It is a month since I wrote my blog on What might Covid-19 mean for the UK housing market. Since then, it has become increasingly clear that – to a greater or lesser degree – the housing market will be in a state of suspended animation during the lockdown.
There now seems an inevitability that after an animated start to the year we are in for a period of low transactional activity – not least because of the effects of lockdown on the practicalities of buying and selling homes.
But the case for a widespread correction in prices is somewhat weaker assuming projections of a V-shaped economic downturn and subsequent recovery prove correct.
Suspended animation
At the end of last month, we took an educated guess that this year housing transactions are likely to between 37 per cent and 52 per cent lower than last. The evidence of the past week has entrenched that view.
Firstly, Zoopla reported that the number of newly agreed sales has fallen by 70 per cent since the coronavirus restrictions were put in place on 23 March (with the number of new enquiries falling by 60 per cent).
Then the RICS housing market survey showed that both new buyer enquiries and new instructions had fallen significantly in the second half of March.
Survey evidence
That RICS survey, which has traditionally been a good lead indicator for the market, operates on a net balance of opinion. In February, the reading for new buyer enquires was +17, suggesting more agents were seeing enquiries rise than fall at that point. It was slightly higher than the figure for new instructions of +11 , leading to the upward pressure that we saw on pricing at the beginning of the year.
In the space of a month those readings fell dramatically to -74 and -72 respectively, with the vast majority of agents seeing enquiries and instructions fall.
But unlike any previous downturn in the housing market, they fell in unison. This means that, while both supply and demand are heavily subdued, there isn’t currently evidence of the kind of imbalance between them which has been the catalyst for significant price falls in previous downturns.
The pricing conundrum
In the coming months, low market activity is likely to make it relatively difficult to establish what has happened to prices, meaning this is only likely to become clear as we come out of the lockdown and transaction levels start to pick up. Even then there will be a period when buyer and seller expectations take time to align.
From a pricing perspective we believe there are five key factors that differentiate the current position from, say, the early 1990s and the credit crunch: the causes of this downturn are entirely different; the relatively low levels of price growth in the run up to current events; the fact that we are starting from such very low interest rates; the Government’s swift response to protect jobs and earnings over the short to medium term; and lenders’ flexibility around mortgage arrears.
V-shaped recession
That is not to deny that the economic impact will not be significant. After all, in the past week Oxford Economics has downgraded its economic outlook for 2020, suggesting that the economy will contract by 5.1 per cent this year on the back of a 8.5 per cent contraction in the second quarter of the year, while the Office for Budget Responsibility has offered a scenario (expressly not a forecast, the Chancellor was quick to reassure us) where the economy contracts by 12.8 per cent across 2020 as a whole.
While the anticipated depth differs across the two, both are optimistic in that they suggest the downturn and subsequent recovery follow a distinct V-shape. So whereas the OBR has pencilled in a 35 per cent fall in economic output in the second quarter of the year, it is followed by two quarters of growth of 27 per cent and 21 per cent respectively.
In an environment where mortgage affordability is not likely to present a problem for those who maintain a stable income once furloughing ends, this is critical because it would mean unemployment spikes and falls back relatively quickly, limiting the number of forced sales brought to the market.
Duration matters
Much then depends on how long the disruption to the economy lasts, which is why we have a keen eye on the prospective period of social distancing, how quickly it is relaxed and how long it takes to rebuild consumer confidence. In that respect there is some, albeit early, evidence that – statistically at least – the measures put in by the government are working.
Of course the number of deaths being reported each day is shocking, and it is important not to forget that behind each there is a personal tragedy. But across the country the number of new cases and deaths appears to have stopped increasing day on day. Meanwhile, in both Spain and Italy, those numbers are on the decline, with governments across Europe tentatively planning how to ease communities out of lockdown.
That suggests there may be some light at the end of what is a pretty dark tunnel. It means that at this stage, we are able to stand by our expectation that house price falls can be contained to 5-10 per cent in a low transaction market and that over a five-year period prices could still rise by 15 per cent across the country as a whole, as we forecast last November.
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