The Ties that Bind: Global Events and the Property Market

It’s very easy to become insular, just sitting in your own corner of the universe, getting on with life, and doing your best to ignore events thousands of miles away as simply things that do not concern you.

That’s a mistake however; world events, with seemingly no connection to the daily round of tenants and properties can have serious and lasting impacts on our businesses, and our lives.

The current troubles in the Middle East have been much in the news and might seem to be some distant problem we can’t influence. While that is true, it sadly doesn’t stop those same events from influencing us.

We’re going to look at how global events can very quickly have a local impact, especially on economies around the world. As property professionals, we’re keenly aware of the links between global events and the property markets.

The rumble of distant drums

Over the past five years, there have been a number of global events which have had serious effects on the domestic market.

Russia’s invasion of Ukraine caused a spike in energy prices which directly affected the UK, and other European economies and the decision by the USA to launch a military attack on Iran is causing major problems for many economies.

But why do these events affect the PRS here in Bonny Scotland and the wider UK? The answer points to one of the unavoidable disadvantages of a globalised economy.

Without getting too transcendental, the interconnectedness of everything, like the internet (which is in part responsible) is a major strength but also a potential weakness.

Forces affecting one aspect of global economies can have impacts elsewhere. We’ve resisted writing ‘unforeseen impacts’ because they are foreseeable, if you like, they’re a feature rather than a bug.

When the USA attacked Iran, despite their claims to the contrary, it was entirely predictable that Iran would attempt to close the Strait of Hormuz. Why? Because doing so would hit back at the USA and many of its allies.

In fact, even causing issues for countries not directly allied to the US was an advantage for Iran as those countries were likely to see the disruption as a direct result of American actions, rather than blaming Iran.

So there’s a geopolitical aspect to this. Additionally, as we all know now, there was also an immediate economic impact, as huge volumes of global seatrade transits the Strait daily, in particular, oil.

The cost of war

You don’t have to look further than your local petrol station to see the impact of war in the Middle East.

According to the BBC:

“Analysts say every $10 (£7.53) increase in the oil price pushes up pump prices by roughly 7p a litre.

Since the war began, the price of a barrel of Brent crude – the global benchmark for wholesale oil prices – has been very volatile, jumping from $73 to as high as $126 a barrel at one point, the highest since Russia’s full-scale invasion of Ukraine.

The cost of filling a typical family car with petrol went up by around £14. A tank of diesel became £27 more expensive.”

Those increased fuel prices affect many aspects of our  day-to-day lives, driving up the costs of the transport which delivers our groceries to the supermarket, our online orders to our doors and, of course, the daily commute to work.

And all that is before we factor in the increased costs of heating and lighting our homes and workplaces.

These increases affect tenants, landlords, homeowners and businesses, leaving everyone with less money in their pockets, intimately binding together global events and the property market.

All of these rapidly rising costs impact UK inflation, and that limits the room for manoeuvre available to the Bank of England in its goal of keeping UK inflation at 2%.

As a consequence, financial institutions have adopted a cautious approach to lending, with many mortgage products being withdrawn from the market, to be replaced by others with higher rates of interest.

That in turn hits the housing market, making it harder for prospective buyers to fund purchases, leading to a decrease in the volume and value of sales. Good news if you’re a genuine cash buyer, not so good if you rely on borrowing.

All of this has led to a fall of 0.5% in house prices for March this year according to Halifax.

Amongst other developments, this led to brief speculation that the Chancellor, Rachel Reeves, was contemplating a rent-freeze in England, although this was rapidly denied by a government spokesman.

Living in an uncertain world

The root of these convulsions in the property market is the uncertainty that inevitably accompanies periods of international upheaval. In the current situation, there is a clear impediment to the movement of oil from the Middle East.

That has rapidly led to the effects outlined above, however global markets abhor uncertainty, regardless of the cause, and while it is true that some speculators will make money, many investors tend to entrench their positions.

Buy-to-let landlords will be keeping a wary, and possibly worried, eye on the costs of borrowing, especially if they face the prospect of having to remortgage in the near future.

There is a high chance that they will have to accept higher borrowing costs, and the obvious recourse, to raise rents, may not be the ideal solution at a time when tenants themselves are dealing with an increasing cost of living.

There is also the situation where current renters who hoped to shortly buy a property of their own feel unable to do so, and the property they currently rent therefore won’t come onto the market, decreasing the available rental pool.

Just to complicate matters, the Renters Reform Act has just come into force in England, which, amongst many other provisions, gives tenants the right to challenge rent increases that they feel are unfair, and limiting the frequency of rent rises.

Whether this combination of global economic pressure and domestic legislation will lead to struggling landlords looking to sell their properties remains to be seen, especially in the face of a weakened sales market.

Advice from the property pros

Ah, just when we thought things were starting to settle down and move along nicely…

These are challenging times for landlords, tenants and homeowners alike, none of it being helped by the somewhat chaotic foreign policy coming out of the Whitehouse.

Lack of certainty is anathema to all markets – leaving aside the minority of speculators who love a high-stakes gamble.

It seems to us that we are all going to have to do the best we can in the circumstances, especially since there isn’t anything any of us can do to materially affect the economic winds swirling around us.

We’ve always maintained that property investment is a medium-to-long-term game, and that is doubly so in times of upheaval, and we would advise investors to view the current difficulties as another storm they’ll have to weather.

The chances of seeing the forecast Bank of England Base Rate cuts this year are well and truly on hold, and time will tell how that shakes out across the financial markets in general.

Whatever the final resolution of the war in the Gulf, the impact will endure for some time afterwards, and that’s before factoring in further US trade restrictions as a result of a ‘failure to aid an ally’ during a war of choice.

Anyone in the position of having to sell property at present has our sympathy. It’s not all doom and gloom, and far from impossible to do, but it would be disingenuous to suggest the market is presently in peak health.

In summary…

It’s a terrible cliche, but there is an element of “keep calm and carry on” at present if at all possible.

Landlords are faced with the prospects of raising rents to cope and in the process potentially losing good tenants to an uncertain alternative. Tenants are once again faced with spiralling costs.

If you would like to discuss your options, we are always available to offer advice. It’s an ill wind that blows no good, and there may yet be attractive opportunities despite the influence of global events on the property market. Just get in touch.

Contrary to some popular opinions, being a landlord or investing in property is not an easy option, it requires work and careful thought to ensure a good return on your capital and time in the best of times.

The present global situation is far from the best of times, making the undertaking more difficult.

It is small comfort, but to paraphrase a mediaeval Persian Sufi poet; “This too shall pass”. Things will get better again.

Thanks for reading!

Written by Chris Wood, MD & Founder of Portolio

Get in touch on 07812 164 842 or email [email protected]