So with most of the world on lockdown (around 20% at the time of writing this), the world economy is grinding to a stand still. Businesses are being forced to close and people are having to stay indoors. The human cost has yet to be accounted for – our thoughts are with those who are on the front line, helping people at the detriment to their own health. We hope that you stay safe during this time and take stock of what is important in life – your health, your family and the welfare of those around you. Stay indoors and help conquer this.

The world is going through an unprecedented era. With this, there are previously unseen risks. This post, and the posts which follow, will look at various elements of the economy, property market and the triggers which are going to shape the short, medium and long term for both residential and commercial property.

On a macro-economic scale (i.e. if you look from a high level) businesses are stopping trade. People are not spending as much money as they usually would as they are staying indoors. This slow-down in the speed at which money flows through the economy reduces inflation as the demand for goods falls. This is a key ingredient for a recession. How far will this go?

The biggest difference in the current crash and the one which occurred in 2008 is that there is no fundamental flaw in the financial system (if we ignore the free money issue – but we’ll save this for a later blog). This is more akin to the great depression. There are several key factors in play here which cause concern for governments across the world:

  1. Debt liquidation and distress selling
  2. Contraction of the money supply as bank loans are paid off
  3. A fall in the level of asset prices
  4. A still greater fall in the net worth of businesses, precipitating bankruptcies
  5. A fall in profits
  6. A reduction in output, in trade and in employment
  7. Pessimism and loss of confidence
  8. Hoarding of money
  9. A fall in nominal interest rates and a rise in deflation adjusted interest rates

Are we seeing this now? Yes. Pretty much every single one of these has happened since the beginning of this crash. What other signs are there of a depressed market – and in particular the property market? Lenders tightening the criteria at which they will lend funds. They have done this over the last week – citing that it is due to low staff levels rather than the economy – but regardless of the reason, if the wheel slows down it is hard to start it turning again. Mainly due to the risk averse nature which sets in among investors.

The size of the stimulus package by country as a percentage of GDP

Hence the stimulus packages which have been created across the world – France and the USA leading the way in terms of % of GDP. The billions and trillions of funds thrown at the issue to dampen the impact, the grants to people and businesses to try and provide a bridge to the other side of this virus crisis. But how long does this bridge run? Will it reach the other side? Will demand from consumers and businesses just pick up where it left off? This is the risk investors are playing with when they make an assumption on what is to come. Many are blinded by the bull market which has lasted for the last 11 years.

On the back of this – and the prospects that the stimulus package together with coronavirus creates so much uncertainty, the UK debt has been downgraded to AA- by Fitch rating agency. The UK debt as a % of GDP will remain at around 76% (compared to the high of around 85% post 2008). France is due to reach 101% by the end of 2020 with the USA at 110%.

These are ‘unprecedented’ stimulus packages. The key difference to now and the great depression is how the governments have responded. What remains to be seen is if they have played the game better than they did back then. Cuts to benefits and raised taxes were the proposed in the midst of the great depression, and rejected – in the end the gold standard was removed (currency value dropped – making exports more attractive), interest rates dropped from 6% to 2% (which sparked a housing boom in the south) and employment slowly improved…

Where does this leave the property market in the UK? I’ll leave this for part 2…