Can the UK property market cope with a double-dip recession? There are just so many variables. So many things affecting the answer to a massively different degree between their best and worst case scenarios, and all of them intertwined and affecting each other's outcomes as much as the property market as a whole - he writes picturing a great row of dominoes ready to knock each other over in spectacular fashion.
However, the answer will always be yes. The property market will always "cope" it is just the poor buggers caught up in it that suffer. For example, during the first dip recession thousands of families lost their homes, but at the same time millionaires from around the world capitalised on the massive discount they could get on prime property because of the combination of the weak pound and falling prices. The property market always copes.
In fact, in this case looking at a double dip recession is hardly different from looking at whether we can cope with the status quo, because for the last 12-18 months while we might not have been in recession, we might as well have been where property is concerned. The mortgage market has remained constrained, unemployment has barely improved, wages have barely grown, house prices have been about flat overall taking into consideration rises, falls and inflation, and property sales have barely risen off the floor they fell onto during the recession-proper.
Can we cope with more of the same for god knows how long, of course we can, we're Brits; we put our stiff upper-lip into the north wind and carry on regardless. So, the real question is, how bad will a double dip recession be for the property market.
Recovery Breakdown Service
If you'll pardon the play on words, because what we are discussing here is not a service offering recovery from a breakdown, but a service to break down the recovery. In the last few months there have been signs of hope in the property market, increasing sales in the residential sector and increasing returns and investment volumes in the commercial sector. One would expect this fledgling recovery to be killed off by a double dip recession, but this is unlikely.
We were seeing increasing home sales not because of the strength of the economic recovery, but because of a surge in demand from buy to let investors due to a booming rental market. Apart from that we were seeing more homebuyers because the lending picture has been gradually improving over the last 18 months. As the rental boom is a consequence of the first recession (repossessions and lack of mortgages) then we can't expect a double dip recession to kill it off - not straight away anyway. Nor can we expect the improved lending picture to muddy overnight.
The UK commercial sector is a completely different kettle of fish. For a while during the recession UK commercial property investment was among the highest in Europe, because of the increased value offered by the reduced prices of assets. Of late investment volumes were increasing again because of low prices, but also because of increased confidence in the recovery of the UK over the long term. Again, neither of these will be killed off overnight.
So it's all in the length...
A double dip recession will be declared if UK GDP shrinks for 2 consecutive quarters. But with GDP growth of just 0.2% in Q4, following growth of 0.6% in Q3 and 0.1% in Q1 (ONS data), we can expect little to change during 6 or even 9 months of barely negative growth compared to the last 6-9 months of barely positive growth. So it is really dependent on the length of the double dip recession that will determine the effect on the property market.
If we dip for only 2 quarters or maybe 3, the main difference will be falling consumer and investor confidence. But we have more variables here. While falling consumer and investor confidence could potentially apply downward pressure to demand, at the same time the prospect of the property market spending even longer in the doldrums is likely to make sellers even more realistic when it comes to pricing.
If we see a longer recession then all bets are off so to speak. A longer recession would likely mean higher unemployment and thus more people losing their homes because they are unable to afford their rent or mortgage repayments. Another wave of repossessions would be disastrous for the UK residential market, which has never really got back on its feet. Demand is still at historic lows so a wave of repossessed properties coming onto the market would almost certainly be a crippling factor.
Less people shopping means an already troubled retail industry would suffer even more, hurting the retail property sector. At the same time, rising unemployment also points to less office space requirements.
We are looking at more loan defaults, which would of course also begin to affect lending. Lending is already far too low, so to constrict the mortgage market further, in combination with one or more of the consequences above would put the market in a tailspin.
But again, the market would cope, it would only be the poor people caught up in it that would struggle to do so.
- Tuesday 07 February 2012