The risk of COVID-19 on the property marketfjpinvestment
There is no doubting that the effect of COVID-19 on the property market and even world has been significant, but we are hopeful that the damage will be mostly temporary.
When it comes to economics, it is reported that stock markets have fallen even faster than during the Wall Street Crash, with supply chains being disrupted worldwide. With regards to politics, Governments across the world have had to implement quite intense measures to curb the rate of infection of the virus.
The property industry is experiencing the effect of COVID-19 at a rather fascinating time. The months leading up to the lockdowns enforced across the UK were very strong for the property market. The market grown with confidence having just passed through the uncertainty surrounding the UK’s relationship within the EU.
Whatever your personal political slant, the overwhelming majority in support of a Conservative Government under Boris Johnson restored confidence in the market that had been missing for years. Some would argue that the market was returning to its ‘normal, healthy state’.
Recent data enforces this, with the UK stock market rising by more than £30 billion after the vote, with Zoopla’s UK Cities Price Index highlighting that property was growing at its fastest rate since 2017, with prices at their highest point in over a year.
A return to volatility in the property market is unwelcome. It is having a negative impact in the short term, but there is a case for the long-term impact on the market to remain just as strong as it would have been, irrespective of COVID-19.
Projecting house prices
For decades, property has been a ‘haven’, something that investors could generally rely on to be a sustainable, low risk investment. Like other ‘hard’ assets, a good example being oil, they tend to weather the storm when it comes to economic turbulence. Generally, they deliver better returns than ‘soft’ assets.
This is evident right now. The stock market has plummeted whilst the property market has taken a small dip. There is certainly reason to be optimistic, with investors potentially moving over to property investments, improving demand, liquidity and prices in the market.
Many are unaware that the property market is extensive. It is not limited to simply buying and selling property or becoming a landlord. Development finance and debt investments, as you are probably aware, are alternative ways into the property market.
These alternative assets not only realise greater returns on average, but investors can enter the strength of the property market whilst minimising administrative work and time devoted to the investment in general.
Further support for the long-term strength of the housing market is evident. Savills, for instance, are predicting 15.3% five-year compound growth in UK property assets, this largely unchanged from before the impact of the pandemic. Admittedly, the outlook for 2020 is not as promising, with prices down 10 percent. Most experts agree this is a worst-case scenario, however.
The 2008 financial crisis
Looking at past events, there is further evidence that property will weather the sudden economic downturn. The global financial crash caused economic ramifications that hit the world.
UK property prices fell by 20 percent over a period of 16 months, with transactions also declining by over 50 percent over a 12-month period to June 2009. Almost all stocks and shares saw substantial hits in value.
Yet, despite this downturn, property prices recovered over the years. The decade between 2007 and 2017, this being before the worst of the crash, we saw an 18 percent increase in prices. Prices rose in London by a substantial 78 percent.
Whilst the price of property will drop and will very likely continue to drop over the coming months, the property market should show resilience and is very well positioned to rebound over a shorter period than we have seen prior.
Given the outbreak is contained in a reasonable period, the rebound is likely to be quicker. This is a health issue having an impact on the economy as opposed to a full-scale financial crisis. With deals likely to complete and viewings to increase when lockdown measures are eased, there is a strong consensus the property market will recover, the question is how long this will be.
Additional factors to consider
There are further reasons that the property sector should experience resilience in the sector, the first being the undersupply of stock across much of the UK.
The housing crisis the UK is currently facing will not be any better when we come out of this pandemic, the need for additional housing will still be ever present. Urgent policy action and investment will be required, much of what was promised by the Government before the impact of the pandemic became a priority.
The introduction of the new stamp duty surcharge for overseas buyers should encourage those based in the UK to invest in additional investment property with reduced competition from overseas. This will also help first time buyers enter the market.
COVID-19 is having a huge impact on the world’s economy, with many facing new challenges they had not anticipated just a few months prior. Whilst there is no denying that the economy is facing some serious challenges at present, history serves as a reminder that property will remain a resilient asset that is highly likely to recover from this period of volatility.
With analysts keeping an optimistic view on the long-term health of the market, there is good reason not to panic. Those with investments should hold and recognise the long-term benefits the sector will provide.
When it comes to the buying and selling of property, the above sentiments are echoed. Those that were nearing completion or had even signed for completion will have to wait until the lockdown measures are lifted.
Mortgage lenders have been advised by the Government to hold existing loans which should settle some nerves. We hope that the ‘pause’ in the market will not cause a rise in people pulling out of all but completed deals.