But numerous questions remain:
- what will the impact on UK GDP be?
- by how much will housing transactions fall, and when will they recover?
- what will the impact be on house prices?
- how is this downturn different from the 2008/09 financial crisis?
- how will the development sector be impacted?
- does it still make sense to lend in this environment?
These are some of the important inbound questions we are fielding from investors and developers. There is a good deal of uncertainty as to the answers, but current thinking can be summarised as follows.
The lockdown policies currently being implemented in the UK and elsewhere are having a large and immediate impact on real-time economic activity.
While this is a decline comparable to 2009, there are fundamental differences. Importantly, the 2008/09 crisis was a recession fuelled by reckless sub-prime mortgage lending, high levels of consumer debt, and an over-leveraged banking system. So-called ‘balance sheet recessions’ notoriously take years to crawl out of.
This recession, by contrast, has been largely self-imposed in response to a health crisis which hit a generally healthy economy, with a property market and banking system on much firmer footing, and a policy framework primed to react with greater speed and force than in the last recession.
So, while too early to determine the impact of the coronavirus, it is not expected to be as damaging or long-lasting as was the great financial crisis. Many economists are predicting a "V" (or maybe "U") shaped recovery, rather than the "L" of a decade ago.
The removal of lockdown measures should result in a discrete jump in activity, and some expenditure could be re-profiled from the first half of the year. Macro policy stimulus and inventory building should also contribute to a recovery. But the scale of the dislocation means we do not envisage GDP reaching pre-virus levels until late 2021.
UK housing market
It is worth noting that, in Q1, the housing market was exhibiting very strong underlying momentum in the wake of the decisive general election results, with a sharp uptick in sales and price growth across the UK.
Rightmove reported that sales agreed in the month ended 7th March was up a huge 17.8% year-on-year, with asking prices up approximately 3.5%.
Covid-19 and the lockdown has put this recovery on hold, with sharp near-term reductions in activity expected.
Assuming the lockdown is maintained through May and gradually eased in June, Knight Frank sees transaction volumes falling 38% in 2020 to circa 734,000, though they note that the contraction may be less if the lockdown does not persist until June.
According to Savills, suppressed transaction activity means we expect to see a build-up of latent demand. The experience of working from home for an extended period of time could drive many households to move.
Knight Frank forecasts a meagre 3% drop in house prices, while Savills predicts a decline between five and 10% (albeit on low transaction volume).
At a minimum, we know that many of the nation’s large housebuilders are voluntarily "hitting the pause button" on residential developments (though it is not currently mandated by the government).
There have also been instances in which some development lenders have recently pulled back from transactions "at the finish line" as they assess their current loan books.
The worry for the nation and the industry is that the funding gap facing housing developers (SMEs in particular) will widen further, driving their cost of capital higher.
These dislocations can present opportunities for lenders both to continue to support the growth plans of development partners and to earn attractive risk-adjusted investment returns.
In a crisis, it can be hard to see the wood for the trees, and natural fight-or-flight instincts often say to run away.
But, in markets, this can often lead to poor analysis and decision making. By keeping your head while those about you are losing theirs, we must rationally assess the current situation and observe how it unfolds. Along with the risks and uncertainty will come great opportunities.