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The Unemployment Tsunami

By Andy Shaw | January 26, 2010

Originally posted 22nd May 2009

Following on from my last article, I thought I’d cover the unemployment issue in a little more detail. Now I’ve been banging on about how unemployment will take off around the end of this year for some time now, and even though the media and nearly all financial pundits seem to be saying it is looking like we are coming through it, I struggle to find ANY positive data that shows signs that the recession is nearing an end. The bear market rally that is happening now will prove to be just that within the next six months and this time next year the talk will be about the winter of discontent we will have just had and how everybody hopes the new conservative government can turn around the disastrous policies of Gordon Brown.

Well I was reading one of the many newsletters I receive and there was a good bit on unemployment in the US and how it has taken over from employment. They presented a site with an animated chart that shows through several years of monthly figures how these figures have changed. It starts with 2006 when there was great employment, then it rolls on to March this year and the representative change in colour is dramatic. I suggest you view the chart, it takes just over a minute:

http://www.slate.com/id/2216238/

Its been 50 years in the US since they have seen so fast a drop and given that there is now a much smaller percentage of manufacturing jobs there then the volatility is breathtaking.

What happens in the US is a fairly good indicator of what is likely to happen in the UK and even though we may not experience unemployment here as severely as they have, it will definitely follow a similar pattern. The US went into recession in Dec ‘07. In May ‘08 we followed suit – i.e., we are a minimum of six months behind them. Signs of the problem for them started to show in Jun to Aug (as you can see from the chart) and then things got really dangerous in Sep to Nov.

So 6 – 9 months after the recession started they were getting some bad signs and after 10 – 12 months the figures were dire. I think we will experience dire figures a little further delayed than they because of the yearly pattern and things will really start to look bad for us from September onwards. Just look how bad it got between Nov and March in the US. I expect to see some serious protest marches this year and there is a possibility that we could even see rioting in some areas.

To quote another analyst – “Normally, labour markets lag the economy because incremental spending transactions are financed via debt, stimulated by interest rate cuts. But as long as credit remains frozen, spending will require income, and income comes from jobs and debt service payments are made out of income. Therefore, in a deleveraging environment job growth becomes an important leading, causal indicator of demand and other economic conditions.

“… The bounce in the economy and the stabilisation in markets reflect government actions that are big enough to impact near-term growth rates, but are not sufficiently directed at the root problem of excessive indebtedness to produce permanent healing. The deterioration in employment markets will continue because companies’ profit margins are so deeply damaged that a little bounce in growth won’t do much to alter their need to cut costs. This deterioration in labour markets will undermine demand and continue to pressure loan losses, which will keep the pressure on the banks and elevate the cost of capital for tentative borrowers, inhibiting credit expansion.”

The problem at the moment is that the media and the economic prediction ‘experts’ are using data to draw their conclusions from, and that data is wrong. So they are using recent past performance to predict the immediate future. The problem is that no-one was really alive and at work the last time this sort of thing happened. So even though we continually hear from the experts that past performance is no guarantee of future results, they are failing to heed their own advice. You have to look at the underlying conditions in order to get a real comparison, and we have not seen a de-leveraging recession in the US or the UK for 80 years.

This will prove very harmful to people who look at their portfolio rebuilding and decide to hang in there. They think it will be over when they see something positive. Well, let’s not forget that 8 out of the last 11 recessions have had one quarter of positive growth, which of course then went on to have other quarters that were negative.

Ok, So What Does This Mean For Us Landlords?

People say I’m a bit of a doomonger at the moment and I just do not see it that way. I am looking at what is happening as a golden opportunity for those that are armed with knowledge and the ability to put themselves in the way of the tide of opportunities as they arise.

In business good news has to travel fast, but bad news has to travel faster. Whenever someone says, ‘I have good and bad news,’ the good news can always wait as I would rather enjoy that after I had taken action on the bad news.

Well here is how this bad news will work for us as landlords. If you are a landlord in an area that usually has a high rental demand then you will probably find that this demand has curbed a bit.  In some areas it will have mellowed and in others the demand will be weak. This is because of a number of factors and I could write a lot on this. However, I will keep it short.

We have gone from being borrowers & spenders to savers overnight, so people will be holding back from leaving the nest. Also, jobs are not being created so there is not as much demand and there have been a huge amount of property developers who have decided to rent rather than sell.

There are other reasons as well but you get the point, the demand has slipped. As unemployment rises then the demand for rental properties will increase again and so will the prices we can charge. As this drags on from the winter of discontent we will see more people using government handouts to rent property and we will have high demand again.

Don’t get me wrong this will not be good news for the country but it will be good news for our profits. Probably from next year on you will have to keep quiet at parties about being a landlord, as the media will most likely be vilifying us for taking a profit when providing a public service. This would not be a good time to have labour in government as they may look to introduce a new landlord tax, or maybe I’m just a cynic!

Anyway, I would expect rental demand to pick up next spring time and I would also expect my yields to increase.

Best wishes

Andy

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