Rupert Gough: Should you buy an investment property in a recession?

ANALYSIS: The rule of thumb definition for a recession is two consecutive quarterly declines of gross domestic product (GDP). But, in reality, the outcomes and effects of a recession are a bit more complicated than that. Either way, the question some investors are asking is, is buying an investment property in a recession a good idea?

A recession, as I'm referring to it here, involves widespread changes to key economic indicators such as unemployment rates and reduced confidence in consumer spending. Essentially all of the things the banks don't want to happen to their customers who have or want mortgages. So how does buying an investment property in a recession work?

The good news is that the Reserve Bank of New Zealand has a raft of economic tools that make recessions much shorter than years gone by. And although it takes a relatively long time to release the data publicly - a couple of months after the end of each quarter - the Reserve Bank and the main banks themselves do keep a close eye on the data as it comes in. This is particularly important when considering mortgage lending policies. Lending criteria needs to be constantly adjusted so that banks can be comfortable that borrowers will survive most future economic environments. If you’re looking to purchase soon, this is important to remember. Policies that can seem to make borrowing ridiculously difficult are actually designed to test whether a borrower can afford their mortgage, not just in the next year but in ten, twenty or even thirty years; no matter what economic factors come up.

So if you’re looking to purchase an investment property while we navigate this turbulent economic time, expect to have to meet a higher bar than might seem reasonable, even with a gloomy outlook in the near future.

If you can buy (or borrow to buy), the next question is; should you buy? The answer comes down to how long you intend to own for.

Mortgage Lab broker Rupert Gough: "Recessions come with increased unemployment." Photo / Fiona Goodall

Short-term property ownership has risk in any market but is extremely risky in a recession. Those looking to buy and flick would want to know if they could weather further falls in the property market or a delayed sale of their property.

But even plans to hold long-term aren’t without risk. Not because of the property's value; over enough time, that will sort itself out. The real risk is your ability to continue to hold the property if something significant happens in your life. Recessions come with increased unemployment, and property owners need to be able to afford not only a loss of their own income but understand that the tenants in their investments may suffer the same.

That’s not a reason to shy away from buying if you can, though. There are plenty of ways to mitigate these risks. For example, having a slush fund of, say, $20k-$40k may be enough to get you through any unexpected hurdles you might face (seek individual financial advice for the amount that suits your personal situation).

This slush fund is available to borrow at a moment’s notice - typically using the equity in your other properties - and, if you’re using a Revolving Credit, shouldn't attract interest payments if it remains unused.

With that slush fund in place, it’s time to decide if buying mid-recession is for you. One benefit of a recession is that there are plenty of bargains on the market. This is, unfortunately, because of the number of people that are going through hard times, but bear in mind that purchasing a property from someone who needs to sell may relieve them of some stress. Purchasing in a down market isn’t automatically predatory and can help some vendors.

The decision to purchase in a recession comes down to three questions: Can you borrow? How can you borrow to minimise near-term risk (eg; using a slush fund)? And finally, will you buy? In other words, can you sleep at night with an additional property in your portfolio. If you can, a recession may be a good time to purchase a property for 20% less than you would have a year ago.

- Rupert Gough works for Mortgage Lab and is author of The Successful First Home Buyer.