Savills research team recently offered some interesting analysis of what a UK property market recovery could look like post-Coronavirus predicting transaction volumes could be down by up to 45% for 2020 with the greatest impact resulting from the next 3 months.
Savills cited impediments to property market activities such as the interruption to agency, conveyancing work and a drop in consumer confidence whilst recognising the Government’s response with extensive support for the economy and business as well as liquidity injections, grants and low-cost loans.
I think that few would disagree that the Government is working hard as Savills suggest, but encouraging lenders to take a benevolent approach to those struggling with mortgage payments may prove to be little more than a band-aid.
Changes in mortgage lending
As each unprecedented day passes, it is becoming clear that the Banks and mortgage lenders have no intention of propping up the housing market with mortgage offers being revoked and money being conserved.
So with agreed transactions on hold, estate agents confined to online marketing, Furloughed workers, restricted or non-existent mortgage lending and closed businesses, it is a matter of time before the true analysis of the housing market can begin.
What might we learn from China?
Savills analysis states that sales have recovered in China by 50% of the four year average in the 2 months since movement restrictions were lifted. Knight Frank says that 39,455 sales transacted across 30 major cities in the first 27 days of March compared with the 4,578 over the same period in February.
Due to the pent up demand following Brexit, the first two months trading of 2020 produced healthy numbers of agreed transactions in many parts of the UK with many of these transactions now placed on hold only to be released when lockdown restrictions are lifted. Whilst many of these transactions may fall by the wayside, many could hold together and release to exchange of contracts in the following weeks.
Could the figures reported by Savills and Knight Frank’s China analysis really be showing the same release of pre-existing transactions rather than a resurgence of new market activity?
Emerging from lockdown
When we emerge from lockdown restrictions the market will respond as quickly as mortgage lenders review their lending criteria. New activity is likely to be unleashed from pent up demand providing that mortgage products are available.
The housing market is driven by the economies of supply and demand but also from the availability of funding and cash liquidity. The Savills analysis states that the central London market is likely to lead the recovery due to many sales taking place in cash but this sector could easily emerge as one of the casualties of global Stock Market volatility. Could it fall to the provincial markets to lead the way with those homebuyers who have regained employment security?
The simple economics of supply and demand consolidates the status quo for house market prices and governs the framework for recovery. The dynamics can be hard to predict with human behaviour an unknown factor. What will be the perceived state of play, how will the damaged economic backdrop be viewed by those who simply want to move home after being restricted from doing so and how long could it take to re-establish real job security.
Increased supply may result from those who are forced to sell from a change in financial or personal circumstances arising from Covid-19. This may be countered by a withdrawal from the market from those who are no longer able to move for similar reasons or perceive that a better time to sell will emerge.
The housing shortage, so well documented in recent years, exerts constant upward pressure on house prices in many parts of the UK – nowhere more so than in the South East. There are still not enough homes being built and Covid-19 will have slowed the process despite many construction sites remaining open for a while.
When the virus is defeated and the housing market returns to some sense of normality we may well see the unleashing of pent up demand from movers of necessity, sellers needing to release equity becoming downsizers or reduce their borrowing, opportunists seeking investment safe havens in property and job relocations arising from the contraction of workforces.
The recovery following the 2008 financial crisis saw each and every one of these stimulants.
The factors that drive a housing market recovery can wrong-foot even the most enlightened economists and that is because human behaviour is difficult to predict but historically, in the UK home, moving is at the heart of domestic financial recovery.
The speed of a property market recovery will depend on whether the population can, and not whether they want to move.
And I predict that the South East will continue to be something of a special case.
Demand is always likely to be strong for good homes in our local towns, villages and countryside given the growth in this region and our excellent communication links.