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nicholas_b

The difference between covid 19 and the 2007 recession

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Hi,

I was at Uni the last time when we had the big 2007 recession so I wasn't aware fully of the impact it was having on house prices other than the fact they decreased. I had no real knowledge of how much they were decreasing buy, whether there was still a steady flow of properties coming on the market, what discounts people were getting etc

My question is, does this feel similar to the 2007 recession? I'm conscious we are all waiting for a house price drop, but with the support measures in place for people, the 300bn plus invested by the govt, the fact nothing seems to be coming on to the market (I know lockdown is the biggest reason) do we feel it will be the same scale as before and trigger a recession? Obviously it will have an impact, I'm just warying of the stocks comparison because they don't seem to be tightly linked from what I can see. 

I'm just interested to hear thoughts on how things developed previously and whether there are any similarities. I often think history repeats itself, I'm always more interested in peoples thoughts who experienced similar events that those purely making predictions (like myself).

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I don't think bears much resemblance to 2007/8.

This recession is going to be longer, deeper and harsher. It will effect some people disproportionately - particularly the young (20-30yrs), women and anyone who works in hospitality or retail.

Lots of small businesses will go bust.

Home-owners are to a large extent protected as are people on high salaries or benefits.

The hardest hit will be the 'JAMS' - just about managing - who get put on furlough or lose their jobs entirely.

Housing price-wise - I don't think it will have a huge effect as we are still going to be short of housing and that is what causes the upward pressure. I think supply will be the issue, with fewer properties coming onto the market as people just try to get their lives back on track.

My advice - don't wait for a big house price drop - if its a good house and the numbers work, buy it.

Just my opinion though.......

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Hi Nicholas

You raise a very good question and with limited personal experience to call upon, it's tricky to have the complete picture.

Recessions and economic/property busts are triggered in different ways. For example, the recession of 2008 was caused by a credit crunch resulting from the Global Financial Crisis, which also lead to house prices falling. Contrast this to the recession of 1990, where interest rates were high with relatively low inflation (where property prices fell) when compared to the recessions of 1973 and 1980 when we had high interest rates but also high inflation (where house prices did not fall).  In other words, different economic recessions have different characteristics and so it's a case of assessing the impact of those underlying characteristics onto our property portfolio. A credit crunch is different (less liquidity) to a high interest rate / low inflation recession (less growth), whereas a high unemployment recession (less rental demand) can affect us in different ways.

Then, we have a global pandemic situation such as Coronavrius. Now, we have had epidemics in recent history (e.g. SARS, Swine Flu, Asian, Flu, Ebola, etc.), although these have been more regional in nature and so much of the west, including the UK, was relatively unaffected by them. The one global pandemic in recent history if I can use the phrase was AIDS, although it was limited in the number of people affected when compared to the flus and coronaviruses mentioned. In other words, the economic impact was also more limited or contained.

If you want to go back to something resembling Coronavirus you need to look at the Spanish Flu of 100 years ago. The economic impact was of a short, sharp shock that largely recovered within a couple of years. I cannot find that much that relates to property prices specifically but references I can find suggest that asset prices held up pretty well.

One thing to be mindful of with pandemics is who is most affected. With the Spanish Flu, it was mostly people in their most productive years i.e. the general labour force, so this also contributed heavily to lost production capacity (put simply, less people to do the work). Whilst Coronavirus / Covid-19 can affect everyone, it has a much more serious impact and death toll on the elderly, so that's quite a different impact economically...possibly less on the long-term labour supply and in fact more on wealth distribution to the next generation, leading to potentially more capital being available. Of course, the lockdown period will be very painful, although hopefully also relatively short-lived when compared to say the recession of the 1990s.

As a matter of interest, I have researched some of this and will be writing about it in the upcoming issue (May) of YPN Magazine...people who subscribe to The Property Voice YPN mailing list (just email/message me) get all of these articles subscription-free ;). I am also planning to reference some of the defensive / stabilising measures we can take with our property portfolios in a talk at the Virtual Property Networking meeting taking place later this week. This is a free event with optional donation to NHS Charities, details here.

Best
Richard


Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

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Imo prices won't drop that much since current circumstances are not similar to 2007/8. 

Back then we had (or US had) a problem with the system. Today system is alright and it is different to what it was prior 2008, it is only pandemic period which freezes things temporarily. Once everything opens back again we get back to previous trends because the whole system didn't change and virus is not affecting banking/properties. 

