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Today we will talk about inflation and economic recession and discuss the most appropriate time to start real estate investment during these stages..
We will begin by defining these terms because the last long economic recession was in 2008, and therefore many of today’s investors who were under 40 years of age at that time often had not started their real estate investments. Also, on the other hand, in 2008, that is, 15 years ago, the spread of the Internet was much weaker than before. Today, therefore, reporting and analyzing events in real time was not available as it is today.
What is inflation in the economy?
Economic inflation is a continuous and sustainable increase in the price level of goods and services in an economy over a specified period of time. Inflation reduces the purchasing power of the local currency, as less goods and services can be purchased for the same money value.
Increased inflation is a sensible and beneficial nature of the economy, as it can encourage investment and spending and contribute to job and income growth. However, when inflation becomes unsustainable and exceeds reasonable rates, it can lead to negative effects on the economy and society.
The negative effects of inflation include many economic and social consequences, such as reducing the purchasing power of individuals and households, increasing production costs for companies, encouraging unsustainable investments, and reducing the competitiveness of the economy in the global market.
The causes and mechanisms of economic inflation vary from one economy to another, and include factors such as increased demand for goods and services, rising production costs, money supply inflation, and changes in geopolitical conditions and government policies.
To combat inflation, governments typically pursue fiscal and monetary policies, such as increasing interest rates, reducing government spending, regulating the money supply, and encouraging sustainable investments.
What is an economic recession?
A recession is a period characterized by a decline in widespread economic activities in a particular economy. A recession is usually accompanied by a decline in economic production, a rise in unemployment rates, a decline in spending and investment, and a decline in overall demand for goods and services.
The causes of economic recession are multiple and complex, and include factors such as declining confidence in the economy, decline in consumer and investment spending, faltering financial systems, turmoil in global markets, changes in government policies, and natural accidents or disasters.
Economic recessions negatively impact individuals, businesses, and governments, increasing unemployment rates, reducing incomes, and hindering economic growth. A recession can lead to a decline in investment and production, diminished demand for goods and services, decreased government revenues, and an increase in debt and indebtedness.
To combat economic recession, governments rely on economic policies that stimulate growth and enhance demand, such as lowering interest rates, increasing government spending, encouraging investments, implementing programs to enhance government purchasing, and providing incentives to companies and individuals to boost economic activity.
This chart shows in grey the periods of global economic recession, as we notice in 2020 when the closure began due to the Covid virus. We had a recession period that lasted from February until April, which is a simple period in which many investors did not realize its existence until after it ended.
The recession that preceded it was in 2008 due to the global financial crisis, and it lasted from the 12th of 2007 until the 6th of 2009, meaning about a year and a half.
What are some economic policies governments can take to combat economic recession?
There are several economic policies that governments can take to combat economic recession. Among these policies are:
1- Motivational financial policies: These include increasing government spending on infrastructure, education, health, and technology projects, and providing incentives to companies to increase investments and provide job opportunities. These policies could include lowering taxes or lowering interest rates on government borrowing to stimulate economic growth and boost demand.
2- Facilitating monetary policies: These include lowering interest rates by central banks to stimulate investment, encourage lending to individuals and companies, and increase financial liquidity in the economy. Measures can also be taken to ease credit conditions to encourage spending and consumption.
3- Tax incentive policies: include reducing taxes on individuals and companies to stimulate spending and investment. These policies could include reducing income and corporate tax rates, and providing tax concessions to critical industries and weak economic regions.
4- Employment and training policies: include implementing programs to train workers and develop skills to increase job opportunities and enhance workers’ capabilities. Incentives can also be provided to encourage labor recruitment and promote small and medium enterprises.
5- Foreign trade policies: include promoting exports, enhancing the competitiveness of local industries, reducing trade restrictions and expanding access to foreign markets. These policies could include signing free trade agreements and implementing policies to protect domestic industries.
Policies applied vary between countries and depend on their economic and political circumstances. Multiple policies may be implemented at the same time to achieve maximum benefit in combating economic recession.
Where are we today?
