Latest London Property News: May 2020
As of yesterday, the real estate industry can resume work, with activities to include: viewing and valuing properties for sale, moving, visiting estate agency offices and developer show homes have been green lighted by the Government today – subject to stringent social distancing guidelines.
Since lockdown was imposed on the 23rd March, the property market entered a period of suspended animation. There is still a lack of clarity as to when lockdown will end, as well as the financial and economic collateral damage for the UK economy will be, and we certainly don’t know what the ‘new normal’ will be or how long it will have to go on for.
So, what do we know? Financial markets, although initially taking fright, have recovered somewhat. Falls of between 10 and 15% across indexes around the world with markets seeming to have stabilised. At least for now. Interest rates have fallen and unprecedented levels of intervention by central banks have been deployed by the largest economies in the world. We also know that working from home for many people is doable and although many aspects of our lives have been interrupted, we can expect levels of activity in the property market to start picking up.
Recent numbers posted by Zoopla on the housing market for their UK Cities House Prices Index make for interesting reading. 373,000 property transactions with a total value of £82 billion have been on hold. There’s extraordinarily little activity. Interestingly supply has not changed much with the numbers of homes for sale falling by just 4% since the beginning of March, suggesting that vendors still want to sell.
The Office for National Statistics (ONS) took the unprecedented step of suspending the publication of its House Price Index until further notice. This is due to the anticipated falls in housing market activity because of lockdown, and the resulting difficulties in providing an accurate picture of the market from April 2020 onwards. Restoring housing market activity to a point where reliable house price data can be gathered depends on how realistic the Government’s Covid-19 three-step recovery strategy for estate agency.
From a wider economic perspective, on Wednesday last week the Monetary Policy Committee (MPC) of the Bank of England voted to keep bank base rate at just 0.1%. The effective cost of a mortgage is now much more dependent on the lender’s margin, reflecting their appetite to lend, and their view of risk. According to the Bank of England, the average cost of mortgage debt for a 75% loan to value mortgage on a two year fixed rate stood at 1.40% at the end of April 2020, showing little change compared to 6 months ago. By contrast, the latest available data suggests the average mortgage rate on an outstanding variable rate loan is more than double that figure at 2.97%. In the face of a projected V-shaped downturn and recovery, during which they expect the economy to contract by 14% this year and rebound by 15% next year, the MPC also voted to continue with its £200 billion programme of quantitative easing that was announced in March 2020. However, two of the nine MPC members voted to increase it by a further £100 billion suggesting there is appetite to provide more support to the economy if needed.
What to Expect of Property Prices?
Rightmove’s Miles Shipside pointed out in a webinar last week that it’s particularly difficult to predict whether house prices will fall and by how much because the nature of the current crisis is different to previous downturns we’ve seen, being caused by global health, rather than economic circumstances. The 2008 house price crash was in part caused by tough restrictions on borrowing:
“One of the reasons it was called a credit crunch was because it was hard to get credit, you needed a 40 or 50% deposit to get approved for a mortgage.”
Combined with higher interest rates, this meant there was more negative equity and a greater number of repossessions, causing house prices to fall, along with a steep rise in unemployment and wage stagnation, leaving many would-be buyers unable to capitalise on cheaper house prices.
By comparison, Shipside pointed out that a combination of pent-up demand, which has been building for the four years since the EU referendum, and freely available mortgages at low rates, as well as a fairly even balance between supply and demand are likely to see house price growth settle before potentially returning to the gentle increases seen since December’s resounding Tory general election victory. Shipside goes to say:
“I can’t see the forces that would usually drive house prices down at work at the moment but I do think there’ll be a slow-motion period where people get used to the new social distancing rules, and where housing might not be at the top of everyone’s list. I think this might last for several months but my gut feeling is that, after that, we’ll see a continuation of upwards price pressure once people get used to social distancing.”
Though future house prices will depend on how long the outbreak lasts, analysts are confident that “very low interest rates” and supply shortages will limit their fall. There will be “modest declines in the short term, but I don’t expect a collapse (in prices),” Roger Jones, head of equities at the wealth management firm London and Capital, told CNBC last week. He added that even if unemployment rises significantly, which would constrain people’s ability to move homes, “we aren’t going to see the (same) collapse as in the global financial crisis,” he said in a phone call. U.K. house prices sank almost 16% in 2008 amid an international credit crunch. Hansen Lu, property economist at Capital Economics, foresees a “modest” 4% fall in house prices this year. He also noted some key differences between the current situation and 2008: the banking system is more resilient; there’s a lot of support from the government to help households weather the current crisis; and interest rates are very low — all these factors should support demand across the U.K.
Prime Minister Boris Johnson announced on Sunday that construction activity could resume on Monday, as part of an initial step to lift the lockdown measures. Barratt Developments, a housebuilder in the U.K., said that work on its construction sites would restart from May 11, but in a “phased” way. “We will then start a phased return to construction, with 180 sites — around 50% of the total — in the first phase,” the company said.
In terms of percentage price falls this year, CEBR (The Centre of Economic and Business Research) has been the most pessimistic quoting a 13% fall in prices this year, whilst most major estate agencies predict this figure more realistically to be between 2% up to 5%, and Savills predicting as much as 10%.
Despite the gloomy outlook for house prices this year, most analysts believe the housing market could make a strong recovery by 2021, after all the market strengthened significantly post the General Election at the end of 2019, and Brexit in January.