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1 hour ago, wookash said:

Imo prices won't drop that much since current circumstances are not similar to 2007/8. 

Back then we had (or US had) a problem with the system. Today system is alright and it is different to what it was prior 2008, it is only pandemic period which freezes things temporarily. Once everything opens back again we get back to previous trends because the whole system didn't change and virus is not affecting banking/properties. 

I think thats being a bit optimistic as the inevitable mass job losses and general nervousness of the population is likely to result in transactions dropping drastically - at least for the rest of 2020 - especially given there seems little likleyhood of a vaccine anytime soon. Hope I'm wrong but i do expect an impact to house prices - nevermind the fact that govt will need to get additional income so taxing the BTL market is probably high on their list

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The above is the exact dilemma I had. One part of me thought; they've stimulated 330bn, surely this compensates job losses and credit squeezes, the two should off set and there shouldn't be a dramatic change.

The other part of me thought how can mass job losses and cessation of self employed and business not have an impact....

My personal thoughts were a mixture of the 07 crash and the Brexit situation, where nobody was poorer but the nervous market meant nothing moved. It's the lockdown that I think is masking a lot at the minute, nothing is coming on the market now for obvious reasons, but will it when lockdown is over...

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5 hours ago, haf1963 said:

I think thats being a bit optimistic as the inevitable mass job losses and general nervousness of the population is likely to result in transactions dropping drastically - at least for the rest of 2020 - especially given there seems little likleyhood of a vaccine anytime soon. Hope I'm wrong but i do expect an impact to house prices - nevermind the fact that govt will need to get additional income so taxing the BTL market is probably high on their list

I don't agree that additional taxation on BTL market is likely to be a government target after this. I think that time will show that renters get more heavily hit by the economic impact of the pandemic, as many (not all of course) renters are not as financially stable as home owners with less cash in the bank and less scope to borrow. They are therefore dependant on being able to rent their home and accordingly if that market is made more difficult for landlords then it becomes more difficult for tenants. 

Maybe the government would counterbalance that with an actual increase in social housing provision which I personally think would be a good thing to achieve some better balance but I don't see this as likely at this time, regardless of the colour of the government.

I think it is likely that house prices will show some variation attributable to this pandemic, probably downward but I think this will be fairly brief due to the underlying fact that there is insufficient stock out there. 

 

Steve

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On 4/13/2020 at 1:20 PM, richard brown said:

Hi Nicholas

You raise a very good question and with limited personal experience to call upon, it's tricky to have the complete picture.

Recessions and economic/property busts are triggered in different ways. For example, the recession of 2008 was caused by a credit crunch resulting from the Global Financial Crisis, which also lead to house prices falling. Contrast this to the recession of 1990, where interest rates were high with relatively low inflation (where property prices fell) when compared to the recessions of 1973 and 1980 when we had high interest rates but also high inflation (where house prices did not fall).  In other words, different economic recessions have different characteristics and so it's a case of assessing the impact of those underlying characteristics onto our property portfolio. A credit crunch is different (less liquidity) to a high interest rate / low inflation recession (less growth), whereas a high unemployment recession (less rental demand) can affect us in different ways.

Then, we have a global pandemic situation such as Coronavrius. Now, we have had epidemics in recent history (e.g. SARS, Swine Flu, Asian, Flu, Ebola, etc.), although these have been more regional in nature and so much of the west, including the UK, was relatively unaffected by them. The one global pandemic in recent history if I can use the phrase was AIDS, although it was limited in the number of people affected when compared to the flus and coronaviruses mentioned. In other words, the economic impact was also more limited or contained.

If you want to go back to something resembling Coronavirus you need to look at the Spanish Flu of 100 years ago. The economic impact was of a short, sharp shock that largely recovered within a couple of years. I cannot find that much that relates to property prices specifically but references I can find suggest that asset prices held up pretty well.

One thing to be mindful of with pandemics is who is most affected. With the Spanish Flu, it was mostly people in their most productive years i.e. the general labour force, so this also contributed heavily to lost production capacity (put simply, less people to do the work). Whilst Coronavirus / Covid-19 can affect everyone, it has a much more serious impact and death toll on the elderly, so that's quite a different impact economically...possibly less on the long-term labour supply and in fact more on wealth distribution to the next generation, leading to potentially more capital being available. Of course, the lockdown period will be very painful, although hopefully also relatively short-lived when compared to say the recession of the 1990s.

