Is A Global Economic Recession Near? How It Impacts The Real Estate Industry
2021 has been a year of chaos as we have witnessed numerous outbreaks, events, and policies that have put the global economy in jeopardy. The already prevailing economic decline worldwide worsened as the next year 2022, began with the US-Russia war. The real question considering all these factors is, are we heading into a global economic recession soon or later?
The globe is now in the grip of a worldwide recession. Many financial markets are in a state of panic. Over the last week, the global equity index has dropped 1.5 per cent. Bonds, gold, crypto assets, and industrial metals have all witnessed sell-offs this year, in addition to equities.
1- Factors Contributing To The Declining Global Economy
China’s growth prospects are being hampered by strict Covid-19 lockdowns as it attempts to limit the Omicron outbreak. China produces 19 per cent of the world’s total output. Falling employment and decreased confidence among businesses and households will stifle spending, putting the economy’s growth prospects in jeopardy.
The Federal Reserve of the United States is in danger of turning the American boom into a bust. Its economy is still suffering from the effects of the covid-19 pandemic, as well as an excessive fiscal stimulus that overheated the economy, resulting in high inflation and increases in average energy costs.
Lastly, let’s not forget the US-Russia war. Another factor that has majorly affected countries around the globe. Countries that were already weak before the pandemic hit and relied heavily on Russian energy and food imports are slipping into recession. Emerging markets are threatened by food crises and famines.
2- US Economy As A Part Of Global Economic Recession
According to rising concerns from banks and economists, the US economy could enter a recession next year, as a sudden spell of pessimism strikes financial markets. A recession occurs when GDP continues to fall for two consecutive quarters. According to The Conference Board, real GDP growth in the United States will decelerate to 1.5 per cent in the first quarter of 2022, down from 6.9 per cent in the previous quarter.
Despite the fact that important aspects of the economy, such as the labour market and consumer spending, remain strong, there are growing concerns that rising borrowing prices for households and businesses will lead to a sharp slowdown.
However, some forecasters are affirmative that the US economy is strong enough to handle any crises and will likely recover before going into a recession. Much of Wall Street is still betting against a recession, with Goldman Sachs projecting the chances of one occurring in the next 12 months at only 15%, rising to 35% in the next two years.
3- Can A Global Economic Recession Affect Real Estate Industry?
Economic conditions cycle globally, and the real estate market follows suit, thus the answer is yes. If there is a global economic downturn, there will come a period when housing values would plummet, leaving individuals who invested in the industry with significant losses.
i- A Housing Recession
A global economic recession can lead to what is known as a “housing recession”. It occurs when investors purchase homes in order to earn handsomely from them when they sell them later. Speculation promotes high demand, which invariably drives up housing prices. We can witness this happening in the US currently as we observe sky-rocketing prices in the housing sector with high demand and shortage of supply.
With prices soaring day by day, it’s inevitable that they’ll crash at some point. Those who take out mortgages and loans during a slump will find it difficult to pay off their debts when interest rates rise. Most investors will prefer to sell their houses for lower rates in order to stay afloat, allowing for cheaper prices.
Let us not forget the 2008 financial crash. Similar things played their part in driving the market toward a crash. When the crisis reached its apex in 2007, the financial markets crashed as a result of countless foreclosures and defaults. Because agents and purchasers failed to heed these warnings, the market plummeted to an all-time low, eventually collapsing.
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