Is Real Estate Worth Investing During Recession?

Real estate investing is a high-risk high-reward option that lures many investors with its tax benefits. However, is it really worth it? Especially during recessions? In this article, we look at this more closely and answer these questions. We invite you to read on.

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How Does Real Estate Behave During Recessions?

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Recessions are unpredictable, and during them many people lose their jobs and become more cautious about spending money. As a result, many investments usually lose value (and price) during that time, but how does real estate behave in such situations?

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The answer is: It depends. During the 2008 recession, real estate prices dropped significantly and only began recovering in 2010.

However, the situation is quite different if we look at a more current crisis, the COVID-19 pandemic. Yes, the appreciation of the house price dropped, but not as significantly, and it quickly started to skyrocket afterward. The prices were still rising, but more slowly.

Euro area residential property prices and contributions by countries

(year-on-year percentage changes and percentage point contributions)

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Source: ECB and Eurostat.

In the end, investing in real estate during the recession is still high-risk and high-reward; you do not have a guarantee that the prices will go down. However, we can observe that they do rise long term.

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Benefits and Downsides of Investing in Real Estate During the Recession

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Let’s shift our focus from history to the practical aspects of real estate investing. What are the pros and cons of selecting this investment type during the recession? Is it a good risk management strategy, or should you opt for different investments? Take a look below.

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Pros

• Lower purchase prices—what we can observe from historical data is the fact that real estate prices during the recession are in a kind of decline. Even if properties still gain in value, they do it much more slowly than after/before the crisis. This means that you can virtually obtain it for less, expecting a high return in the upcoming years.
• Diversification—you should diversify your investors’ portfolios, and real estate is one of the asset classes that can help you with that. Since it is relatively less expensive during recessions, it might be a good time to invest in it.
• They are stable—real estate is an excellent hedge against inflation, which usually comes with recessions. Investing in it can prevent your clients’ wealth from declining.
• Long-term returns—in the long run, real estate should bring your investors considerable returns.
• Tax benefits—finally, real estate comes with multiple tax advantages, depending on the location. Investing in it will help your clients optimize their expenses.

Cons

• Recession is unpredictable—as shown by our previous two examples, you cannot be sure whether the prices will go up, slow down, or drop. Investing in real estate always comes with a risk which is multiplied by recession.
• Fewer people sell real estate—since real estate does not lose as much value as other investments during a recession, it might be more difficult to find a suitable opportunity.
• High interest rates—investing in real estate during recessions also poses a risk of suffering from higher mortgage interest rates; naturally, this risk occurs only if the investor decides for a bank to sponsor their investment.
• Low liquidity—due to fewer people being able to afford real estate, you may have problems liquidating such investments during the recession—it’s a good time for long-term profits but not the best for flipping.

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So, Is Real Estate Really Worth It During a Recession?

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In the end, there is no simple answer to whether it’s worth investing in during a recession. Each economic crisis is different and may abruptly affect the market. However, if we look at long-term gains, real estate should still be profitable, so it isn’t a bad choice either.

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If you are planning a strategy for your current client, you should consider all the variables. To decide whether real estate will be a good investment, you need to establish:

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• What level of risk tolerance does the client have?
• Are they oriented on short-term or long-term goals?
• How does the market behave right now, and what are the potential consequences?
• How do the governments react to the crisis?

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With all these aspects in mind, you can proceed with the next steps: either looking for different investment classes or analyzing potential real estate opportunities. If you choose the latter, remember to calculate the risks thoroughly. How to do that? It is possible with our wealth management platform, WealthArc, which incorporates an elaborate, AI-powered risk management module. With it, you will be able to calculate the risks, simulate different scenarios, and make a fully informed decision.

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The Takeaway

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Real estate investments have several benefits, especially during a recession. However, they always come with risks. Are they a good option for an economic crisis? Yes, but it does not mean that they are 100% safe, so bear that in mind when planning your clients’ strategies.

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You may also read: Effective Strategies for Managing Family Office Investments

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References:

1. Delger Real Estate, Bozeman, Montana
2. Federal Reserve Bank of Dallas
3. ECB and Eurostat.

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