As a matter of interest, I have researched some of this and will be writing about it in the upcoming issue (May) of YPN Magazine...people who subscribe to The Property Voice YPN mailing list (just email/message me) get all of these articles subscription-free ;). I am also planning to reference some of the defensive / stabilising measures we can take with our property portfolios in a talk at the Virtual Property Networking meeting taking place later this week. This is a free event with optional donation to NHS Charities, details here.

Best
Richard

Richard your response is a really interesting and thought provoking account - many thanks.

Steve

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On 4/12/2020 at 7:49 AM, nicholas_b said:

I'm conscious we are all waiting for a house price drop

Hi Nicholas_B

Personally I am not waiting for a house drop and don't agree that we all are.

I agreed a purchase at the start of 2020 which at that time looked like it should go through quickly. It is a relatively straightforward refurb. A couple of potential concerns arose from the survey which got resolved by a builder I know but by the time that was done the lockdown kicked in.

The upshot of this was that the trades I had lined up to get some work done could not proceed and that the solicitors opted to pend all their transactions to reduce the risk of exchanges taking place that could not then complete due to banking problems (which as far as I know haven't materialised). 

How did I feel about this? Frankly whilst I remain perfectly happy to buy the house, I am glad that it is now delayed. The alternative is that I would have completed and then suffered a much longer void than planned for waiting for trades to be able to get up and running and also for potential tenants to be able to start looking / applying. 

Has it crossed my mind that I should renegotiate the price I am going to pay? Yes of course it has. If when the lockdown starts to lift it becomes apparent that there has been a major price drop then I daresay I will try to renegotiate, but if it looks like things are going to recover within a few months then to be honest I remain happy with the price agreed. An imperfect deal is better than the perfect deal that never comes

As soon as restrictions begin lifting, short of a major change in the property market I will be looking to complete the deal and crack on so that i can get the new deal added on to my long term portfolio.

Somewhere once I read that what you do is less important than making sure you do it quickly, action beats reaction.

Steve

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9 hours ago, haf1963 said:

I think thats being a bit optimistic as the inevitable mass job losses and general nervousness of the population is likely to result in transactions dropping drastically - at least for the rest of 2020 - especially given there seems little likleyhood of a vaccine anytime soon. Hope I'm wrong but i do expect an impact to house prices - nevermind the fact that govt will need to get additional income so taxing the BTL market is probably high on their list

Job loses? People didn't lose the job because the businesses went bust, people mostly got suspended in their jobs because they froze the businesses temporarily. In addition to that many have been furloughed which still give them an income without working. Once everything is back to normal there will be thousands and thousands of job offers on the market. People will come back to work faster than they got unemployed. I'm more than sure. 

In regards to properties, I sort of agree with what Rob&Rob said on one of the latest podcasts: "People who sell now are the only who have to". And as I observe the market I monitor 7 major cities in the UK weekly in two categories (total no. of offers and within my price range) for over 2 years not many those must sells, literally a fraction of a normal traffic. You can check it yourself on Rightmove or Zoopla.

So now ask yourself what drives the property price down? To me it's always a factor which forces sellers to sell, this could be financial pressure or personal life situation. Epidemic could also be a trigger but only if it lasts long, and I mean long like several months where people can't afford to pay off the debt anymore. Not just few weeks like we are experiencing now. Many countries are opening already, take Iran as an example, other European countries or US gov plans for restart, not even mentioning China where people are enjoying bats again already! UK restrictions will be loosening soon as well.

Sellers are not and won't be under pressure after these few weeks and we will be back to normal hence it won't imply 'force, must sells' and the price will NOT go down as some are hoping to. They will stay at the same (or show a small growth) level and once confidence will build up after few months we are back on that rocket growth again.

The only thing I could question and I didn't evaluate yet, is excessive quantitative easing which happened in US and Europe. This is exceptional and I'm curious how much this will impact the inflation. Surely this will impact the economy but I'm not sure if positive or negative as voices and opinions are divided since QE is a bit controversial topic.

I'm not an expert and I'm not educated in economics, this is just my long-winded personal opinion. 

TL;DR Coronavirus is not a drama, let's think what we spend on those trillions of dollars printed around the globe. :lol:

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12 hours ago, steve brown said:

I don't agree that additional taxation on BTL market is likely to be a government target after this. I think that time will show that renters get more heavily hit by the economic impact of the pandemic, as many (not all of course) renters are not as financially stable as home owners with less cash in the bank and less scope to borrow. They are therefore dependant on being able to rent their home and accordingly if that market is made more difficult for landlords then it becomes more difficult for tenants. 

