Property transactions are frozen, but what will happen in the thaw? Invisible Homes takes a look at the potential implications that COVID-19 will have on the property market.
The property market, exemplified by Hammersmith & Fulham where we currently focus, experienced a very strong start to 2020. After years of uncertainty surrounding Brexit, the ‘Boris bounce’ was in full swing – price growth was up to 3% compared to last year, with prices rising by 0.8% in March alone. April, May and June tend to be the strongest months for transactions, since families try to secure their purchases before the summer holidays, and so it is likely that there would have been even steeper price growth in those months. But that was then, and this is now.
Transactions have ground to a halt, after official government guidelines stated that home buyers and renters should, where possible, delay moving while stay-at-home measures are in place to fight coronavirus.
UK Finance, representing more than 250 firms across the banking and finance industry, said mortgage lenders will support the halt on home moving by extending mortgage offers for up to three months, to reduce stress during this uncertain time. But that doesn’t change the fact that the housing market, like so many other parts of the economy, is in an enforced coma.
What does the Future Hold?
Making any type of prediction right now must be tempered with a huge amount of care. We are, as we keep hearing, in uncharted territory. Of that there can be no doubt. Not only do we not know how the local and world economies will respond to the shutdown, but we also don’t know that much about the cause of the shutdown itself. Our knowledge of Covid-19 is fledgling. So much is still untested, and this will affect the length of shutdown and therefore the economic impact (we are choosing not to mention the most significant part – loss off life – since the focus of this article is the housing market).
What we can do is make a measured assumption of what is most likely to happen, given lessons from the past and what we at least think we know about the present.
The general consensus is that in June we will see a return to some type of normality – at least from an economic standpoint. People are likely to return to their places of work, but with certain restrictions and care, with the most vulnerable remaining in isolation. We can call this both the optimistic and most likely scenario. There are many others.
“Recent events mean the property market is being put into an induced coma. That is likely to lead to a record drop in property transactions—not prices.”
If this is the case, then the economy should bounce back relatively quickly. People will start to buy things again, perhaps even at an an increased rate, and workers who lost their jobs will likely find new employment. The wheels will start turning again. The unprecedented speed and depth of this recession will likely be followed by an equal (or near equal) rise, in a similar timeframe.
What does this mean for property? Well, one thing we know about property is that it is pretty illiquid. In a falling market, this can be a problem – as many sellers experienced in the post-Brexit era. Just because a house is worth ‘x’ on paper today, doesn’t necessarily mean someone will come along and pay it. Indeed, some sellers attempted to sell in 2014 but had to wait over two years to find a buyer, by which time the market had fallen nearly 15%.
But the flip side of illiquidity is resilience. Property doesn’t respond anything like as quickly as the stock market. Traders who watch the markets all day naturally assume that a shock of 10% to share prices should translate straight into property prices. Yet it rarely does.
There are exceptions of course, and it is usually the massive shocks that do translate. If we go back to 2008, for example – the post-Lehmans world – the London property market dropped 30% in about six months, but there are some noticeable differences between then and now. In 2008 there was a debt-virus spreading through the economy, and it was clear that it would take many years for the economy get well again. Right now, the virus is spreading through the population, and whilst its financial cost will be paid for many years by governments and taxes, the workings of the underlying economy are fundamentally sound. This virus may or may not be around for years to come, but the economy should return to health quite quickly.
This is where the resilience factor is key. If the broad consensus is that the recession, however deep, will be V-shaped, then the property market may emerge broadly unscathed. Sellers, recently educated by how quickly prices bounced back from their 2009 depths, will be unlikely to sell at a huge knock-down when a predicted bounce-back is just around the corner. Interest rates will remain very low. Employment will normalise. Few sellers will be forced to sell. Solid assets, particularly homes, will be even more desirable.
According to a recent survey by the London estate agent Benham & Reeves, 83% of clients said they intend to continue with planned home sales or purchases this year despite the virus, and that broadly tallies with the overall feeling from our buyers. But of course, sentiment can change on a sixpence. It appears though, that after years of waiting for ideal market conditions, buyers and sellers are refusing to put their plans on hold any longer.
As Niraj Shar puts it in his recent Bloomberg report, the property market will experience a shutdown, not a crash, unlike the more volatile financial markets, “Recent events mean the property market is being put into an induced coma. That is likely to lead to a record drop in property transactions—not prices.”
Opinion: What does this mean for buying and selling in 2020?
Mark Wells, CEO of Invisible Homes, offers his opinion, “If what many of us hope for happens, and come June we are all starting to pick up the pieces, then the property market will begin to move again. Perhaps it will carry on with even more vigour than before lockdown. Perhaps buyers will be so desperate to get larger spaces since lockdown that they’ll be fighting each other to buy, and prices will rise significantly.
“Time will tell … but we think a single digit movement is the most likely outcome, and in truth we expect less than 5%.“
Stranger things have happened. It does feel a little too optimistic though. Even when we do start moving around more freely there will remain plenty of unknowns. Will there be another lockdown? Will the virus mutate? How long to get a vaccine? What has been the real damage to the underlying economy?
Prices are set by shared risk between buyers and sellers. When uncertainty is high, then prices tend to fall. Sales will be done between the sellers who accept that the world is not what it was, and buyers who accept it’s unlikely to be as bad as the pessimists claim. Where will that be? Time will tell on that, but we think a single digit movement is the most likely outcome, and in truth we expect less than 5%.”