We are obviously all facing huge professional and personal challenges associated with COVID-19 and now more than ever we need to communicate with each other.
There were three crosses cutting the key themes we need to focus on diversity, environmental, impact and the three main property sectors first of all would have leash and cook who lead off talk about the residential markets, the commercial markets and finally focusing on the rural market.
The economists generally believe that this will be a V shaped downturn and a V shaped recovery the question I suppose in everybody’s minds is what the shape of the V V will and shows the 2 scenarios which have been put forward from by Oxford Economics and Morgan Stanley. On the house price forecasts is that on the basis of those two scenarios they are forecasting that whichever scenario takes place there will be no net loss in GDP over the five year.
• Oxford Economics are forecast there suggesting that in the second quarter of this year the economy contracts by 2.5% before a strong rebound in the fourth quarter of the year and that rebound lasting through into the first half of next year there is likely to be some downside risk and they are forecasting that this downside risk instead of being a 2.5% percent contraction of the economy and in the next quarter is 3% and the banks back in terms of economic growth takes a little bit longer.
• Morgan Stanley they are forecasting that the economy will contract by five point 5.1% this year but rebound by 5.6 to 5.7% next year so whichever forecast and then a pretty strong recovery thereafter what does that mean then in terms of some of the you can see that in essence that sharp V is also reflected in a temporary increase in unemployment under both the base case and the downside scenario that is relatively short lived and that is crucially important for example to the UK housing market.
Housing Market
If we look at unemployment and contraction of the economy is likely to be a prolonged period of low interest rates, which in the context of the UK housing market, that would suggest that affordability for those people with stable incomes is not going to be a significant problem, so in a black downside scenario around interest rates stay lower for longer but, at the end of the five year period end up broadly where they would have been in the base case.
I suppose is it will it be as benign as this will it, perhaps be more severe, and it’s against that context that it really depends on the depth of interaction and disruption, which we have to business from measures of social distancing and, they like and how long they last. The only clues that we can really take from that is what happens in other countries, for example the experience of China and within China the first peak in cases occurred just 36 days from the first case being notified, on the 31st of December. There was a subsequent peak in cases when they changed the way in which they were reporting and clearly there was a lag in terms of the number of deaths, that were being reported as those cases translated through into fatalities later down the line but, in the case of China where the social distancing restrictions and, restrictions on the movement of people, were pretty strict, there was a period of broadly at three weeks where there were 1000 cases or more being confirmed each day and, thereafter, the drop off was relatively significant, so now we are beginning to see very slowly life begin to return to something approaching normality across most of the major cities of China.
I suppose whether or not that can be replicated across the EU and in that respect, I think it’s probably worth doing to that of the UK, so on the left hand side shot here, you can see the number of newly confirmed cases in Italy and, the number of newly confirmed deaths, as well, you can see there for a period now of a week to 10 days, we seem to have hit something of a plateau in terms of the new cases, there is at the moment for a little the drop off in terms of those cases but, I think it’s that market and what happens within Italy that is going to give us the clues to the length of the disruption may happen within the UK. Somewhat less through the cycle in terms of case and growth in cases, within the UK has lot to do with the effect of social distancing but it’s also worth remembering that Brexit itself is not entirely gone away, the uncertainties of Brexit may well pale into insignificance compared to those which we currently face.
For a single quote which we felt encapsulated the role of property within an uncertain word a world and in that respect we chose this one it is taken from Superman the movie in 1978 and it simply says “Son stocks may rise and fall utilities, and transportation systems may collapse, people are no damn good, but they will always need Land” so against that context where does it leave the UK housing market? We suspect there are probably four key factors:
• General Uncertainty, which is likely to weigh on consumer confidence and I suppose, in addition to that, over the recent past we have seen that way on the confidence of some of the mortgage lenders.
• Physical Practical, difficulties in moving and executing a transaction, and it’s here that we are looking for the industry to adapt whether, that be through delayed completions whether, that be through the use of legally binding, and watertight licenses where a seller, for example, remains in occupation of the property post completion, whether that could delay the marketing.
• Stock Market Falls as making people feel less secure about their personal wealth.
• Long Lasting Impact on the housing market, is the negative impact on earnings employment and indeed wealth generation against that context.
Transaction levels in the UK housing market that will bear the brunt, and, in that respect, we have looked at 2 scenarios.
• First of those, the period to June transaction levels take the down to 40% of their five year average and stay there until September and, increasing back up to about 80% of that benchmark level by January and back to 100% by may 2021, before you see some of the pent up demand come back into the market in 2022 as confidence is restored in people’s earnings and job security.
• The second scenario is a little bit more severe, more of an impact where transaction levels take it down to just 20% of their five-year average, take longer to increase up to 60% by January and, then again get back to 100% to May 2021.
