It’s clear the property market hasn’t crashed yet, and we think it won’t crash at all. In fact, demand is still there, and supply is short. The problem is the inability to transact right now.
We spoke with an Economist who has high hopes for the property industry towards the end of 2020. The reason for this is that UK expenditure is down 15%,whilst UK income is down only 5%. So, in fact, there is surplus money in the economy right now.
The economy is driven by positive feedback, and that’s why at the start of March, the stock market fell by nearly 40% due to the negativity surrounding Coronavirus. The stock market feared the worse and, guided by media negativity and sometimes sensationalist media, the stock market was heavily affected, even though 40% drop in share prices seems irrational.
What we are currently experiencing is a short sharp collapse, with no financial ‘depression’, and the potential for a strong recovery once restrictions are lifted.
The Government has taken extremely robust measures to prop-up the economy during this period. Whilst unemployment will surge, the Job Retention Scheme has kept a lot of people in employment, and when restrictions are lifted, employment will rise sharply as pent-up spending in the economy begins.
If you compare this period with the 2008 crash, there are huge differences. In 2008 lending stopped and loans were called in, effectively burning money and reducing the GDP as it removed capital. Whereas in this instance, the banks want to lend for the most part and are in much better financial position. Consumers will have money to spend, which is why there could be a big upwards bounce when restrictions are lifted.
Short term economic activity is driven by the flow of spending. The UK economy is now worth £2.2 trillion and the Bank of England are adding another £200 billion to that through issuing government bonds to provide bank borrowing and to pay for massive infrastructure projects. This will increase cash in the UK economy.
The Economist we spoke with estimates this will increase cash in the UK economy by 6%. When the supply of money increases, house prices also increase. Brexit uncertainty kept prices stable in 2019 and everyone had forecasted a ‘Boris Bounce’ at the beginning of 2020.
We think that Coronavirus has effectively put the ‘Boris Bounce’ on hold until we are in the clear and people can feel confident again. The money is in the system. We are just unable to spend it yet.
We like the analogy of a hosepipe. Think of money as water in the hosepipe. Boris turned the tap on full, releasing huge spending plans, massive infrastructure projects, but Coronavirus is like a kink in the hose. The money cannot be spent. The pressure will build and build within the hosepipe until the kink is released and the economy will be in full flow.
With that comes confidence in the property market. Mortgage borrowing at a 2-3% interest rate is almost like ‘free’ money when you consider the rate of inflation. More people buy and house price inflation starts, leading to more people buying in fear of missing out.
80% of all lending is for mortgage finance and therefore neither the banks, the Government, nor homeowners would ever want property prices to fall. As long as house prices are stable, people are generally happy.
When restrictions are lifted and the lockdown is over, the economy will recover extremely quickly.
Austerity is old thinking. New government-thinking is that, as long as inflation doesn’t go up, debt and spending money is not a bad thing. Businesses are now retaining cash and borrowing new money at cheaper rates to pay back older debt on higher rates. The number of failed businesses is very low. Good, healthy businesses are able to go to sleep with the aid of government help. Business will come back stronger and more efficient.
Right now, house prices are stable. It’s the volume of transactions that have gone down, not the price of a property. There should be a significant upturn to pre-Corona levels. Mortgages have never been cheaper to source. Unemployment is temporary. Inflation adjusted mortgage rates are essentially free money.
Assuming money supply contributes to 6% growth and the lockdown is lifted, we should be in for a rise in house prices by up to 5% during the 6 months following, due to the limited stock and supply of property.
When shops start to reopen and restrictions lift, when it is safe to gather once again to watch sport and travel internationally, this will be the start of a sharp rise in economic output and a sharp rise in pent up demand to spend money, especially on property.
MD, Let Leeds