Following the relative containment of the COVID-19 health pandemic, last Wednesday, the Chancellor, Rishi Sunak confirmed that the UK is now dealing with the economic fallout and is officially in a RECESSION!
**que dramatic music**
What is a Recession?
A recession is defined as 2 quarters of negative economic growth, which makes the news unsurprising given that the country was on a government-imposed lockdown for much of that period.
However, the media were quick to capitalise on the uncertainty, by publishing headlines stating that the economy shrank 20.4% compared with the first three months of the year.
What they didn’t disclose, was that spending increased by 1.8% in May and by 8.7% in June and is expected to continue to do so for the rest of the year.
This recovery in growth is much quicker than previous recessions and is partly because the downturn was caused by a virus and the economic fundamentals are still relatively sound.
What drives growth?
Growth is measured as a country’s total output or Gross Domestic Product (GDP), which in turn is a function of Consumption, Investment, Government Spending and Net Exports:
*GDP = Consumption + Investment + Government Spending + (Exports-Imports)*
To increase GDP, we must increase any or all of the elements on the right-hand side of the equation.
In times of economic stagnation, the Government typically increases their spending and indeed, we have seen the government pump over £30 bn into the economy to date by means of an economic stimulus package.
Net exports will increase as a weakening of the pound means that it is cheaper for other countries to purchase UK goods.
The only thing that could challenge the increase in consumption, investment and net imports is unemployment, because if people aren’t working and earning money, they can’t spend money in the economy, decreasing GDP. The Government is working hard to ensure that doesn’t happen through schemes, initiative and incentives.
What does this mean for the property market?
Contrary to popular belief, there is strong evidence to suggest that there is going to be an increased demand for investment property, leading to an increase in house prices.
There is likely to be more domestic investors because:
• Stamp duty reductions encouraging buyers
• The Bank of England may reduce interest rates to stimulate the economy – if these hit negative levels, people will have to pay to keep your money in the bank!
• Jobs are not as secure as people thought – need an additional income stream
• Throughout furlough, people have had time to re-assess their finances and plan their investments
• Uncertainty = Opportunity – people are eager to pick up a good deal and have the funds to be able to afford it
There is also going to be more international investors as their money can go further when the pound is weak
All of the above factors will lead to increased prices as demand increase past supply.
Why does property fare so well in volatile environments?
A lot of people believe property to be a great investment in times of uncertainty because:
• Unlike the stock market, the price of property is dictated by the ability of the buyer and seller to negotiate
• Property is a long-term strategy and in 20 years’ time, when the houses are worth £500k, it won’t really make a difference whether they were purchased for £1,000 more or less
• In the unlikely event that prices fall dramatically, people can always re-negotiate sales before exchange of contracts
What’s the story in Leeds?
We invest specifically in the Leeds property market and the city is faring remarkably well in the face of the COVID pandemic. Properties are flying off the shelves from a rental perspective and house prices continue to increase as demand outstrips supply. This is because:
• Unlike in the Global financial crisis of 2008, there has been no massive property boom in the lead up to the COVID-pandemic (as lenders have been more cautious with their lending) so the prices are still affordable
• There were low levels of stock pre-COVID and we expect that to continue as people continue to be nervous about moving in the current climate
• Houses around the £100,000 mark don’t tend to drop in price a lot because it often costs more than that to build them.
Ultimately Uncertainty equals Opportunity
A Portfolio Manager from a large investment management company said that the figures indicate that the recovery has begun.
“Given this is a fairly backward-looking data set, it is important investors do not lose sight of the opportunities that are available in the UK as the economy attempts to fire on all cylinders again.” Paul Craig, Quilter Investors Portfolio Manager
It is clear that people who do their due diligence and take action will enjoy a lot of upside benefit and those who wait too long will miss the opportunity of the decade.
If you’d like to discuss the opportunities available in the Leeds property market, please click here to start a WhatsApp conversation with us.