In terms of transaction levels across the UK, in November last year we were forecasting that transaction levels would consistently be around 1.2 million over the course of the next five years, now they may fall this year to somewhere between 565 thousand transactions and 745 thousand transactions before getting back to about one point 1,000,000 next year then that pent up demand coming back into the market in 2022 before getting back to something approaching normality through 2023 and 2024. So that is translate as prices will have all of the charts, shows you the relationship between inflation adjusted house price movements and growth in the economy.
Reality nominal prices continue to rise it was rampant inflation, that drove inflation adjusted price prices into negative territory, the two of course that we remember much more clearly is the late 1980s early 1990s and, the period immediately post GF see when prices fell by 20 to 25% in nominal terms what’s also important. At the moment we haven’t seen the same level of house price growth either on a cumulative basis, or indeed in terms of a spike of house price growth prior to the disruption that occurred in the market, and it’s for that reason against the context of a relatively up subsequent upswing in the economy, that we think that pricing arm is perhaps less exposed than it would have been in previous downturns.
What is clear, however, is that the recovery becomes restricted as long as unemployment stays relatively high, it’s only when unemployment levels full that we see the capacity the house price growth, to come back, as people become more secure about their job security and more secure in their earnings, and against that context that the Oxford economics forecast of unemployment is for a relatively short, upward spike in unemployment do but generally maintaining relatively high levels of employment across the economy, so again, that suggests that it protects on the downside and leaves us with some ability for a V shaped recovery in the housing market, subject to a little bit of a delay, because perhaps of Brexit and the period over which people need to retain and rebuild consumer confidence.
– We think for first time buyers, to become more cautious certainly over the near term, that means, their numbers are likely to be more dependent on the availability of help to buy, and we suppose help to buy is likely to be a very important feature of the market, as house builders eventually start to build up levels of delivery on their sites and it will be clearly some pressure from government to be able to do that, so that may well present an opportunity for first time buyers to make use of help to buy at a point when house builders need to be quite pragmatic on pricing and probably offering incentives to get them on the market.
– For those trading up, again a short term impact but I suppose the experience of living in the close confines, with the rest of your family at a house that you squeeze yourself into for the last five years and delayed the decision to trade up, may just trigger a bit of a release of demand, as these people have realised their need for more space and as confidence resumes go back into the market and then in terms of downsizers again, clearly a short term impact.
– The older generations are now decided that actually, now is the time to right size the attractions of retirement housing in the longer term, particularly where they have assisted level of care may become more attractive.
– Mortgage buy to let landlords, I think it’s going to be hard work the experience, of any terms of any form of rent arrears at a time, when they are already under significant financial pressure, you may make them question whether or not they remain in that market, those issues less have an impact for debt free private landlords, because they’re not squeezed in the same way under tax policy and, indeed have the capacity to absorb rent arrears more significantly, probably when the longer term will play to the hands of institutional investors.
– Finally, the specialist sectors I don’t believe that the experience self-isolation and social distancing is a huge advert for the code of in sector, clearly it could have some impacts on the care home sector, in the longer term, for retirement housing it may just open up and expands that market, whereas, for student accommodation are a lot depends on what is going to happen to flows of international students going forward.
Word of caution, clearly these scenarios are made at a point, in time and in a period, of significant uncertainty they are likely to change their circumstances unfold.
Commercial Market
We have already dealt with the sort of two possible scenario, the key for me is, in terms of the pace of the recovery, though is to take a term that was used very commonly during their post global financial crisis.
The big difference between this crisis and, previous market crisis that we’ve seen is, actually the sort of the limited level of bank led sales that we’re going to see. I think post the GF see a lot has been learned, I don’t think we’re going to see a lot of stock being jumped on the market and, I think core investors are generally going to remain relatively motivated, they’re all going to be looking at the occupational story and, my sort of simple headline comment on the occupational challenges going forward, or if you think about leasing income, the shorter it is the more at risk. As well, to remember Brexit remains a risk with a justifiable delay potentially to the UK trade negotiations, properties starting to look like a relatively safe place to be least worst asset, as probably, it will be less development activity, over the next 18 months to two years, than we were expecting at the beginning of the year, this leads through potentially to lower vacancies and an uptick in rental growth logistics.
Rural Market
The impact on rural property markets and, also then look at how sustainability, might drive some of the decisions that come off the back of the coronavirus crisis, in terms of their economic incentives. Now we are in a situation of food crisis, where supermarkets are really having to gear up, to make sure that their distribution challenge from us, major switch between eating out of the home to eating in the home, it is met through a change in food supplies farming may well be one sector of the economy which is not a really adversely impacted.
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