Freefall in markets & a world on lockdown
To say it’s been a crazy few months would be an understatement. Over the last quarter, we have seen severe volatility in the stock markets and countries going into lockdown, closing their borders and implementing strict policies to control the spread of the pandemic. The question for us is — what does this mean for the economy and the housing market?
I was expecting an economic slowdown at the end of 2019 or the beginning of 2020. No one expected COVID-19 to be that trigger. After a healthy 2019 with markets extended and one of the longest bull runs in history; and given we are in the mid-cycle of the real estate cycle, it is not surprising to see market panic. This is the point where we are due for a pause. However, the effects of the mid-cycle are more likely to be felt in the stock market than the broader economy, and if we get recessions, they tend to be milder and shorter-lived.
How bad could it get?
COVID-19 will be more disruptive to the economy than what we would have otherwise experienced (some global economies were starting slowing towards the end of last year).
If we hadn’t experienced such an outbreak, it is unlikely governments and central banks would have responded with this degree of stimulus to get through the crisis. The level of liquidity getting pumped into the system will result in the economy moving forward. A lot of liquidity created ends up in the land market and further fuels the second half of the cycle.
Unless something new emerges, I believe markets have priced in the impact of the outbreak. However, the recent turmoil is bound to create echoes around the economy, and there is a chance we may see more bankruptcies that could cause further market disruption. As markets deal with the situation, they are likely to experience further volatility that may take several months to unfold. However, if we look at previous cycles as highlighted below and the amount of liquidity being released into the market, the next stage of the cycle should be bigger than we anticipated.
Is this 2008 all over again?
The answer is no. Although the global impact of the virus is still not clear, it’s unlikely the upheaval will be nearly as severe or long-lasting as the downturn of 2007–09. The 2008 downturn and recession resulted from years of overlooked and deeply-rooted issues in the economy. On the other hand, COVID-19 is an external event that is happening to the economy, much like a natural disaster.
Therefore, the economy, businesses, lenders and consumers are in a much better position to weather the storm. I have summarised how the current crisis compares to the market crash of 2008 in hopes that it will bring some perspective to our readers.
2008 & COVID-19
The downturn of 2008 was set off by a severely overheated housing market. Credit was easy, and lots of lenders and banks approved large mortgages to people that couldn’t afford them and loans to buyers who weren’t qualified. As banks packaged mortgages and sold them as securities home prices rose to stratospheric levels. When the market collapsed, millions stopped making mortgage payments and were pushed into default while the banks holding the securities collapsed or got driven to the brink of bankruptcy.
These issues had been brewing in the banking & real estate market for years and resulted in mass layoffs and unemployment, and this led to consumer spending being severely impacted, causing deeper issues across the economy. Credit was frozen, and banks stopped lending, almost bringing the economy to a standstill.
COVID-19 first appeared in China towards the end of last year and has been the catalyst for today’s economic downturn. As the population avoids public places, the first victims of the economic impact have been services industries. Restaurants, bars, airlines, shopping malls, and high street retailers are already reporting severe losses.
As grim as this may appear, the impact is not on the same scale as the Global Financial Crisis of 2008, and it is unlikely it will take the same economic toll. Sectors like the travel & tourism industry will suffer the most, as companies cancel trade shows, conferences and events and high volumes of consumers scrap their vacation plans. If we use China as a guide, the west should be through the worst of the outbreak within 6–8 weeks. A far shorter period of stagnation than 2008.
The downturn of 2008 caused the economy to contract for five of the six quarters during the slowdown, with a fall of 8.4% at the end of 2008.
COVID-19 is expected to reduce growth by 1 or 2 percentage points over the next 6-months by most economists.
Impact on the housing market
The downturn of 2008’s housing bubble began in the 90. According to market analysts, average home values had doubled before the peak in 2006 and the crash in 2008. The housing market then remained stagnant until 2012.
COVID-19 has caused short term disruption in an otherwise healthy property market. Values have been steady over the last few years, and property prices are just 18–20% above their previous peak. In most cities in the U.K., housing is affordable and not overpriced. With mortgage rates at record lows, we can expect a boost in market activity after the virus passes.
Impact on Companies
The downturn of 2008 had corporations reporting $5.8 trillion in rated debt according to S&P Global Ratings. 65% or less than two-thirds of which was investment grade. A wide variety of companies, including retailers, financial institutions, and automotive companies collapsed as revenues plunged. In some sectors, from January 2008 to January 2010, manufacturers cut 29% of their workforce over 2-years.
COVID-19 2019 had corporations reporting $9.3 trillion in rated debt, of which, according to S&P Global Ratings, 72% is considered investment grade. However, conditions for repayment are becoming more challenging, as investors flock towards U.S. Treasurys. The sectors most likely to be hit the hardest are the retail and automotive industries where shopping malls, department stores, and small scale retailers have already been struggling.
The downturn of 2008’s pain was felt throughout the economy, with governments and central banks passing massive stimulus packages. They granted tax savings and credits to companies & individuals and provided funding for schools, healthcare centers, and low-income workers. They also approved extensive upgrades to energy transportation and communications networks.
COVID-19 damage appears to be more contained with lawmakers discussing more targeted measures, like helping the hard-hit travel industry and offsetting losses of income for hourly workers through expanding unemployment insurance and paid sick leave.
How long will it last?
The downturn of 2008 put millions out of work and decimated household and business spending. The slump lasted 18-months.
COVID-19 Experts say the downturn is likely to be 6–8 months. That is assuming the number of cases peak in the next few months and reduce by summer.
Dealing with a crisis
It is difficult to know what will emerge from the current crisis and how many people will get sick or worse. Will the extreme measures taken by governments help to maintain the economy or lead to inflation? It’s hard to say. However, it’s better to focus on the things we can control than those we cant. Therefore, in these situations keeping our selves and our families safe is what matters most. I will be writing regular articles keeping readers updated on the impact of the crisis on the UK property market.