What is the potential economic impact of the coronavirus outbreak?
The general consensus from economists is that the UK will experience a short, sharp shock to economic growth (GDP) in Q2 2020 followed by a relatively quick recovery. In a scenario outlined by the Bank of England - who assume social distancing measures remain in place until early June, before being gradually lifted over the following four months - UK GDP could fall by around 30% in Q2 2020 compared with Q4 2019. As social distancing measures are gradually lifted, GDP is expected to recover rapidly in Q3 and rise further in Q4.
But as we already know, some households have suffered from job losses and income reductions. The Bank of England think unemployment could to rise to 9% by June, the highest rate since 1994, and much higher than the latest figure of 4.0% in the three months to February. Meanwhile average weekly earnings could fall by 4% in Q2 2020 – both of which will have an impact on affordability in the housing market this year.
Whilst GDP is expected to rebound quite quickly, the labour market may take a little longer to recover. In the Banks scenario they expect the unemployment rate to reach 8% in 2020, before gradually falling to 7% in 2021 and returning to 4% in 2022. Average weekly earnings are expected to fall by 2% in 2020, followed by an increase of 4% in 2021 and 2% in 2022. The good news is that interest rates are set to stay low for quite some time and inflation is also expected to remain below 1% until 2022 which will soften the impact on households.
Will the reduction in the Bank of England base rate of interest provide any relief for the property market?
In March the Bank of England cut the base rate to an all-time low of 0.1%, just a week after cutting from 0.75% to 0.25%. Despite the reduction, competition in the mortgage market was already fierce and rates were low - therefore there haven’t been many signs of the emergency cut being passed onto new mortgage lending. For example, the latest data from the Bank of England shows that the average interest rate on a 2-year fixed rate 75% LTV mortgage rose very slightly from 1.41% in February to 1.42% in March.
However the economic shock from Covid-19 does mean that interest rates look set to stay lower for longer which is good news for the housing market. Other measures taken by the government and Bank of England, such as the introduction of mortgage holidays and schemes to support households’ incomes, will also support the housing market in the near-term.
Do you think house prices will fall?
The latest data from the ONS showed that house prices rose 2.1% in the year to March 2020, with London recording 4.7% annual growth. Although this mainly reflects a time pre-lockdown, it does give us an indication of the state of the market beforehand. And unlike in the lead up to previous crises, recent price growth has been modest - particularly compared with the 2008 crash when prices were rising 8% on average in the two years preceding. This means we're unlikely to see the boom and bust nature witnessed in 2008.
We may see small house price falls in the near-term, but there is little evidence of this occurring at the moment as most sellers are holding firm. While households whose incomes have remained stable will be able to continue with their move, the real economic impact from the Covid-19 crisis may take a little while to feed through. If more people lose their jobs and incomes fall, we could see pressure on pricing build over the next few months. Prime areas will hold up better because higher income earners have been less affected by the crisis. Additionally, we've already seen price falls in these markets over the last few years resulting in pent-up demand.
There are still lots of unknowns, but overall we expect house prices in Great Britain to end the year similar to 2019 levels. Affordability pressures will weigh on the market, however, the relative short-nature of the coronavirus lockdown means any recovery should be quicker, although not necessarily greater, than that seen in previous crises.
What’s the long-term outlook for the housing market?
The long-term outlook for the housing market very much depends on what damage is done to the economy, particularly in the labour market. Any reduction in household earnings, particularly if combined with an increase in inflation, will impact affordability. And this will limit any capacity for future price growth.
Generally we expect house prices to remain flat this year, before returning to growth in 2021, albeit at a slightly lower rate than we originally anticipated. Price growth will start to return to pre-Coronavirus levels around Q2 2021 with London expected to lead the way due to pent-up demand and the fact that prices here had been falling over the last few years.
Affordability however, remains a key issue and this will continue to keep a cap on longer-term price growth. After all, it still takes over 15 years for an average single person to save up for a 15% deposit on a home in London, five years more than the average in England & Wales.
Will lots of households default on their mortgage and be forced to sell like in 2008?
We are unlikely to see as many mortgage defaults and therefore forced sales as we did during the 2008 financial crisis. The mortgage market has evolved over the last decade, with stronger stress testing and limits on higher loan-to-value lending introduced by the Financial Conduct Authority in 2014 to help protect the market.
