Jeremy's Blog 27th November 2020: Asset Values
This article by Jeremy Moody first appeared in the CAAV e-Briefing of 26th November 2020.
What drives asset values? The basic answer is supply and demand, encapsulating human behaviour. Demand is often the key driver and supply the key constraint, with value where people want something rather than because someone has it to sell. Markets, summarising people’s thoughts, hopes and fears, express the balance between them and ever-changing prices influence actions. That restless movement guides further choices between assets, sectors and regions, testing what will thrive, adapt or fail and allowing innovation.
These dynamics are not dispassionate immutable algorithms but the results of people interacting, motivated by many things, including fear, greed and whether there is the confidence to act and invest – the importance to the economy of “animal spirits”. With parties acting for the future, markets tend to look forward. The wheat price rose when the Internal Market Bill was thought to threaten No Deal with the EU and so tariffs. UK interest rates (and so the cost of Government borrowing) rose on the first announcement of Covid vaccines.
Markets are lubricated by finance, its availability and its cost. Where lenders do not lend, buyers have less reach. If money, also an asset, has a higher price, that is likely to affect what buyers will pay.
The vast quantitative easing of 2008 and 2020 with the ultra-low interest rates of the last decade are an enormous experiment, with easy money no longer going to inflation for goods and services but to asset values, already supported by a glut in world savings driving long term interest rates sharply down. We are testing the dangerous words – this time things are different.
In a sea change of circumstances, investors are watching the effects of climate change and the measures to tackle it, feeling risk in fossil fuels, flooding and high carbon, and also opportunities. Assets thought valuable may become “stranded”; new value may arise in others.
Lending terms or loan-to-value ratios have effects. With the role of buildings in this, the new consultation on how residential mortgage lenders might consider the energy efficiency of their book is the next step in influencing behaviour and so prices in the housing market. As with Agricultural Occupancy Conditions, less efficient properties may become more dominated by cash buyers. If “green” properties are not at a premium but just expected, how sharply might others be discounted? In these restless seas, such change will also bring opportunities.