Of course, the state of the economy in terms of inflation and recession varies from one country to another. In some countries with weakly stable currencies (such as the Turkish lira), inflation rates rise rapidly and also decline in the same way later.
Countries with stable local currency exchange rates, such as Gulf countries with a currency pegged to the dollar, have lower inflation than other countries.
There are many points affecting inflation and recession, and today we will talk about Turkey because it is the country in which we talk about real estate investment.
According to the latest report issued by the Turkish Statistical Institute, it shows that inflation rates for the month of 8 in 2023 reached 58.94% on an annual basis (and they are now rising due to the increase in oil prices in the world, and oil is included in the calculation of general inflation rates)
The peak of inflation was approximately a year ago in August 2022, at 80.21%.
This global inflation was mainly caused by the printing of about $5 trillion carried out by the US government with the aim of providing support packages to citizens (most of whom were already still working in their jobs), which led to an increase in global demand for many products on the one hand and a disruption in supply chains on the other. Other.
There are many secondary influential reasons as well, but what is important to us is to realize that the decline in the price of any product or service today in light of the economic recession that is already occurring in many areas in each country individually is due to the measures taken by governments, such as raising interest and making real estate loans difficult, etc., and not Due to a real defect in this property or service.
We shared an article in which we talked about inflation and recession since October 2022. You can return to it to view: Save your money from inflation in 2023 and from economic recession in 2024.
What about real estate prices?
There is no doubt that high inflation will be addressed by governments through monetary tightening policies, most notably raising interest rates, and this means that real estate loans will become truly difficult to obtain.
This, in turn, will lead to a decrease in real estate prices. You can return to our dedicated article about the decrease in Istanbul real estate prices to get a broader idea of the types of real estate whose prices will decrease.
Since local demand constitutes 97% of all real estate sold today in Turkey, the difficulties imposed by banks on real estate loans will inevitably cause a significant decrease in demand temporarily until the end of the period of monetary tightening.
This means that there will be unique investment opportunities for the foreign investor who does not use bank loans to buy his property. Is this true?
In fact, the answer to this question is yes and no at the same time and requires elaboration
The properties whose prices are declining due to lack of demand are the residential properties that local citizens mainly go to buy through real estate loans, and therefore their prices will decrease in varying proportions depending on the developer’s financial strength and ability to reduce his profits when offering these properties at new prices that suit the difficult economic situation.
Also, the prices of used resale properties may decrease due to the difficulty of obtaining bank loans to purchase them.
But both of these types do not represent the best investment properties, because investment in Istanbul starts from projects under construction in the central areas built exclusively by prestigious real estate developers.
Therefore, if your goal is to buy a residential property or a used property, you can wait another period until the interest rates reach their peak, and then you will find the cheapest possible price for these properties.
However, if your goal is to buy an investment property, then you are already dealing with a financially strong real estate developer who chooses a strategic place with high demand. Therefore, local investors do not rely on long real estate loans to invest in this type of project. This means that the prices of correct investment properties will not be greatly affected by inflation and recession. .
Should I buy today or wait?
The choice is certainly yours, and there is no magic recipe for choosing the optimal time. We can only clarify that the current prices in investment projects are stable and have not decreased, as residential real estate prices have decreased, and construction work is still ongoing, and therefore there is no shortage of liquidity for the real estate developer.
This means that if you start investing now, prices will most likely not fall, and even if they do happen by a small percentage, they will be temporary until they rise again (as long as the peak of inflation has already passed).
However, if you postpone starting your investment, you must know that properties under construction constantly rise in price as delivery approaches, month after month, and therefore you may miss the opportunity while you are still waiting for the best price.
Times of inflation and recession are ideal opportunities to increase real estate investments and are not appropriate times to reap profits from previous investments, which is a very important point today.
Where the investor looks at his previously purchased property that there is a decrease in its price (relatively according to the specifications of this property) and therefore decides to sell his property today instead of expanding his investments and reaping double his profits later when inflation ends.
You can always get professional and free real estate advice by contacting us.
