We have a saying: “Lots of people make lots of money in the good times and fewer people make even more during the tough times”.
Tough times are coming to the property sector. Please do not believe the commentary suggesting that we will bounce back quickly. The economic ‘damage’ already suffered means that is not possible. Strong words? Maybe, but my view is that we should plan for the worst and ‘hope’ for the best.
Before we look at the opportunities, it is best if we understand the effect that relatively small falls in house prices have on the sector and how we work with them.
Using optimistic forecasts is foolish when appraising, negotiating and agreeing deals so all deals should be stress-tested for falling values (right down to where the asset has no purchase value) and increased costs. We will be seeing some increased costs - while labour costs are likely to go down due to unemployment, materials may well go up. Deals should be structured on the lower base values and if the vendor won’t do this then walk away, watch and wait as the opportunity may come back. We were always told and have always told others that a deal is made in the purchase which is 100% correct, anything that is made after is a bonus.
If we are wrong and values remain stable then there is no real problem as our own deal structures allow for the landowners to receive additional payments on top of the purchase price, depending on the values at the time of sale or refinance.
However, many “experts” are suggesting a quick bounce back for the housing market with strong pent up demand and continuing low interest rates, fuelling a return to the strong market seen in the first quarter of 2020. Will this happen? We do not know how Covid-19 will impact our economy, regardless of expert opinion on QE, taxation, inflation, stagflation, interest rates etc. No one knows and as ever most only see the headlines and commentary that fits their own thinking.
Lloyds are the biggest mortgage provider in the UK and earlier this month they issued forecasts indicating a 5% fall in house prices during 2020 with a severe downside indicating a 10% loss.