Steve

This is an interesting one as many similar arguments were made when govt added 3% to stamp duty then when the removed interest relief and also when tenant fees got banned. The evidence seems to be that govt can keep taxing BTL until they see a real impact to the market eg the recent extra SDLT for overseas buyers. Its also obvious that govt is siding with tenants at the expense of landlords so I am not expecting an easy time ahead but am continuing to invest while shifting strategy to alternatives like leasing my propertie sto organisations rather than standad family BTL's

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8 hours ago, wookash said:

Job loses? People didn't lose the job because the businesses went bust, people mostly got suspended in their jobs because they froze the businesses temporarily. In addition to that many have been furloughed which still give them an income without working. Once everything is back to normal there will be thousands and thousands of job offers on the market. People will come back to work faster than they got unemployed. I'm more than sure.

Its a guessing game as to what happens but the view I am agreeing with is that things will not be 100% normal till 2021. Yes there will be a phased release back to work with restrictions in next month or 2 and probbaly by sept more and more people will be working but i doubt it will be the same as 'normal'.

Personally I wont be going to holidays abroad, regular restaurants, events etc for many months so I can't see how there won't be job losses in various sectors unless the govt keeps paying furlow wages. Long ad difficult road through 2020 is my view so am planning accordingly.

I hope you are correct and will be more than happy if its quick and by summer we are back to jan 2020 levels.

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The varying opinions are all interesting and valid.

There are definitely job losses, the amount of people that claimed UC increased ten fold in two weeks (to 1 million claims in that period alone), a combination of losses, furlough, no work for zero hour contract workers and many self employed going without work all contributed to this. There are definitely losses, the furlough scheme is good but not bullet proof.

Are renters more affected than home owners... yes, I would agree with that. I'm just not sure what impact it has on the market, for sale or rent. I imagine lots of people may stay in their family homes now, similarly there may be more people planning to buy for the first time staying in their rented home or planning to rent until there is more certainty. Again, will this have an impact on sale prices? Could it lead to a buoyant BTL market because of demand, leading to house price rises, or a decrease now there will be presumably a decrease in potential buyers (reduction in first time  buyers). Not to mention changes to mortgages.

I'm not a psychic. I cannot see in to the future. Nor can anyone. That's why I was interested to see if there were any comparables. The best chance you have about estimating the future, generally tends to be drawing comparisons from the past.

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Some good discussion taking place in here. Let me add in a couple of references and additional insights to deepen the research behind the debate.

1. You might find a couple of the articles in this Landlord magazine interesting; in particular, the one by the economist and the portfolio investor: https://issuu.com/landlordinvestor/docs/li_magazine_55th_edition/6

2. A link to a post on Linked In sharing 4 economic scenarios out of Coronavirus / Covid-19 here https://www.linkedin.com/posts/richardmb_four-scenarios-for-the-global-economy-after-activity-6656120480556208128-OVbK It seems that the UK is aiming at Best Case, given the description and the UK's response.

In short, a temporary drop in transaction volumes is inevitable but transaction volumes alone do not drive prices. Most forecasts are for a significant drop in short-term economic activity, followed by a fairly rapid recovery over the next couple of years...supported by massive amounts of printed money (QE). People still need somewhere to live, including people who have lost their jobs.

There will no doubt be a drop in property prices in the short-term but it should not be too drastic or too prolonged, why? Because of the underlying demand, still limited supply and the availability of liquidity. This is very different to the GFC where nobody would or even could lend, lenders are in better shape and will need to lend to hit profit targets and to bridge the dip seen during the lockdown. Equally, there is evidence to suggest that 'private money' is looking for ways to invest. Consider P2P, crowdfunding, SSAS pensions, private funds and family trusts as examples. People still need to generate a return on their cash, arguably more so as QE effectively devalues cash.

Here's my view for the next couple of years... The smart money will be buying right now. The early adopters will be next. Then will come the followers. Then the masses. Pick the stage that fits you the best ;)


Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

10%+ ROI property deals every week: check out PROPERTY DEAL TIPS
Amazon best-selling author Property Investor Toolkit & #PropTech, YPN Magazine columnist & PODCAST host

Web & Blog: The Property Voice | Curated property news & insights feed

Facebook Page | TwitterLinked In

Let's connect...mention The Property Hub :)

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On 4/19/2020 at 12:43 PM, richard brown said:

Some good discussion taking place in here. Let me add in a couple of references and additional insights to deepen the research behind the debate.

