There are many different types of property buyers, and in recessionary times some come forward while others take a step back and wait until housing market conditions improve. Is there a perfect time to buy a house, and why are some homebuyers keen to buy during a recession?
Types of Buyers
Different types of property buyers exist in all property markets globally. For example, in the UK, USA and Australia, buyers are grouped into these categories:
- First Home Buyers (FHB)
- Owner Occupiers
- Property Investors
- Property Speculators
First home buyers are buying their first home, whereas owner-occupiers are on the property ladder with their own home, and as statistics go, on average, they sell and buy a home to live in every eight years.
However, in some areas of Britain moving home is considered a much a big deal, and they may change their house only a couple of times in their lifetime, i.e. every 23 years.
In the USA, the time between properties is equally disparate. Some people move as often as every six years, while other Americans may do so every 18 years. Transiency of homeowners depends on their wealth and career. Australians definitely like to move from house to house a lot more often, Property Update reports 43% of homeowners moved in the last five years. So who are the other types of property buyers? Investors and speculators, and one of them loves buying houses in recessions.
Property Speculators Versus Property Investors
A recovery or boom phase in the property cycle is the preferred time to buy and sell speculators. A recovery offers lower sales prices so that a renovation can occur and the property sold for a profit. During a buoyant economy with high property prices, speculators will ‘flip’ homes, i.e. buy and sell within days for a profit as property sales prices keep going up.
Property investors are another type of buyer, and they buy homes as rentals for rental income. Typically a long term strategy, and the rental property sold many years later. The typical real estate investor has one or two rentals, and they are a retirement plan, sold subsequently in life when the investors are retiring.
Real estate speculators are often called property investors when typically their strategy is to buy and sell a home as quickly as possible for a profit, and this strategy is the opposite of that of an investor as explained earlier.
Speculators want to get in and out of the property sale and purchase transaction as fast as they can so they can move onto the next one, similar to share trading.
There are a lot of speculators of real estate that are also day traders. When the housing market encourages the quick flip activity, property speculators can be so busy; they’re doing it full-time. The purchasing, renovating, and selling of a trade property is longer than the buy and sell flip, but it usually provides a higher profit. Speculators are unlikely to rent the property out. They will complete the renovation and then list it for sale.
All homebuyers need to time their purchase, and in a recession, the buyers that stay put are owner-occupiers. Selling a property in a recession is not great timing, as this is when property sales prices drop.
Post pandemic UK property values are expected to drop between five and 15 per cent. Owner-occupiers will stay put and look to sell up when their home’s value improves, which happens when the economy is in recovery, and then it returns to a boom. In a boom, the economy is growing, there are fewer people unemployed, and property values rise. A typical property cycle is seven to ten years, and it typically follows economic trends.
When the economy is booming, so too the property market; similarly, when the economy is floundering, property values fall. Usually, there are fewer sales, which forces many real estate agents out of the industry.
Property Investors Buy Houses In Recessions
Realtors that work with investors do have enough activity to keep in business. Recessions are attractive to property investors who want to buy houses for less than their market value. For example, if the home is worth £250,000 but in a recession, the owners want to sell it quickly and do so for 5% less, i.e. for £237,500, the buyer has £12,500 in instant equity. Investors look for these deals, as it’s suitable for their LVR (loan to value) ratio.
Lenders are keen to provide mortgages to mortgagees who can show ample equity in the home or houses used as security for the loan. Property investors who have their home loans with one lender can leverage the combined equity in their property portfolio, giving them an easy path to borrowing more money.
Each time an investor buys a house for less than it’s market value, it improves its equity position for the next purchase. Therefore it’s easy to see why recessions are the time investors prefer to add to their property portfolios and why lenders love dealing with investors.
First Home Buyers
In a recession, first home buyers with their deposit at the ready can see a window of opportunity to get onto the property ladder. Property sales prices drop, and post COVID-19 in the UK, USA and Australia, as much as 15% is predicted, so this is a good time for first home buyers to pick up a property for less than what it costs in recovery or boom phases of the property cycle.
There is a saying: it’s always a good time to buy a property, and it refers to the fact, not all homes are the same, and there are some locations that are or appear to be recession-proof. Therefore all homebuyers need to do their homework before they purchase or sell a property.
Timing is essential, but more important is your circumstance and the other factors like location, price, your financial position.
The best homebuyer in a recession is one who can align their timing, purchase power, to come out ahead.
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