The recent news of Omicron’s debut into the UK has reignited interest in the property market and created a heated debate about the implications for the UK market. Covid-19 has been thrust back into the spotlight thanks to the new Omicron variety, the latest in a long line of varieties that have wreaked havoc on the planet and its people since first appearing in West Africa a few months ago. Some are claiming that the new version is more virulent and lethal than ever before.
At the time of writing, global stocks were down 3%, listed real estate was down 4%, US government yields were down 20 basis points (bps), and the price of oil was more than 14% below recent highs. Due to the variant’s potential severity (Delta was initially recognised as a basic “variant of interest” by the WHO), as well as the underlying policy backdrop, which comes at the start of a tightening cycle, the reaction has been more virulent than it was when the Delta variant first surfaced. Markets first responded by deferring certain pricing. Landlords who had houses for sale including houses for sale in Aylesbury are encouraged to find out how much their property is worth to alleviate tensions. During this time, the market has also pushed back some pricing in the money, equities, and commodities markets. Markets surged on the news that China had released a few additional strategic reserves and made tweaks to the OMO in an attempt to support the Yuan on December 22nd, itself a tumultuous day.
The economic impact will be determined by two factors: policy and fear. Because families and businesses are now significantly more prepared for another lockdown, the latter will play a larger role in determining the level of activity reduction. There is, however, a reason to believe that the impact will be minor. We’ve grown accustomed to living with the virus, and government’s response last year – to protect workers and/or assist the temporarily unemployed – could create a moral hazard, reducing the type of preventative behaviour often associated with periods of heightened uncertainty.
One evident trend is that demand has migrated back to London, as evidenced by the difference in the number of new prospective buyers who registered in the three months leading up to November compared to the same period last year. However, as the second table indicates, the moves are dwarfed by what happened in 2020 when the country-escape trend took hold.
Part of this will be due to the relaxation of travel restrictions, however, as we’ve seen, increased overseas interest hasn’t yet translated into increased purchases. Many overseas purchasers are gearing up for next year, which means they’ll be paying close attention to the Omicron narrative.
Policy, however, continues to play a role in both physical trade limitations, such as those imposed on travel, tourism, and leisure, and macroeconomic policy. Omicron complicates the inflation narrative by potentially increasing some of the ‘transitory’ drivers of price increases, making central bankers’ work more difficult. Recent yield fluctuations suggest that the Fed will take a more accommodating approach on monetary policy. However, fear and policy are not mutually exclusive; the severity of public health constraints can influence fear, which in turn influences policymakers’ response.
Real estate has an impact on both policy and fear. Increased constraints on the retail and hotel industries, as well as a return to working from home as an alternative to traditional office space, are all well-known consequences. An expected decline in foreign travel could hurt cross-border activity, while a shift in mindset could make December transactional activity a little more subdued. But, perhaps more crucially, Omicron serves as a stark warning that the virus is still far from being eradicated. Some of the underlying dynamics that are impacting demand for core real estate assets will be amplified as a result of this.
Despite the amount of supply coming to market, we believe that capital growth prospects are not jeopardised. Our transactional activity declined in September and remained modest in October due to a slight pullback in buyer interest. This is in contrast to June’s robust levels, implying that sector momentum has slowed, which we attribute to market anxiety over what will happen post-Brexit. Some structural trends, such as a preference for existing stock over new development, are being reinforced by the current climate.
While we wait for additional information on the Omicron model, another factor to consider for the UK property market is that it may delay an interest rate hike, which had appeared to be a foregone conclusion earlier this month. Last week, the Nationwide announced double-digit UK house price rise, owing to low lending rates and limited availability. Rising rates (combined with increased supply) were projected to put downward pressure on pricing starting next year. If the Omicron variation turns out to be significant, it could have an impact on supply and demand, as well as the timing of a rate hike. It’s a painfully murky forecast, but predictions for the coming year should get a lot clearer.