2020 was a year where many of us, at some point, assumed the role of ‘armchair’ virologist or economist. After most of the media incorrectly predicted the housing market trends for 2020, many outlets have continued their negative outlook based on the rising national debt, second virus waves, lockdowns, rising unemployment and Brexit. I strongly disagree with this negativity – here I will explain why.
Most of the media seem to overlook that the UK’s money supply is currently at around three times its average rate. Money supply has increased above normal levels for nearly a year, a direct result of government / central banking policy to help protect jobs and business continuation throughout the pandemic. Examples of this include the ‘furlough’ scheme (protecting jobs and income), government business grants, CIBIL loans and ‘bounce-back’ loans.
When the creation of money into the system outweighs the ability to spend it on goods and services (currently due to government restrictions), it creates an ‘inflationary gap’—gradually increasing average prices of goods and services. Historically, the property market is one of the first markets to react to this change. Based on this and new consumer behaviour and business practices I anticipate that the value of commercial, inner-city property will fall, large out of town units for online retail will increase, and residential property prices (mainly those outside of London) will increase. Today’s money supply will positively influence property prices next year, provided there is no extended recession affecting transactional volumes.
Within the media, there seems to be a popular view linking unemployment levels to property price predictions. Unemployment levels will increase in 2021 – possible to around 8%. The pandemic has been a catalyst for change in consumer behaviour and business practices. Therefore, a lot of the unemployment will be ‘structural’ – meaning that the jobs lost will not be replaced ‘like for like’ but new opportunities should arise.
History is a good indicator of what can happen in similar economic settings. In the 1980s, despite recessions at either end of this decade and an average unemployment rate of 8% (a lot also structural) – how did property prices rise at an average of 13% per annum? The answer is banking policy – at the time, the two major players were duelling for the crown of the largest bank in the UK (by total assets). This, combined with building societies being allowed to become banks, increased the money supply into the UK system immensely and increased house prices despite higher unemployment levels.
In the 1990s, banks had to become more prudent due to previous recklessness in lending policy and reduced interest rates, affecting profit margins. Even though unemployment levels decreased, the overall supply of money had diminished compared to the 1980s. As a result, property prices increased by just 3% per annum. In isolation, unemployment has had little or no impact on overall property prices when looking at the past 30-40 years.
Availability of High Loan to Value Mortgages
During the pandemic, many banks have changed the products on offer to borrowers with smaller deposits. Some may argue this will affect the market – I disagree. Due to Covid-19, many ‘millennials’ have made savings as a result of the government lockdowns having reduced their day-to-day expenses. Adding in the ‘Bank of Mum & Dad’ with increased funds and interest rates at rock bottom providing little return, there is a financial sense in assisting a child’s property purchase. As inflation increases in 2021 (possibly to around 4%), the overall desire to own property will increase.
The bank of England has created around £200bn so far during the coronavirus pandemic (the equivalent of giving every UK resident £3k). The money supply is likely to increase in 2021 – possibly 50% more than so far, the most considerable fiscal stimulus since the Second World War. With a barebones trade deal secured with the EU, the UK government will now, more than ever, want to give the economy every opportunity to thrive after Brexit and as such I see the ‘fiscal pedal’ being to the floor for the foreseeable future.
Assuming the government restrictions ease over Q1 in 2021, based on mass vaccination and reduction in new Covid-19 cases, economic activity will increase incrementally. While government restrictions remain in place, businesses and individuals will continue to be supported by the state. There will be a continuation of many city-based industries allowing staff to work remotely; this will drive the desire for those based in the London Boroughs to seek value for money in the commutable North. Regardless of the stamp duty deadline, and whether it remains as it is, I expect growth in both transactional volumes, average prices and economic activity in the Greater Peterborough area throughout 2021. The future looks bright!