The Covid-19 pandemic is having an unprecedented effect on the global economy, with many businesses around the world facing financial difficulty. In the UK alone, retail sales saw their biggest monthly fall since records began, the PMI employment index has crashed, 78% of the workforce has been furloughed in businesses that had temporarily closed or paused trading, and more than 1.8m people had made new benefits claims through universal credit since the beginning of March. But what about the property market, the question of stimulus packages and the impact on landlords and letting agents?
In this guest blog, Dale Kames, Head of Lettings for Clee, Tompkinson & Francis shares his thoughts. With over 30 years of experience as a Letting Agent, Dale holds a CeMAP qualification, an NFOPP Level 3, and is an Associate of the Guild of Professional Estate Agents (Lettings & Sales). He has also trained over 5,000 landlords and letting agents in the last five years alone, and presented 300 training courses qualifying for Rent Smart Wales licenses. Over to you, Dale…
Normally when I’m asked about the future for landlords and letting agents, I answer that it’s going to be the usual mix of opportunity and difficulty. However, when a global crisis like Covid-19 hits us, all logic goes out the window, at least for a while.
I personally think that there’s going to be a fundamental change in the global economy unlike anything we have had since even cavemen began bartering - and this will have a huge influence on the property game.
The impact of Covid-19 on a macro level
On a macro level, massive government-enforced lockdowns and their cascading economic effects have put millions of people out of work. Through no fault of their own, many have been reduced to dire straits and are now scrambling to find ways to support themselves.
Politicians, attempting to help those whom they’ve kept from working and resuscitate markets that their lockdowns have extinguished, have united around the notion that the government must provide a “stimulus” - and as a result, the government unveiled an unprecedented £330bn bailout package. The Bank of England has set interest rates to near zero, promised virtually unlimited loans to banks, purchased mortgage-backed securities, and created new “money” in many other ways.
Clearly, when people are locked down and cannot work, they need some means of supporting themselves. But are stimulus packages and related financial manipulations a good solution to this problem? To answer this question, let’s start by looking at what happens in a marketplace when there’s a disruption and businesses do not receive stimulus money.
What would happen to the economy without a stimulus package
First, the disruption reveals vulnerabilities, incentivising investors, entrepreneurs, and workers to make better decisions about future investments of time and money. Weak leaders and ventures are exposed, and excessive risk taking and complacency are punished.
Property businesses that are overextended and are unable to obtain additional loans go bankrupt, but their employees and capital don’t disappear. Buildings owned by bankrupt landlords don’t vanish. Instead, such resources are acquired by more responsible owners spearheading more stable ventures.
Likewise, the most productive employees of failed agencies often find work with better companies in their field or related fields. Others find new types of work, which often require them to develop new skills that are in higher demand in the changing economic landscape. Those with contingency plans - whether savings or insurance - are rewarded, and their forward thinking is reinforced. Others rely on the support of friends, family, and private charity.
On every level, market disruptions reveal fragility and provide people with the information they need to make their personal and professional lives more robust, which contributes not only to a stronger recovery, but also to an economic immune system better able to withstand future crises. Now, let’s look at the consequences of governments responding to a massive market disruption with a stimulus package.
What will happen to the economy with stimulus packages
Whereas people otherwise would notice faults in particular businesses and personal financial plans, they are less likely to do so when those weaknesses are papered over with bailout money. Unprofitable, unsound agencies and landlords are propped up, and ineffective and wasteful executives and managers often remain at the helm. Assets and personnel who otherwise would move to more productive ventures instead sit idle or are employed to produce services for which there is reduced demand.
Those who otherwise would have strong incentives to make better financial decisions and increase their resilience for the future instead are incentivised to proceed as if little has changed. “Free money” enables many people to maintain poor spending and saving habits; they need not so earnestly prioritise their values or restructure their finances when the government pays them to rest on their laurels.
Further, unlike individuals and businesses, governments don’t create wealth - they only redistribute it from one person to another. In the UK, stimulus won’t be funded by raising taxes (which would cancel out the stimulus, rendering it pointless) but by borrowing more money.
