Property Investment Value in Downturn Times

Feeling nervous about property values during a downturn - or a recession - is understandable. It's a knee-jerk reaction that can follow two paths: sell quickly at a bargain price and get out, or hang on and forget about selling until things look better. The advice about property in poor economic circumstances is the same for any investment: don't panic.

It's a fact that during a downturn - not necessarily a full-blown recession - real estate has been considered a more stable form of investment. Property will always remain sought after - everybody needs a place to live. In some instances, prices may rise and actually benefit owners. While there are reasons to either retain or sell in a downturn, you should not make hasty decisions or do things any differently to the way you might proceed in a more stable environment.  

Property investments can produce stable income.

The consistent or predictable income from rental properties is what makes investment in real estate ideal during an economic recession. In addition, the ability to raise rental rates during lease renewals allows you to keep pace with rising prices associated with inflation.

Property remains less sensitive to volatility.

One of the hallmarks of property investing is its slower-to-move nature. Real estate tends to hold a relatively low correlation to stock market movements, and this aspect can make it a more reliable choice during a recession. Stock markets and alternative assets like cryptocurrency move downwards rapidly during a recession, but while property isn't immune to volatility, it tends to move more slowly than other investment categories.

Property will most likely outperform stocks and bonds.

For a downturn to seriously impact the housing market, it would need to fundamentally alter the dynamic between supply and demand, which in itself can remain reasonably steady despite an economic slowdown. A spike in unemployment could negatively impact demand, and certainly rising interest rates can prove a hurdle, but the fact remains that people will want to buy homes.

With the current influx of people moving from Gauteng and Kwa-Zulu Natal to the Cape, the balance between supply and demand remains constant. Typically, a recession does not necessarily lead to a decline in real estate prices. In fact, property can increase in price as people bolster the real estate market by taking money from stocks and bonds and transferring it to what they see as a longer-term, safer haven in the form of property.

Property investment in a recession?

A recession is marked by a shrinking economy. People spend less money on discretionary purchases, focusing instead on essentials. While it's not exactly a rosy picture, real estate can offer some stability for investors when the economy slows. There are three primary factors that can make real estate a good buy if you're looking for an alternative to the market in a recession:

• Low correlation to stocks. Historically, real estate has a low correlation to the stock market. That means that even if stocks are experiencing increased volatility because of a recession, there's very little carryover to the real estate market.

• People still need housing. Even when the economy is in a downturn, people still need a place to live. Suppose the demand for rental properties remains steady, or even rises during a recession, and there's a limited supply of housing to go around. In that case, property investors are better positioned to benefit from a steady stream of rental income.

• Recessions create bargains. A recession doesn't automatically precede a drop in home values. But if a downturn causes a hot housing market to cool off, that could open up opportunities for investors to purchase rental properties at a discount.

The flipping opportunities

If you're not interested in owning rental property for the long term, you might try flipping real estate instead. Flipping means finding a property, fixing it up, then reselling it for more than you paid. The more units you're able to rent out, the more rental income you can generate. However, more units can mean higher maintenance costs and more responsibilities overall. But if you are able to find good buyers relatively quickly, flipping homes could present significant profits if you're buying homes at rock-bottom prices - so it's a strategy that could work well in a downturn or recession.

Leapfrog Property Group

Leapfrog Property Group offers a fresh and innovative approach to buying, selling, renting and property investments, ensuring the best property deals for clients across South Africa. Our agents are qualified, trained, and experienced; our approach is bold and spirited, driven by heart, generosity and honesty. It is our mission to advise,  eliminate obstacles and save you unnecessary expense. Trust is our watchword. And value our motto. Armed with our combined credentials, we are the bright face of excellence in the South African market. 

Find us at: www.leapfrog.co.za

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