Seek Professional Advice: Engaging a financial adviser can provide valuable guidance and help you navigate the changing landscape.
- Explore Government Support: During recessions, governments often introduce measures to stimulate the economy. Stay informed about any assistance programs or initiatives that could support your financial situation.
- Consider Long-Term Goals: Remember that real estate and mortgage lending are long-term investments. While recessions may bring short-term challenges, the market tends to recover over time. An asset value (or loss) is never realised until it is sold – in saying that, we don’t want a flog a dead horse, do we? We can be a sounding board.
Understanding the dynamics of economic recessions and their impact on mortgage lending and the real estate market is essential for informed decision-making. While recessions can present challenges, they also bring opportunities for those who are prepared. By staying informed, seeking professional advice, and adopting a long-term perspective, you can navigate the storm and make sound financial choices in the face of economic uncertainty. Contact RSFA to seek financial advice for any of your lending needs today.
This blog contains general information only. The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Rod Schubert Financial Advice (RSFA) shall not be liable or responsible for any information, omissions, or errors present. We recommend seeking professional legal and/or financial advice before taking any action. Our Disclosure Statements are available on our website.