1. You might find a couple of the articles in this Landlord magazine interesting; in particular, the one by the economist and the portfolio investor: https://www.dropbox.com/sh/yownwpt42cdbut2/AAAf4V613iXoKXHdCAmrVYgja?dl=0

2. A link to a post on Linked In sharing 4 economic scenarios out of Coronavirus / Covid-19 here https://www.linkedin.com/posts/richardmb_four-scenarios-for-the-global-economy-after-activity-6656120480556208128-OVbK It seems that the UK is aiming at Best Case, given the description and the UK's response.

In short, a temporary drop in transaction volumes is inevitable but transaction volumes alone do not drive prices. Most forecasts are for a significant drop in short-term economic activity, followed by a fairly rapid recovery over the next couple of years...supported by massive amounts of printed money (QE). People still need somewhere to live, including people who have lost their jobs.

There will no doubt be a drop in property prices in the short-term but it should not be too drastic or too prolonged, why? Because of the underlying demand, still limited supply and the availability of liquidity. This is very different to the GFC where nobody would or even could lend, lenders are in better shape and will need to lend to hit profit targets and to bridge the dip seen during the lockdown. Equally, there is evidence to suggest that 'private money' is looking for ways to invest. Consider P2P, crowdfunding, SSAS pensions, private funds and family trusts as examples. People still need to generate a return on their cash, arguably more so as QE effectively devalues cash.

Here's my view for the next couple of years... The smart money will be buying right now. The early adopters will be next. Then will come the followers. Then the masses. Pick the stage that fits you the best ;)

Thanks Richard, this is really helpful!

What would be the impact on property market and property investor in terms of forward interest and credit now that government has accumulated quite a lot of debt?

Will there be any direct impact on availability of credit / bank lending appetite or no direct impact?

Many thanks,

Elva

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I reckon this is going to be a much deeper recession than 2007 given the economic shut down globally and the massive job losses expected to happen when the furlough scheme ends.

I would hold back for 6-12months before trying to get back on the market again as prices could fall by up to 15%-20%. The biggest property discounts on the last recession happen 1-4 years after the 2007 crash, then prices started picking up again around 2013 onwards... 

I know a lot of people say there is a shortage on the market and prices won't go down that much but there was shortage even back in 2007 and the prices did end up going down by quite a bit. 

Also one thing to remember is that prices do tend to pick up first in the most desirable areas so i would avoid investing in the north until the south east has picked up some momentum. Again this is something i observed during the last recession. 

FYI just to give you an idea - an article from the telegraph today: https://www.telegraph.co.uk/property/uk/buyer-demanding-20pc-house-price-cut-property-market-reopens/

Hold tight, be patient and trust your instinct 

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I have just continued as business as usual.  They always say do the opposite of what the media is reporting - they have been reporting doom and gloom so we have just cracked on.  The way i have looked at it is that there is so much money pumped into the economy at the moment it has to be spent.  I appreciate that employment will take a hit in October (or when the furlough scheme ends) but when speaking with clients, friends etc there are very few people that we know who are furloughed.  Most are simply working from home and know very few people who arent working.  

Since the EA's started up again a few weeks ago we have been unbelievably busy and have had a tonne of new clients get in touch regarding buying investment properties, probably the busiest we have ever been.  Lots of the conversations with new clients is that they cant see any value in keeping cash in banks and having the income from a BTL (or a few) is now important to them.  I know from a personal perspective this pandemic has made me re-think my own priorities and now I am focusing on getting income generation than building up my cash pot.  My priority is paying the bills each month, and I was fortunate that whilst the world shut down my income from assets continued and I wasn't personally affected financially.

We didnt see any drops in house prices - again thinking logically why would you?  Everyone was in the same boat, you couldn't buy or sell, so why would prices change?  New listings are going on at the same price points and the EA's I regularly chat to are absolutely run off their feet with interest.  From Dec 19 to March 20 a lot of them were telling me that they were having record months (best since 2008), so there was obviously a large amount of demand in the market.

I think if you continue to buy sensibly then most investors can ride this through.  12 months from now the market is going to be hot so this is definitely the best time to be picking up a few purchases (personal opinion of course!)

Darren

 

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