Coronavirus - A case of history repeating itself?

Coronaviruses (CoV) are a large family of viruses that cause illness ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS-CoV) and Severe Acute Respiratory Syndrome (SARS-CoV).

Coronavirus disease (COVID-19) is a new strain that was discovered in 2019 and has not been previously identified in humans. Coronaviruses are zoonotic, meaning they are transmitted between animals and people. Detailed investigations found that SARS-CoV was transmitted from civet cats to humans and MERS-CoV from dromedary camels to humans.

Several known coronaviruses are circulating in animals that have not yet infected humans. Common signs of infection include respiratory symptoms, fever, cough, shortness of breath and breathing difficulties.

In more severe cases, infection can cause pneumonia, severe acute respiratory syndrome, kidney failure and even death. Standard recommendations to prevent infection spread include regular hand washing, covering mouth and nose when coughing and sneezing, thoroughly cooking meat and eggs. Avoid close contact with anyone showing symptoms of respiratory illness such as coughing and sneezing.

Source: World Health Organisation

COVID-19 has caused panic across the world, from supermarket shelves to global stock markets. Questions are being asked about whether the financial and property markets will survive this pandemic.

However, looking at similar pandemics or epidemics like swine flu, it appears people have no reason to panic. Swine flu was first introduced to the UK on 27th April 2009 when a Scottish couple were returning from their honeymoon in Mexico. The first death being a woman with underlying health conditions on 14th June 2009.¹

COVID-19 is similar to swine flu, in that the first case in the UK was on 22 January 2020 and the first death wasn’t until almost two months later on 13 March 2020.

Therefore, it seems appropriate to use swine flu as an example to predict what will happen to the UK financial and property markets. Historically, markets have declined when a pandemic or epidemic is first introduced and that is what we are currently experiencing from the COVID-19.

However, looking at previous pandemics, financial markets are usually resilient and tend to bounce back once the peak of the crisis has been reached.²

The chart (Figure 1) shows that before the crisis peak, financial markets tend to contract. This is what we are currently seeing in terms of coronavirus. History shows us that once the crisis reaches its peak, financial markets will quickly bounce back and continue to grow.

Therefore, the question to ask is when will we reach the peak for cases of coronavirus in the UK?

Professor Chris Whitty, England's Chief Medical Officer, said on March 12th 2020 that he expects that the UK would reach the peak of its coronavirus outbreak in about 10 to 14 weeks. We would therefore expect the peak of the coronavirus to reach its peak around late May this year.

This means that we should expect financial markets to continue to struggle until then. After the peak, we would then expect the financial markets to rebound over the following 1-3 months.

Historically, there has been a boost in financial markets when vaccines have been released. Typically, it takes around 5-6 months for a vaccine to be released from the first global case of a virus as seen below (Figure 2).⁴

COVID-19 was first detected in December 2019, therefore if we assume it will take 5 months to release a vaccine, we would expect a vaccine to be released around May. This further supports our theory that financial markets will begin to recover around May this year. As history has shown, the UK housing market does not react in the same volatile way as the financial markets.

When swine flu riddled the UK in 2009, the virus was economically impactful with news outlets giving particular focus on fewer mortgages being approved and a reduced amount of construction activity.

Despite these issues, the UK housing market still increased 10.1% between March 2009 and March 2010, rising to 15.6% in London.³

Nationwide suggested that this was the result of cash-rich buyers returning to the market and low interest rates limiting the number of distressed sales. As a comparable, when the Ebola crisis was classed as an epidemic, the housing market also increased 14.4% and 26.6% across the UK and London respectively during the crisis which took place in 2018.⁶

Today, interest rates have never been lower on record (0.1%), which is the second time The Bank of England has made a base rate cut in just one week; and with the introduction of the 2% stamp duty surcharge for all residential purchasers by non-UK residents in 2021, there will be an influx of cash-rich foreign buyers looking to buy property before the surcharge is introduced. The UK property market is therefore in a better position to withstand the threats surrounded by the coronavirus than what it was during the swine flu pandemic.

