The UK economy is facing a significant downturn and it could well be a very long road to recovery. However, it is my firm belief that the property market will be crucial in helping us to restore stability over the longer term. If the government acts to support the property market now, we may well witness a quicker recovery for the economy as a whole. In this article, I shall explain why it is my personal belief that this could be the case.
Meanwhile, given the unexpectedness of our current situation we should consider any and all options for ensuring a strong recovery. I propose one such option below.
Certainties turned on their head
It is worth reflecting that the current crisis has resulted in scenarios that no one anticipated.
Let’s take an example from the high street. Many shops have been under threat from online shopping in recent years. However, there are various services that were still deemed safe. Hairdressers for example; you cannot have a haircut over the internet, so the growth of internet trading was not a threat. We did not predict that another, very different threat was around the corner.
Covid-19 has brought so-called “safe” high street services to a standstill, and the paralysis of the high street is having a direct impact on the property market. This market was already under pressure from the rise in digital services and – let’s not forget – from Brexit. The latest crisis is yet another, very significant blow. History has shown that this level of disaster will set in motion a chain reaction throughout our entire economy. It is my belief that we need to dampen the effect of this as soon as possible.
Property market at a standstill
Since the beginning of my career I have seen a number of economic crises come and go. The sterling crisis of 1964, the secondary banking crisis in the mid 1970s, the fall-out from Black Wednesday in the 1990s and the global financial crisis of 2007-08. I have seen how instrumental the property market is to the wider economy and its speed of recovery during difficult times.
Currently, we are facing a very worrying scenario: there is no “market” at all. There are no buyers, no deals are being done, and therefore we no longer have a market value from which to determine exactly how much any given property is worth. From this starting point, the situation looks bleak.
- In the commercial property sector, when the market does start to tentatively move again, it seems likely that property values will be considerably lower than they were before the pandemic hit. I make a presumption that many tenants will be exercising the break clause in their contract as soon as possible in order to either negotiate leaving or to take less space on more favourable terms. Also, deferment of rent payments is a further downward pressure on values. Meanwhile, the effect of companies contracting or going out of business will accelerate vacancies, which will have an adverse impact on loans. The consequences on the returns to investors from pension funds and saving institutions will be grave.
Lower values will also mean that loan to value conditions will no doubt have been breached. Since there is still cover the banks will want to take action – by either demanding a partial repayment or foreclosing in the knowledge that they will get repaid. In recent years, the banks have been more conservative in their lending and this will encourage them to believe that they can recover what is owed. They also know that the quicker they take action, before the market gets flooded with properties, the better.
- In the residential property sector, first time home buyers will still be around notwithstanding the virus – as will, of course, those wishing to move up the ladder. However, in my view the current crisis has had the following impact: uncertainty on employment and difficulty in viewing property as a result of social distancing policies. These factors will affect how much buyers can afford to spend and how confident they feel about making a purchase. Meanwhile, sellers may wish to hold on to their current properties until the market starts to look more favourable.
It seems highly unlikely that values will rise in the foreseeable future, in either the commercial or residential property sectors, and the impact of this will be far reaching. How long it will take to encourage growth once again depends, in part, on the action taken now.
How to support economic recovery
In order to introduce some form of movement into the property market, the government needs to give buyers a reason to act. Here, I propose one option that can be put in place immediately.
It relates to measures that were brought in when the market was buoyant and house prices were sky-rocketing. At that time, the government increased stamp duty and imposed restrictions on overseas buyers in order to dampen the market. Now that the property market is suffering, it seems to me that reversing those measures would be a quick and effective way to help stimulate activity again. The government could eliminate stamp duty and eliminate restrictions on overseas buyers very easily. This need only be a temporary measure – for say, the next 18 months.
These actions could result in movement within the property market that would offer a sense of all-round confidence on which to build.
Now is the time to act
It is true that I have been allied to the property industry since my career first began. My suggestions here, however, are not about protecting the interests of my own industry. This situation is far bigger. Past crashes showed that waiting a few months to see “how things pan out” proved to be a disaster, because the domino effect through a collapse in values became unstoppable. I emphatically believe that if the government takes action now to support the property market, our entire economy could benefit.