The Impact of the Highly Improbable
The concept of a Black Swan event was arguably first popularised by the statistician, ex financial markets trader and author Nassim Taleb in his 2007 bestselling book The Black Swan: The Impact of the Highly Improbable. The book focuses on the extreme impact of rare and unpredictable events, and the human tendency to retrospectively find simplistic explanations for these. I think the book is a triumph of mathematics, psychology, history and story-telling, but moreover it’s something one can refer back to at a time like this to try and make sense of the mass concern that seems to have gripped so many. With the spread of the Coronavirus now becoming the popular choice for front page reporting is seems a black swan event is upon us and many of us are scratching our heads to try and make sense of it all.
Patterns & Pandemics
When the first cases of Coronavirus hit the headlines in East Asia at the end of December 2019 (at that point the virus still wasn’t fully diagnosed), few could have predicted that it would mushroom into global hysteria. Flights cancelled, holidays abandoned, business travel curtailed, conferences (such as Europe’s largest property summit, MIPIM, which I had intended to attend myself) postponed.
At the time of writing, the Coronavirus death toll has hit 2,942 and is still growing. It’s important to acknowledge the human tragedy at the heart of this. However the mortality rate at less than 2% is relatively low and it’s worth keeping things in perspective. For example, the current death toll is approximately half that from annual motorcycle deaths in the US alone, and someone in the UK would be more than 5 times more likely to suffer from heart disease in their lifetime, than die from Coronavirus if they did contract it.
Less than 3 months ago Brexit and the UK general election seemed to be the inescapable crisis that dominated Britain, but now all that seems boring in the face of the next big news story that has trumped all else. Nothing seems immune, not even Donald Trump who has survived many issues that would have felled most heads of state, since the spill over from this could impact his valuable approval ratings and the key metrics he uses to judge his ongoing progress – US job creation and the stock market performance.
Like a hurricane during storm season, the ability for this virus to impact shores far away from its origin feels scarily potent. My main business focus is property and a lot of people have asked my thoughts on the potential impact of Coronavirus on the UK property market.
Coronavirus and the UK Property Market
History is a great teacher, but I find that memories are short. There have been several epidemics in the past which have threatened to become pandemics and the patterns are similar. Not to belittle what’s happening, but the path generally follows that of concern, fear, hysteria, normalisation, subsidence. Furthermore, since the Brexit vote in June 2016, property market activity has been subdued, construction activity is down and countless planned property purchases have been put on hold. Just when some optimism returned to the market post the UK election, the concerns around Coronavirus hit meaning that the pent up activity which should have been released is once again caged pending the “optimism trigger” that unlocks the gate. Things may indeed end up getting worse in the short term and judging from the reaction of the stock market last week it would take a brave person to assume the problems won’t get worse medically or economically. However, I feel cautiously confident that today’s troubles are fuel for the positive momentum we’ll see in the UK property market in the medium to long term. It’s no secret that there is a massive under-supply in the UK residential property market due to a combination of long-standing structural issues (a slow and antiquated planning permission system, politics of the environmentally protected areas, NIMBYism, under-investment from government, lack of confidence from developers, etc) so adding in Brexit and Coronavirus into this cocktail only exacerbates the supply side problems and one only needs understand basic economics to predict what the likely outcome is if demand does fall along with supply (natural population growth is one of the key drivers for demand and, with the exception of immigration levels falling due to Brexit, none of the aforementioned issues really dampen the demand side of the housing equation). Furthermore it’s worth noting the UK government are keen to keep the economy motoring along in the face of any Brexit shocks and in the new Chancellor’s budget the expectation is that he will advocate for further borrowing to fund government spending, support investments in large-scale infrastructure (such as HS2) and at the same time not increase taxes (a vote-winning manifesto pledge), and such an approach, along with the Bank of England’s propensity to keep interest rates low to avoid monetary policy shocks, should provide a stable footing for the property market to thrive.
Capitalising on the Opportunity
In summary, I remain optimistic about the medium to long term prospects of the UK property market and I am actively looking for smart projects to invest in myself, because quite frankly it’s at times like these when the macro fundamentals are strong but the psychology of the masses is fragile, that one can find some of the best investment opportunities. I’ll conclude with a reference to where I began this article and leave you with a quote from Taleb himself:
“If you take risks and face your fate with dignity, there is nothing you can do that makes you small; if you don’t take risks, there is nothing you can do that makes you grand, nothing.”