The Treasury borrows money by selling bonds to banks. But because banks don’t have that kind of money sitting around, the Bank of England digitally creates and lends them as much money as they need to purchase these bonds and does so at near-zero interest rates. With this money, the banks purchase the bonds from the Treasury, and the Treasury funds the stimulus package.
However, just as with printing money, this process has many destructive consequences. For one, by expanding the amount of money in the marketplace, the government decreases the value of every pound in circulation.
So, instead of agencies investing in productive capacity, they will be incentivised to chase short-range consumption, which causes problems in the not so distant future. There is an idiom for this: “eating one’s seed corn.” Families who lived off their land would reserve the seeds of some of their harvest to plant during the next season. When a crop failed, they sometimes had to eat their stored seed to survive, which meant they had little or nothing to plant the following season.
To sum up, a stimulus package can conceal and perpetuate fragility, hiding information that people need to think clearly and act accordingly in regard to their finances and their work. They lure capital away from productive investments, weakening rebuilding efforts, dragging out recessions, and making us all more vulnerable to further crises. Not only that, but they also violate our rights by inflating the money supply and reducing the value of every earned pound.
The government response to the COVID-19 pandemic will harm many innocent people. But, in my opinion, stimulus packages will only make a bad situation worse. Though touted as a cure, such “stimulus” could be, in fact, another disease.
The impact on a micro level
On a micro level therefore, landlords will desert the market and will be hamstrung for a while with reduced availability of re-mortgage products and probable ‘down valued’ property. Arrears will also accrue in an estimated 40% of tenancies, leading to deferred mortgage payments.
If a landlord claims a mortgage holiday, this will increase their payments when ‘normal’ life returns, leading to possible rent increases. And don’t forget that Section 24 Tax limitations are now fully implemented together with the difficulty of EPC & MEES legislation now biting.
Letting agents are being forced to reassess their staffing and systems which may lead to redundancies, more working from home and embracing of new technology, whereas estate agents in sales will suffer from a lag as is normal in sales unless they have some ‘in the bag’ to recommence.
Although, with many sales in a chain, it will not be inconceivable that someone in the chain will pull out because of redundancy, uncertainty, hoping to get a reduction etc. There is the hope that there will be a return to business before the furlough money ends so that a staged return can be arranged for staff, however, it is anticipated that initially many branches will not reopen and medium term many more will close.
Advice for landlords
Some practical advice for landlords, in the meantime, is as follows...
1. Council tax on empty propertyAn exemption ‘G’ can be claimed from Council Tax if occupation is prohibited by law:
- The property must be unoccupied and unfurnished
- Occupation must be prohibited by law (including a closing order or demolition order) or kept unoccupied by reason of action taken under powers granted by or under any Act of Parliament with a view to prohibiting its occupation or to acquiring it such as a compulsory purchase order
The exemption does not apply to actions between individuals or companies under contract law such as restriction orders and does not apply if the property is occupied by squatters who choose to occupy even though prohibited by law.
2. Deferred rent
Firstly, any rent deferred is not legally due so will not count towards a ground 8 rent arrears claim. This could delay the point at which the ground 8 trigger happens and therefore delay the possession action. My advice is that you do not agree to defer, but equally you assure the tenant that due to the current circumstances you will not be actively seeking possession for any rent arrears. We might add "as long as you are convinced they are paying what they can" or other caveats, which will better preserve your position.
Secondly, as an agent, we would not agree to deferment without the agreement of the landlord and any rent guarantee insurance company. Not getting agreement could invalidate the rent guarantee insurance. Thirdly, it would be wise to get the agreement of the guarantor. This is because anything that increases the guarantor's liability could see them off the hook, so make sure they agree as a precaution. (The increased risk might be argued to be from allowing thousands of pounds of rent arrears to accrue).
What next?
Whatever happens in the coming months, one thing is for sure: we are only part way through this health crisis and just starting out into the economic crisis, so many changes are to come. If you are facing financial difficulty as a result of the Covid-19 pandemic, the sooner you seek professional advice, the better. Contact McAlister & Co today for free, confidential advice.
