What History Can Tell Us About The Coronavirus And Property Market

As you will already know, the world has suffered an outbreak of the Coronavirus (COVID-19).

Due to the ferocity of the outbreak in China,Europe, Iran and South Korea, it has been recognised as a pandemic by the WorldHealth Organisation (WHO) on 11th March 2020.

What began as a crisis in China, has now gained significant wind travelling across the world which has sent shockwaves to global economies. As of today, the FTSE 100 index of top UK firms has fallen by more than 30% since February 21st 2020.

The UK economy is in a state of uncertainty, and so each and every market is set to enter a period of unknown and that includes the property market.

Global economies have all felt the devastating effects of this outbreak and as time goes on it is growing even more difficult to identify any specific time frame while we work through this difficult period.

On the good side for property investors, the housing market has endured challenges in the past and has time and time again been proven triumphant.

Fortunately, we can use our understanding of the resurgence in the property market and identify what patterns and trends have followed in the midst of crisis in the past.

While it might seem logical to study theFinancial Crisis of 2008, this recession was due to the collapse of the US housing market, and so figures will be far different to that of the UK recession in the early 1990’s. See the figure below illustrating the variability in the UK property market in the lead up, during and post the recession in 2008.

Contrasting these figures with the recession in the early1990’s which began in the third quarter of 1990 and ended in the second quarter of 1992. Figures show that within the second year of the recession between mid-1991 and mid-1992, there was a significant improvement in property returns.

At this time, there was an increase in the rate of income return which caused the falling rental incomes to steady.

This dignifies the direct link to unemployment rates and the property market and so considerations can be made as to how impactful job losses might be as a result of isolation policies which has affected the hospitality and entertainment sectors.

Yesterday, the chancellor, Rishi Sunak announced a major package of measures to assist small and medium sized businesses through the coronavirus crisis. This will offer interest free loans/grants to businesses to make up for any shortcomings faced during this period to prevent insolvencies and redundancies.

When the economy entered its recovery phase in late 1992 and early 1993, there was no sudden change to rental values on the properly market.

This is because the economy was still in a period of “jobless growth” so while GDP was increasing, unemployment rates rose with it. Then in the latter stages of1993, there was a major upturn in performance which led to the all property equivalent yield to fall by 150 basis points until June 1994.

What we now know is that the optimal time to have invested in the property market was in late 1992 (or early 1993).

Consider this, the current average income return per property is 3.6% at a 5-year average. The investors who bought in the second quarter of 1993 would have received ungeared total returns of an average 9.3% over the five years to the second quarter of 1998. Even the investors who entered the market prematurely during the second year of recession, favourably gained 5.5-6% ungeared real returns for the next 5 years.

Thus, for you as an investor, history dictates that this temporary crisis could offer up lucrative returns if you were to enter the market while the economy is faced with such disruption.  

Whilst this Coronavirus outbreak does bare similarities to former financial crisis: the causations somewhat differ. As previously mentioned, the Financial Crisis of 2008 was at the fault of US Banking systems, a slight contrast to a worldwide virus epidemic.

This might explain why so far, reports show that coronavirus has had very little impact on confidence in the property market, in fact, there are even regions in the UK where confidence is continuing to rise.

This outbreak has caused the property market to become shrouded with widespread uncertainty, which is why it is useful to draw similarities to the uncertainty surrounding Brexit in recent years.

Throughout this period, most people who were involved in the housing market with long-term views remained undeterred with their investment. This meant that despite some short-term tremors in the market, in the long-term house prices continued to rise.

Even the more reluctant investors and homebuyers quickly developed more confidence to move forwards since December. This has led to the increase in house prices and transactions across the UK.

Thus, when certainty begins to resurface there is an instant injection into the housing market. So, while the changing economy might appear immeasurable at present, the expectation is that its effect on market confidence will be short lived and we'll likely see a spike in property prices as confidence slowly starts to come back.

The government has predicted the coronavirus cases to peak in several week’ time, which in the property market is a considerably short period of time.

Another case which can further solidify this expectation of there being a short-term impact is the swine flu outbreak in the UK from April 2009. Like the coronavirus outbreak, the national economic impact was severe to say the least.

However, house prices still rose by 10.1% betweenMarch 2009 and March 2010. Therefore, following previous economic trends, house prices should remain stable even if there is a sudden reduction in demand.

To summarise; Invest in completed property now while you can get great deals, and wait it out for a couple of months.

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