Should you invest in UK property during a recession?.

Should you invest in UK property during a recession?.

June 29, 2022

The UK economy proved to be more resilient than many anticipated during the covid-19 pandemic. It bounced back impressively over the second half of 2021 which left many looking ahead positively to the future.

The latest figures from the Bank of England suggest that the picture might not be quite as good as we had initially hoped. The cost of living crisis is well documented, as is the ongoing issue with energy prices which is contributing to that. The combination of both is putting pressure on household spending and having repercussions in the wider economy.

Looking at the bigger picture reveals some concerning numbers. The UK manufacturing and servicing sectors have both contracted further than expected thanks to the cost of living crisis, and this has been a major contributor to predictions that the UK has entered a technical recession – a period of two quarters of negative economic growth.

Earlier in May, the Bank of England predicted that the economy would contract in the final three months of 2022 as the cost of living sees households cut their expenses. The Bank further forecasts weak quarterly growth in 2023 and a contraction as a whole next year. It predicts a fall in GDP of 0.25% next year and a consequent small rise in unemployment.

Thomas Pugh, an economist at RSM UK, says in the Financial Times that the projected slump “is a clear sign that the economy looks set to worsen after contracting by 0.1 per cent in March and increases the chances of a bigger fall in the second quarter and of a recession this year”.

This situation is viewed by the market as likely to lead to further rises in inflation over the rest of 2022. Indeed, the Bank of England has indicated that it expects to increase the base rate of interest further in an attempt to combat rising prices from its current level of 1.0%.

So, what does this mean for property investors? Put simply, it could be the ideal time to speculate and invest for long-term gains, even if the short-term economic picture may look less promising.

We have argued previously that rising inflation rates can offer some advantages to investors. Overall, the benefits of investing, and the income on offer, is potentially a lot higher than any inflation or rise in the base rate of interest.

The reality is that UK property has proven itself to be one of the most resilient and reliable assets on the market time and time again. Property prices and rents remain on an upward trajectory, and the underlying situation regarding a lack of new supply is no closer to being solved. That is a point in favour of investing despite any rise in inflation caused by the economy performing less well than predicted.

The second question that property investors need to be aware of is: if the UK does enter a recession, will it cause house prices to fall?

The theory behind that question makes sense. We are already seeing households spend less due to the cost of living crisis, and a recession would further decrease the amount of money on hand – potentially reducing the number of people looking to move house or rent a new property. Housing is a big purchase after all.

This would theoretically reduce competition in the market, causing prices to potentially fall. While this is true to some extent, the reality is that there is such a shortage of available housing in the UK that a fall in the number of buyers may not affect the market all that much.

There is an annual shortfall of more than 100,000 new homes when construction rates are compared to demand. This leaves a huge backlog which is the foundation of rising house prices – as Halifax noted in April, prices have risen for 10 consecutive months and by 10.8% overall in a year.

While the potential for a temporary recession appears to have cooled some demand, the underlying fundamentals have not changed.

This could even end up being an opportunity for investors. There is no prospect of the millions of additional homes the UK needs to be built in the foreseeable future. This ensures that demand is likely to remain for years to come, and that there is potential for investors to get ahead of the game and invest while the market slows in anticipation of a future upturn.

“For now, at least, despite the current economic uncertainty, the strong increases we’ve seen in house prices show little sign of abating,” said Russell Galley, the managing director of Halifax.

“Housing transactions and mortgage approvals remain above pre-pandemic levels, and the continued growth in new buyer inquiries suggests activity will remain heightened in the short-term. The imbalance between supply and demand persists, with an insufficient number of new properties coming on to the market to meet the needs of prospective buyers and strong competition to secure properties driving up prices.”

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Author

Sanjit Dhanjal.

sanjit@opulentinvest.com