The market begins to move, but constraints remain
The government has taken steps to reignite the housing market. In England estate agents can return to work and viewings are now permitted again, albeit under certain restrictions. People are also free to move house. This is the first step on the road to a recovery in activity, but the practicalities of buying and selling while social distancing will be a constraint for the time being. More on the reopening of the market here.
Short term activity will be supported by a degree of pent up demand and some buyers may now have a greater inclination to move following lockdown. Towards the end of April we surveyed almost 700 prospective buyers and sellers. They were predictably cautious for the short term, but expressed a greater desire to move within the next 24 months than previously. There was particular emphasis on moving for more space, and to the countryside. You can read more results from the survey here.
It is also possible that the new homes market may recover faster, due to it being easier to perform virtual and socially distanced viewings in new build homes.
While this bodes well for an increase in activity, it is starting from the exceptionally low levels observed during lockdown. Data from the main property search portals suggests that sales agreed and new listings were at around 10 to 20% of the levels seen immediately before the lockdown, although buyer browsing levels have been higher. Almost all surveyors reported falling levels of activity in April, according to the RICS Survey. Both new buyer enquiries and new instructions fell in sync, so there is no immediate pricing pressure from a supply/demand mismatch. This may change if the measures recover at different rates. With the reopening of the market, most surveyors are likely to report rising activity next month.
Low activity levels are also reflected in mortgage lending data. New mortgage approvals fell to their lowest level in March since early 2013. The drop was particularly sharp as it followed an exceptionally strong February, which had been the strongest month since early 2014.
Longer term, the extent to which market conditions improve will depend on the wider economy. The phased release of lockdown restrictions point towards a more gradual recovery than had previously anticipated. Oxford Economics have signalled that they expect to revise down their current GDP forecasts for Q2 and full year 2020, which currently stand at -13.5% and -8% respectively.
Almost all surveyors reported declines in activity between March and April. Reports of new buyer enquiries and new buyer instructions fell together, to roughly the same levels. If these measures recover at different rates, that could provide pressure on house prices. A significant rise in both measures is likely next month. As the market begins moving again almost every surveyor is likely to see a rise in activity, albeit that rise may be muted.
The RICS Survey can be a good indicator of house price movements, which are later picked up by the indices. But current events are moving at such a pace that it may only reflect what is happening now. The significant drop in the RICS price indicator is at odds with Nationwide, which still reports strong growth. We would expect Nationwide to dip in the coming months, as it typically lags behind the RICS data. Of the transactions contributing to the April Nationwide number, 80% were reported to have been agreed or exchanged before the lockdown.
Transactions continued their general downward trend in March, according to HMRC figures. They show no significant change to completed sales volumes in March, despite the start of the lockdown. Most sales underway were still able to complete at that point. We would expect to see more significant declines in transactions in next month’s data.
House prices rose 0.7% in April, according to Nationwide. This is an annual growth of 3.7%, the strongest annual growth in three years. This may have been based on fewer transactions than normal however, which can lead to volatility in average price data. Nationwide also reported that 80% of the sales in the April figure were agreed/exchanged before the lockdown. That said, this strong growth is in line with trend, which has been rising since the general election last year. Annual rental growth held at 1.4% in March, remaining largely steady for the past 5 months. Growth was the fastest in the South West, at 2.4%, and the lowest in Scotland, down -0.6%.
Annual house price growth was strongest in Knowsley, up 9.7%. It was followed closely by Rhondda Cynon Taf at 9.3%, and Falkirk at 7.6%. Aberdeen saw the weakest performance, falling -6.7%. It was followed by Boston and Moray, at -4.2% and -3.2% respectively.
Our expectation remains that house prices will fall by around -5% to -10% in the short term, as buyer confidence is weakened by the ongoing Covid-19 pandemic. That would be a smaller fall than either the early 1990s recession or the Global Financial Crisis.
The pace of recovery beyond the short term falls will depend on the state of the wider economy. The May forecast from Oxford Economics anticipates GDP being -0.7% lower by the end of 2024 than they expected in April, or -1.4% under their downside scenario. This will have a knock-on effect on household incomes.
But interest rates are also now expected to be lower for longer. Our November forecast for 15% UK house price growth over the five years to 2024 included an assumption that the Bank of England base rate would rise to 2.0% by the end of that period. Oxford Economics’ current forecast is for it to be 1.0% under both baseline and downside scenarios, remaining at their current level of 0.1% until Q1 2022 under the baseline or Q3 2023 under the downside.
The trade-off between borrowing costs and income rises will determine the medium term outlook for house prices, once the initial crisis has passed.
The immediate impact of the lockdown has been on transaction numbers. Between 23rd March and 12th May, the physical restrictions of the lockdown prevented the majority of sales from proceeding. That restriction is now lifted in England, but constraints remain as a result of the social distancing and hygiene requirements around viewing occupied homes.
The greater drag may simply be the reluctance of buyers to consider moving whilst other restrictions around schools, leisure and the workplace remain. Buyers of new homes may be less susceptible to such concerns.
Mortgage lenders are currently in a much better state than during the GFC and are likely to be keen to lend as the market unlocks. But higher loan to value products may be restricted, due to concerns around price stability, and lenders will be wary of borrowers’ income security.
Therefore, although we do expect an immediate spike in activity levels, this will not be a full return to ‘business as usual’ in the short term. This will only come when buyer confidence returns and the employment market stabilises.