Recessions mean businesses go bankrupt, wages cut and unemployment rises, making spending hundreds of thousands of pounds on a new home seem like a very risky business.
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But how will this pandemic-triggered recession affect the housing market? And how could that be different from the last recession of 2008? Here’s all you need to know …
What is a recession?
The generally accepted definition of a recession in the UK is where GDP declines in two successive quarters.
Britain’s economy shrank 2.2 percent between January and March and 20.4 percent between April and June, according to the Office for National Statistics.
This officially puts the UK into recession for the first time since 2009.
GDP can be measured in several ways, but it is most often calculated by the total expenditure of a country. This means adding up household spending, government spending, investment (for example, a business that buys equipment, a construction business that builds houses) and net exports (the value of exports to other countries, less the value of imports from other countries).
In normal times, economies grow, which makes recessions unusual.
How does a recession generally affect the housing market?
When the economy is strong and growing, it means there are more jobs and companies make more money, which in turn allows employees to be paid more.
This leads the government to receive more money through taxes, which allows it to either spend more on vital public services, such as health and education, or to reduce taxes.
During a recession, the opposite happens. Businesses are forced to make cuts, resulting in job losses, while governments cut spending, which affects services, or raise taxes.
All of this normally leads to lower house prices. This is exactly what happened in 2008, when the financial crash was triggered by the bursting of the US housing bubble.
House prices fell in the UK between 2008 and 2009, before recovering in 2010.
“The 2008 recession was about the housing market and equities, which hit disproportionately higher income groups,” said Carol Propper, professor of economics at Imperial College London. BBC Future.
“Right now, the crisis seems to hit low income groups a lot; vulnerable, young and less skilled workers. “
Why could it be any different?
House prices fell 1.7 percent from April to May, according to Nationwide, but that may not be the start of a dramatic crash.
Indeed, this recession is very different from that of 2008. Governments around the world have made the decision to shut down large swathes of the economy and have been able to put in place measures to protect them to some extent.
Now that foreclosure restrictions are relaxed, there is hope that the housing market will rebound, as the economy as a whole begins to do so.
However, the situation is still very uncertain. If this recession results in a large number of job losses and long-term economic hardship, house prices are likely to fall as people cannot afford to buy.
It would also lead people not to want to sell their homes, as they would be forced to do so at a loss.