Additionally, lenders and banks have offered mortgage holidays to those in need and this will help support homeowners through the crisis. According to UK Finance one in seven mortgages in the UK are now subject to a payment holiday, and this should limit the number of households falling into mortgage arrears.
What will happen to rents?
Once lockdown restrictions ease, we expect activity levels in the rental market to rise. Renting offers more flexibility than buying a home, so as uncertainty increases, so too does the demand for rental properties.
But although demand for rental accommodation is set to increase, and there are already signs of it picking back up again, the longer-term economic damage to people’s jobs and incomes mean that rents on newly let properties are likely to fall between 2% and 5% this year. And we’ve started seeing the first signs of this, with our monthly lettings index showing that rents on renewed tenancies fell for the second consecutive month. Rents on renewed tenancies fell -1.1% year-on-year in April which was caused by a -3.2% fall in London and -2.4% fall in the South East. View our latest Lettings Index.
Once rental growth in Great Britain returns, probably in the second half of the year, we expect rents to move in line with people’s incomes with stronger growth expected in 2021.
How will Coronavirus effect first-time buyers?
The effect on first-time buyers will depend on how hard their incomes have been hit and whether they need a mortgage to purchase their first home. Saving up for a deposit is normally the biggest barrier for first-time buyers and takes time, but it’s low and middle income households who are likely to be disproportionately worse off from the Covid-19 crisis - many of whom would be first-time buyers. And this means it may take longer for them to save for a deposit.
Those first-time buyers who already have their deposit may find it harder to find a mortgage at the moment. Some banks and lenders withdrew higher loan-to-value mortgages as an immediate response to the Covid-19 crisis, but there are signs that lenders are beginning to open their books again.
The good news is that interest rates are set to stay low and there is still government support available to many first-time buyers in the form of stamp duty relief and schemes such as Help to Buy.
Will the government tinker with stamp duty to help support the housing market?
We don’t know. It wouldn’t be unheard of given the stamp duty holiday offered following the 2008 financial crash, and the fact that stamp duty receipts have slipped a little in recent years. The government does consider the housing market an important industry because of its spin-off, so I’m sure they’ll be watching closely.
It’s also worth remembering that stamp duty relief is still available to first-time buyers purchasing homes up to £500k.
Do you think the lockdown will change the types of properties people want to live in?
Quite possibly. We’ve already seen a big rise in demand from applicants looking to move out of London and we expect this to continue. House prices in the country have lagged behind those in cities over the last decade, which means country homes look relatively good value.
Over the last decade house prices in prime areas of London have risen 79%, almost double the 42% recorded in prime country locations. This means that the average seller leaving London can gain an additional 953 sq ft by selling up and moving to the country, often the biggest pull for those making the move out of the capital.
Will there be lots of homes available to buy after lockdown?
According to Rightmove 97% of homes that were available pre-lockdown are still available online which is a promising sign that sellers want to continue with their house sale.
However the flow of new instructions to the market has been very low during lockdown, and although we expect there to be pent-up demand from sellers waiting until the movement restrictions come to an end before listing their home to sell, it could take time to feed through. The lockdown had also put a halt on construction which means the flow of new build completions coming to market may be delayed a little too.
On the flip side, lockdown may have caused some households to bring their decision to move forward, with many searching for extra space.
What will happen to yields?
We don’t expect yields to change much in the short-term. Any reduction in rental growth will probably be accompanied by a small fall in house prices too, which will balance yields.
Longer-term we expect rental growth to recover quicker than house price growth, mainly because we expect to see a bigger increase in demand for rental homes which is unlikely to be balanced by an increase in the number of homes available to rent. This would indicate a small increase in yields.
Is now a good time to invest in a buy-to-let property?
The rental market has been buffeted by lots of changes over the last few years which has made it less profitable for some landlords than it once was. And one result of that, is some landlords have chosen to sell up with fewer new landlords buying rental homes. In fact, in Q1 2020 landlords bought just 8% of homes sold in Great Britain, the lowest proportion on record.
For many investors, it’s the longer-term capital growth that’s important. The average landlord who sold in 2018 made a gross gain of £79,770, and this rises to nearly £250k if they invested in London having owned the property for just under 10 years on average.
And there are still returns out there, particularly in the North where yields tend to be higher. Although we don’t expect house prices to rise as much as we’ve seen in the past, the rental market will grow in the future.