Since the 1980s, there have only been two occasions where the UK property market has contracted, which were during the early 1990s recession and the 2008 financial crisis.

Both recessions had similarities in how they were caused, these being high interest rates and high unemployment.

The early 1990s recession saw company earnings decline 25%, as a result unemployment rose from 6.9% of the working population in 1990 to 10.7% in 1993.

In 1990

During 1990, house prices were falling by 10% as home repossession rates rose.⁷

Home repossession rates increased due to the high unemployment rate and high interest rates, which effectively meant mortgages were more expensive and fewer people were in work. Therefore, unable to pay for their expensive mortgages, hence the crash.

In 2008

The 2008 financial crisis had similar indicators. The subprime mortgage crisis forced banks to recall loans from companies, those companies then couldn’t afford to repay these loans and had to lay off their workforce. The unemployed workers then could not afford their high interest mortgages once the teaser rates expired and their homes then got repossessed.

With lots of homes being repossessed, there was then an excess supply of houses on the market, the UK housing market therefore contracted to correct the market.

Similarities

Looking at these two recessions and the indicators that caused the UK property to contract, there are no similar indicators present right now to suggest that a recession would affect the UK property market.

Recession

The two biggest indicators to look for are high interest rates and high unemployment. As previously stated, UK interest rates have never been lower, which means mortgage rates have never been cheaper and unemployment is at its lowest level since November 1974. It is therefore likely that if a recession was to hit the UK today, growth in the UK property market would slow.

It is extremely unlikely however that the market would experience negative growth.

Why would the market not experience negative growth?

Because unemployment is low and people are working, in the event that they lose their jobs, mortgage rates are cheap due to low interest rates, which means more people are likely to be able to pay their mortgages and will therefore lead to less repossessions and a steady supply of properties on the market. Because there is a steady supply of houses on the market, house prices should remain the same, if not increase.

The market is currently at the panic stage of the coronavirus pandemic (not helped by a 200% increase in worldwide social media users since 2009).⁵ Once the peak has been reached and a vaccine has been released (which are both expected to be around late May), we should begin to see financial markets rebound back to normal within the following 1-3 months.

This has been evidenced in the form of previous pandemics, namely SARS, Swine flu, Ebola and Zika. Property markets should not see any real effect caused by coronavirus as was also the case during the swine flu pandemic where house prices continued to grow. Furthermore, any negative effect that coronavirus may bring to the UK property market is likely to be outweighed by the positive effects of the Brexit boom which we are currently experiencing in the UK.

In the event of a possible recession, although the volatile financial markets will be affected, it is unlikely that there will be negative growth in the UK property market due to interest rates being the lowest ever seen and the unemployment rate being at its lowest rate since November 1974.

Following the UK Government announcing on the 17th March, 2020 that it would be providing a guaranteed £330bn business support fund to both big and small UK businesses, this will provide much needed cash flow to businesses to fund employee salaries and operational expenses. It is hoped this will continue to keep jobs alive therefore enabling the population to pay their mortgages or rent whilst being able to buy products and services from local businesses.

Whilst jobs have been kept alive, it is also worth noting that mortgage lenders have also been advised to provide 3 month payment holidays as well as business rates being frozen for one year. Such moves are designed to help stimulate the economy and keep money circulating through the system.

As previously stated, the only two recessions where the UK property market has experienced negative growth was because of high unemployment and high interest rates. With the UK not experiencing either of these indicators, it is fair to conclude that in the event of a recession the UK property market is unlikely to contract and would if anything continue to grow, just at a slower rate.

JaeVee joint ventures with experienced property developers in building new homes in the UK that typically take 18 months to build therefore meaning from an investors point of view, it’s important to look at the position in 18+months time when the units hit the market.

The historical trends detailed above show that when our development units hit the market in 18 months time, the financial climate, as a result of the current pandemic, should have already corrected itself in a positive manner.

Please note this report is not to be considered as investment advice. We recommend you seek independent financial advice and conduct your own due diligence before making any investment.