Tue 05 May 2020
Mark Bridge (MNAEA), Director & Owner
Whilst there is a lot of good information out there, there are also people pushing inaccurate or false information. Sometimes innocently but not always!
As most of us aren’t medical professionals or economists, the question is which headlines to trust?
With that in mind I had the great opportunity to take full advantage of a webinar with Roger Martin-Fagg, a 'behavioural economist' whose global experience ranges from the Bank of England and New Zealand Treasury, to consultation across a whole raft of industries.
Here are the key points addressed...
When is the Lockdown likely to end?
Lockdown won’t have a straightforward end. We won’t wake up one morning and it’s done, instead it’s going to be a phased rollback.
Currently you can still go outside for essential activities and the first rollback will likely see this list expanded to cover other, broader tasks. In fact, we can already see this happening with DIY stores.
Schools are also likely to reopen soon with some suggesting June as the month we’ll see this happen.
Social distancing will continue however, even when activities are added to the list.
At the other end of the spectrum you’re likely to see the more social industries such as bars and restaurants being some of the last to reopen.
International travel will be the longest effected. This will be in part due to government restrictions but also public confidence in other countries’ ability to tackle the virus.
What is happening to the money supply and why is this important?
Money supply is crucial to the economy as you can’t spend money if it doesn’t exist. The government and Bank of England are taking extraordinary steps to ensure the money supply continues.
The Bank of England is buying up new government bonds called GILTs. This allows government spending to continue, from buying extra equipment for the NHS to providing the money for furloughed employees.
Commercial banks can lend more as well; however they are still required to make sure lending is viable. Whilst the banks are allowed to have more lending on their books, it shouldn’t be viewed as free money and they are still required to judge whether a business is viable. Essentially, would they have lent to the business outside of lockdown?
In short, everyone wants to keep businesses going without creating a lot of bad debt in the long term.
Will there be another financial crisis?
The impact of the 2008 financial crisis can still be felt today in some quarters. It was triggered by bad debt and bad investments that not enough people saw coming.
The result was an abrupt stop of the banking system’s ability to lend. Without lending the economy couldn’t remain liquid and spending decreased. This meant the economy froze. This stop in the flow of money, combined with sensationalist, little understood media headlines, sent people scrambling to get hold of their money physically. This further reduced the bank’s ability to lend.
Our situation in 2020 is very different. The banks still have a flow of money, in fact the government is pumping more money into the system to ensure banks can lend and people have money in their pockets to spend.
The result this time around is a large portion of the general population have spare cash and the banks have the ability to lend. The issue is lockdown is preventing both parties spending their money.
All of this suggests something far more positive than is being reported. Whilst this quarter might see a huge decline to the economy, as lockdown is lifted there will likely be a huge spending spree by both the banks and general population. It’s also likely that the government will continue to spend as the economy's largest industry.
What about the Stock Markets?
The stock market has been used by many in the media as a representation of how bad the economy is doing and using it to predict a grim future. The stock market is a long term investment however. If you look at it historically it rises over years, has a big dip as it ‘resets’ itself and then starts to grow again. Usually larger than before.
The important factor in this equation is the money supply. If the money supply is available, the stock market will grow again.
It’s also important to note that most of the population don’t hold their savings in the stock market. The majority of people’s wealth is held in real estate from the house they live in to homes they rent.
This is important for two reasons. Firstly, many people will not feel dramatic financial pain due to the fluctuations in the stock market. Secondly, the moral of the country will largely be unaffected by the state of the stock market. This means less panic and no big rush to gain access to your money like we saw in 2008.
A far larger factor to most people is the value of their properties and there are no signs property prices are dropping.
Are we heading for a global recession?
The short answer is no.
An economic depression requires two critical factors. Both lending and income need to be down for an extended period.
Right now spending is down. But that’s because many of our regular avenues to spend are closed, not because we don’t have the money to spend. We’re actually chomping at the bit to get back out there again and start spending.
You will see mention of unemployment rising which people immediately attach to an impending depression. While there is a rise in unemployment, there is a very good chance this is short term. Once businesses are open again they will need to bring back the staff they previously had. After all, a bar can’t reopen if there’s no one there to serve the drinks.
A further consideration, especially for the housing market, is the demographics most likely to have been made unemployed. The industries reporting the largest unemployment are ones who predominantly employ low skilled, low paid, young people. Whilst terrible, these people were far less likely to invest in the property market. So, the pool of people involved in the housing market hasn’t changed much.
What will happen to interest rates?
The government is keen for the economy to keep moving. This means lending and spending needs to continue. While lending is in part being covered by government guarantees, spending is a slightly different beast as you can’t put a guarantee on a person’s spending.
