As professional independent financial planners, we’re constantly bombarded with huge quantities of research, some of which is exceptionally robust, some considerably less so.
Sometimes we’ll review research on a particular subject and find diametrically opposing views. Invariably, that’s when competing forces are arguing for their self-interest. This is particularly so when it comes to house prices: estate agency and mortgage lender research invariably talks up the benefits of having oodles of bricks and a mortgage up to your eyebrows; we’ve never seen any estate agency/property website suggest that people shouldn’t buy property because it’s overpriced! However, we do see the ‘property overpriced’ argument from those whose self-interests are met by people investing in alternatives to property. So how do we know what’s right? We challenge the arguments we’re presented with and look for impartial evidence. For house prices, Land Registry and HMRC data is “fact”, albeit usually somewhat dated and subject to distortion by variations in particularly large, or particularly small transactions.
In this article, we’re going to try and give a balanced view of short term and long term house prices, but please remember house price movements are subject to significant variation, even within the same village, so don’t bet your house on our comments, instead use them to provoke thought and examination
“Lies, damned lies and statistics”
FACT: There is a chronic shortage of housing in the UK
FACT: There are 634,453 empty houses in the UK (Ministry of Housing, Communities & Local Government as of October 2018)
REALITY: There is a chronic shortage of the “right” housing, in the “right” areas, this is particularly true of the South East of England.
In a February poll, taken before the full impact of coronavirus on our shores, property analysts expected house prices to rise 2.0% this year, a typical ‘keeping up with inflation’ rather than real growth. Our view is that this was probably a reasonable assumption, although, with Brexit on the horizon, we’d have expected some house-price shocks later in the year if a fair trade deal isn’t reached between the UK and EU.
Spring is usually a key busy period for the property market, but the lockdown killed most activity. Some would argue that for too many years, the health of the property market has been a barometer of the financial health of the UK, so if people aren’t buying property, we all have a problem. That problem started to manifest in April when the number of property transactions fell to a record low of 37,000.
Recognising this problem, the government innovatively relaxed restrictions on the housing market before starting to ease the lockdown more generally. House Buyers staggered out into the sunlight from their lockdown on 13th May and there was an immediate slight pick-up in activity. HMRC data shows a total of 46,230 property transactions were completed during the May, much better than the previous month, but still down 52% on the same month last year.
Estate agents are saying that demand is high; less vested interests suggest that the high demand is largely deferred demand from the lockdown period and that is may be short lived as the increasing risks of unemployment put pressure on households causing demand to plateau or fall.
A more balanced consensus suggests that housing market activity is likely to edge higher in the near term, albeit remaining below pre-pandemic levels, until more is understood of the economic impact of the pandemic.
The wordsmiths at Commerzbank elegantly “expect the housing market to be a casualty of the economic scarring that will result from this recession.” We think this is fair; the magnitude of the shock to the economy makes a subsequent house price fall unsurprising as the nature of the property market means it hard to accept that it could go though such a profound economic shock without taking a material hit. The unanswered question is “how big a hit?”
The same sentiment is found in a Reuters poll (23 June) of property market analysts which anticipates property prices will fall by an average of 5% this year due to unemployment caused by the coronavirus recession. In a worst-case scenario, the same poll predicts values will fall an average of 11% this year. Of course, such averages tend to have significant extremes – in both directions.
Our view has been that the second half of 2020 is going to be a pivotal test for the property market. The furlough scheme is being scaled back and we’re already seen unemployment increase in quantities not seen for many years, but we’re also seeing lockdowns ease and people start to move towards their new ‘normal’. The government’s fiscal policies will be tested like never before as they seek to keep people in jobs, which is fundamental to the future direction of house prices.
It is interesting to note that preliminary data from Nationwide suggests that annual house price growth ground to a halt in June and is now in year-on-year negative territory for the first time since 2012. We take such statements from lenders seriously but note that it is based solely upon Nationwide’s own lending experience.
One would normally think that first time buyers would welcome the fall in property prices reported by Nationwide, but, rather than bringing a first property closer, a corresponding tightening in lending requirements (Nationwide for example his tripled it’s minimum deposit requirements) has pushed property even further out of reach for many.
If first-time buyers struggle more to get on the ladder, homeowners the next rung up will have difficulty selling their own properties; in turn perhaps forcing them to lower prices to entice a buyer. If that second or higher rung homeowner is ‘forced’ to sell their home, due to unemployment, separation, mandated relocation etc they’ll find themselves in a buyers market, which will fuel the banks’ concerns of negative equity contagion with a corresponding further tightening of lending; a typical British vicious property circle, but one that is statistically overdue.
We’re already observing that mortgage lenders aren’t just tightening up for first-time buyers, there has been a widespread withdrawal of mortgage products over the last few months. A survey conducted by Butterfield between May 29 and June 02 of more than 1,300 homeowners and prospective buyers found that despite already having a pre-coronavirus ‘mortgage in principle’ approximately half had subsequently been denied a mortgage. A trend which if it continues will only weaken the housing market.
The financial reports from big lenders confirm a fear of weak housing market as most UK commercial banks have taken write-downs on the value of their loan books, indicating they expect many people to default on their mortgages. This has the impact of potentially increasing the supply of houses on the market at a time of economic uncertainty and reduced availability of attractive borrowing, which is likely to drive prices lower.
Robert Gardner, Chief Economist at the Nationwide Building Society has recently been quoted as saying “the medium-term outlook for the housing market remains highly uncertain. Much will depend on the performance of the wider economy, which will, in turn, be determined by how the pandemic and restrictions on activity evolve.” We tend to agree with Mr Gardner, we don’t think a reliable property price trend will be evident until it is clear that the COVID-19 health crisis and COVID-19 financial crisis are both behind us.
Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it.