Residential market and outlook
On 13 May, nearly seven weeks after the government virtually banned home buying activity, new regulations were announced that amended the advice to make it clear that ‘people who wish to move home can do so’, effectively opening up the housing market once again. Whilst there are still social distancing measures to adhere to, it means that the buying and selling of homes and the housing market generally can get back on its feet. This also means that April probably saw the trough of the market in terms of activity.
In the months immediately before the COVID-19 crisis activity in the residential housing market had increased at a promising rate. The conclusive result of the general election in December 2019 had instilled a strong sense of certainty amongst buyers and vendors which had hitherto depleted due to Brexit concerns. At Carter Jonas we found buyer registrations were four times higher than the same time last year, while offers on our properties were 32% above the first three months of 2019.
Bank of England mortgage approvals data rose for four consecutive months and by February 2020 had shown approval levels not seen in over six years (January 2014). However, by the end of March approvals had dropped significantly to 56,161, a fall of 24% over February’s data and the lockdown only became fully enforced by the end of the third week of the month. We can expect that this will fall even more significantly during April when the sector was virtually stopped. The public sector will probably be considerably larger after the crisis, as some industries will not be able to survive and will have to be nationalised. We have already seen this, with the UK’s train operating companies now effectivity in public ownership, for example.
With the increased activity over the three months to March, there had been an equivalent steady increase in house price growth, and this was evident in all three of the major house price indices (Halifax, Nationwide, ONS). Nationwide’s April house price index noted house price growth of 3.7% annually. However, they are quick to point out that data is collected on mortgage approvals and there is a long lag between mortgage submission and mortgage approval. This is therefore just a further indication that the housing market was in a good solid state before the lockdown.
Looking ahead and suppressed activity during the enforced stoppage of the market, will undoubtedly lead to latent demand now that these regulations have been relaxed. Indeed, at Carter Jonas we have already seen great enthusiasm return in both the sales and lettings market, with a rise in buyer and tenant enquiries of 50% since the beginning of April.
We have also seen indications that there is an increasing desire by people to move, either for more space or due to personal circumstances. Many have recognized that there working life may now be radically altered and they may no longer need to live in close proximity to their place of work. Our regional offices have seen a rise in interest from people wishing to move out of metropolitan centres and this is mirrored in recent Rightmove data which showed an increase proportion of enquiries by people viewing properties outside of their city, as compared with the same period last year.
We also expect new demand to come from those who, after months of staying at home and working at home, will now also want a change of scenery, additional space or outdoor space and thus will commence a move they may not have thought seriously about before, while yet others may find themselves in new personal circumstances – wanting to move in or move out with their partner, etc
In the short-term the lettings market, whilst being affected by a very reduced number of new tenancies, will be fairly insulated from the worst of the economic effects of COVID-19, particularly as the government has put in a three-month moratorium on evictions. However, private landlords had already been vacating the market in ever higher numbers as the sector was becoming less financially attractive. With cashflow issues due to possible rent arrears in the months ahead, the supply side of the lettings market may become even tighter in the longer-term.
What will help the housing market recover, now that restrictions are lifted?
The government announced from 13 May that the buying and selling of homes may continue, thus reopening the housing market. People are once again able to visit estate agents, and view properties for sale or rent and move home, although the regulations encourage virtual viewing in the first instance. This means that the bottom of the market, in terms of activity, will have been during April and we will see a steady increase from here.
Also encouraging, from 4 May, Land Registry announced that it has relaxed rules over electronic versions of deeds, meaning they can be signed, scanned and sent. They further announced that ‘witnessing’ of signatures may be done through glass (for example, a car window) to comply with social distancing guidelines. This will help ease one of the current hurdles in the sales process and going forward may make transactions quicker, particularly for those purchasing from overseas.
Mortgage lending at the same terms and rates as prior to the lockdown will help thaw the market. Favourable credit conditions should remain and with current, historically low interest rates, we anticipate that now that buying and selling homes restrictions have eased, this will return to normal.
Continuation of virtual viewings – so far the industry has embraced technology and innovation. The continuation of these techniques will aid a faster recovery as it means that some manner of social distancing can still be maintained.
Employment levels. The government has thrown a lot of money at maintaining current and future employment levels by implementing not just the furlough scheme but other stimulus measures to keep small and medium sized businesses afloat. Clearly this needs to be maintained for some months while the economy ‘normalises’. For consumers to afford deposits and monthly mortgage repayments and indeed be approved for mortgages at any rate, robust employment levels must be maintained.
Consumer sentiment – consumers need to feel confident about the wider economy as well as their own personal finances. These are all very low at the moment, although both the GfK index found that by the end of April they have increased ever so slightly from an all-time low at the start of April.
The structural supply issues generally within the UK housing market will help to alleviate any substantial fall in pricing.
- The impact of the COVID pandemic and lockdown on economic growth has already proven to be substantial, but the length and depth of the downturn is still highly uncertain. Factors which will affect the overall impact continue to include such things as:
- the speed with which governments can bring the outbreak under control;
- the speed with which the bioscience sector can develop and mass-produce a vaccine and / or medication to assist recovery
- the success of interventions by fiscal and monetary policymakers.
- the speed with which consumer confidence returns
- We can say with near certainty that the fall in UK output in Q2 will be by far the largest recorded in modern economic history with declines of up to -35% during Q2 (OBR) forecast, before an increase of 27% and 21% during Q3 and Q4, respectively.
- Now with seven weeks of lockdown behind us it is expected that the only way from here is ‘up’. The Prime Minister has already said we have passed the peak of the virus and lockdown measures are gradually being eased. Nevertheless, quite major restrictions on consumers and businesses will remain in place and can only be eased slowly. This means that a more drawn out downturn may result as more output is permanently lost rather than postponed and the overall productive capacity of the economy is reduced. Given the unprecedented nature of the restrictions, the psychological effects on consumer and business confidence could be quite long-lasting.
- The public sector will probably be considerably larger after the crisis, as some industries will not be able to survive and will have to be nationalised. We have already seen this, with the UK’s train operating companies now effectivity in public ownership, for example.
- The UK government has introduced a monumental package of fiscal measures, unprecedented in peacetime to “do whatever it takes”. Measures directed at households include a three-month mortgage holiday, additional welfare payments and funds for those unable to pay rent.
- Measures for businesses include paying 80% of the salaries (up to £2,500 per month) for furloughed employees; the ability for businesses to defer VAT; a targeted business rates holiday; and cash grants. The UK’s corporates sector was in good health prior to the crisis, and these measures are designed to ensure that as many businesses as possible survive the crisis
- The Government also announced £330bn of guarantees for bank loans to the corporate sector, which would be increased if needed. Although significant interventions, these measures will do little to alleviate the short-term impacts of the shutdown of large parts of the UK economy. Their main purpose is to ensure that the economy is able to restart when restrictions are lifted.
- The labour market has been amazingly resilient in recent years, with employment at a record high and unemployment at a record low. It is encouraging that the labour market is starting from a strong position, and the Government has offered a substantial package of measures to help mitigate the adverse impacts of the crisis. A sharp rise in unemployment appears unavoidable however, although much will depend on how long the crisis lasts. Having said that, employment levels are expected to fall throughout the year as not all businesses will have been able to survive. An unemployment rate of 6.9% (from 4.0% currently) is anticipated by Treasury consensus economists by the end of 2020.
- Although Brexit is very much a secondary concern at present, this will return as an issue once the COVID-19 crisis is over. Although the government appears determined to adhere to its end-of-year deadline to complete trade negotiations, this appears increasingly unlikely.