The Bank of England tries instead to incentivise people to spend. This is done by keeping interest rates low to show people there isn’t much benefit to keeping their money in standard savings.
For example, the Bank of England’s interest rate cuts trickle down to your savings and ISA’s. While each one will have different interest rates, banks will look at cutting them all as they are borrowing at a lower rate.
Interest rates can seem confusing however so let’s take my ISA as an example. For every £10 of interest I used to get, the interest rate cuts mean I’ll now only get 37p! Ouch! The result is far less incentive for me to save my money, increasing the chances I’ll spend it.
Whilst some people will spend their savings on luxury goods, the ones we’re interested in are those who look at the return on their savings and how they can increase it. They will look to other avenues they can invest in to increase that return. A prime example being real estate.
Low interest rates for real estate hold a lot of potential. With savings delivering a lower return, the appetite for investing in property increases. This is because the same interest rates giving you virtually no interest on your savings also translates into lower interest rates on mortgage offers.
Interest rates are likely to remain low for some time, probably a year. The government and Bank of England will be keen to get as much money back into the system as quickly as possible to recover from the months of covid-19 isolation. Low interest rates will help to stimulate this.
What about inflation?
Inflation is a tricky business. If you can accurately predict it you can make a lot of money.
The argument for inflation revolves around supply and demand. When demand is high inflation increases. When supply is high it comes down.
As discussed, as lockdown eases there will be a spending surge which will result in high demand. However, because spending in some areas stopped, that also means supply has built up.
What you may see is an initial rise in prices as some businesses look to recover their losses from lockdown but it will balance itself out over time.
What is likely to have a far greater impact is Brexit. If you are after an indication of where inflation is going to go then the outcome of the Brexit trade talks are what you need to be looking into.
What is the prediction for consumer confidence and spending?
This, like much of the above, isn’t about a loss of confidence or a loss of spending power. Both of those are high, it's just we aren’t allowed to act on them.
When lockdown guidance is relaxed we will likely see a big surge in spending. You will see some people commenting now on how their bank balances are looking healthier than ever because they haven’t been able to go out to pubs, restaurants and high street chains. As soon as people can spend, they will.
And the same goes for real estate. We don’t make these large purchases on a whim; many will have been planning their house move for several years.
Once lockdown is relaxed prospective buys will be keen to start the process again so expect a wave of viewing enquiries around that time.
So, what is the likely impact on house prices?
The short answer is that house prices are unlikely to be affected.
House prices were doing very well at the start of the year. It’s important to remember that what’s happening right now isn’t due to lack of lending or lack of spending. We are simply on a temporary break of doing non-essential activities.
For house prices to fall, lockdown would need to last for multiple years. If that were to happen (and it’s incredibly unlikely it would), this long-term lockdown would simulate a reduced spending power and reduced lending.
Any regional house price fluctuations that may be occurring are far more likely due to conditions outside of the Covid-19 lockdown, for instance Brexit.
And what can we expect over the next 12 months?
The next 12 months are going to be split into tranches. Each tranche will see a section of life return to normal.
This can start happening soon as we know the NHS is no longer at risk of being overwhelmed.
The obvious ones will be high street shops and stores opening along with services such as going to the dentist or seeing your hairdresser.
Many of you will be reading this from home as your regular place of work is currently off limits. As people return to work transport of all kinds will also start to increase again.
Exactly when these tranches will happen, and what is in each one, is down to educated guess work. We will likely see a second, albeit much smaller, peak in infection rates as we roll lockdown back so the relaxing of guidance will need to be tweaked accordingly.
What's the important takeaway for the next 12 months?
The important takeaway is that over the next 12 months, specifically for the first quarter, we are likely to see the dip in the economy continue. As measures ease, the economy will improve with a rise most likely in July.
The lockdown is like a giant foot stood on the hosepipe that is regular economic spending. With each easing of the lockdown measures, that foot will lift off a little more. Spending will surge as it’s built up behind the blockage and people look to catch up not only with their family and friends, but their lives and plans.
Post first quarter of the next 12 months will likely see a continuation of social distancing and businesses having to innovate to accommodate that. Take for instance house viewings. It may seem as if you have to turn up to look around a house however savvy estate agents are already turning to virtual viewings as a solution to the lockdown. These techniques are likely to become the new normal.
Overall the future of the economy is far more positive than many are giving it credit for. In fact in 12-18 months time I’d expect many estate agents to have concerns around recruitment as they try to keep up with the demand.
Have you found the above interesting and informative? Hopefully for those worrying about house prices, this has gone someway to addressing any concerns you have.
|Stay safe, keep well.
Director and Owner
Mark Antony Estates
p.s. Are you curious what your property could be worth? Find out in around 53 seconds by clicking here.
p.p.s. Download our eBook on how to get the best selling price for your property by clicking here.