By now, everyone is aware that world markets are not just on shaky ground, but fluctuating wildly on a daily basis.
Are world equity and fixed-income markets going to end the year up, down or sideways? No-one dares even hazard a guess at the moment, as volatility is so extreme and the daily swings are tremendous.
To investors in so-called liquid securities (especially equities and fixed income), this has been the worst start to a new year in recorded history. Liquidity has dried up almost to a standstill, as investors try to convert as many assets to cash as possible while they figure out what is happening in the world.
For us, the key question to answer is, what is the impact, if any, on the property market?
Do falling oil prices affect London residential prices? Do falling bank stock prices have an impact on the demand for office space in Manchester? How does a lack of liquidity in fixed income markets affect student accommodation in Glasgow? And should property investors welcome negative central bank rates?
At a micro level, the short and frustrating answer appears to be… it depends.
You can always find instances of, say, Middle Eastern investors pulling out of London real estate because they need more cash to compensate for lower oil prices; hedge funds diverting cash from real estate to fixed income to take advantage of high yields; and banks reducing certain types of lending as they look to increase capital reserves and reassure their equity and bond holders.
Conversely, you will also see instances of family offices diverting more cash to real estate as a safe haven; insurance companies moving into property lending as a source of yield; and pension funds piling into PRS for long-term income and capital growth.
However, taking a step back and trying to look at the situation from a more macro perspective, to me it appears this volatility should not significantly affect the UK property market.
While the events of 2008 are still raw and fresh in our memories, it is understandable that property investors will be concerned that the world market turmoil will affect their market.
In 2008, the FTSE 100 fell more than 30%. In the same year, UK house prices fell by 16%. In 2016, at its worst point so far this year, the FTSE 100 was down almost 10% from the start of the year. Within a week most of that drop had been clawed back. House prices, on the other hand, have continued to rise so far in 2016.
Of course, changes in house prices can, and often do, lag changes in stock market indices. And there are times, as in 2008, when the two markets did appear to be correlated. But the flip side is that there are clear times also when the markets are uncorrelated.
In the Black Monday market crash of October 1987, the Dow Jones plunged more than 22% in one day. The FTSE 100 fell 10%, and then another 12%, over two consecutive days – both of which are still the largest one-day percentage falls in the history of the index. Yet the “real” economy was largely unaffected, and in 1987 UK house price growth was positive in both nominal and real terms.
Similar instances include the Asia crisis of 1997 and the Russian crisis of 1998 (including the collapse of hedge fund LTCM, which required the US Federal Reserve to bail out numerous banks); these were tumultuous times in the world securities markets, but the real estate markets continued largely unaffected.
Without doubt, globalisation has exacerbated the transmission of volatility between markets. And academic research has identified correlations between world stock markets, particularly at times of heightened volatility.
But more work needs to be done on the connections between global security markets and real estate markets. My own research indicates that the times when the respective markets do appear to show a strong correlation are when the security markets are reacting to a credit squeeze. This is when real estate as an asset class is hit.
Today’s volatility is more a liquidity crunch than a credit crunch, and that’s why I don’t expect to see any imminent spillover from the turmoil in the world markets to the UK real estate market.
Randeesh Sandhu is chief executive, Urban Exposure
