28 May Price Recovery or Price Reduction?
|Reading through some of the optimistic market updates written by esteemed colleagues in the industry, an impartial observer may be forgiven for thinking that Estate Agents are are “talking their own book”. It does stand to reason the more confidence in the market, the higher the volume of transactions and the firmer the prices will be to the benefit of most Estate Agents. |
So it’s time to face the facts. The UK is facing potentially the deepest recession since the great frost in 1709 and the government is pumping billions into the economy to avoid a financial meltdown; the global stock markets have crashed and only partially recovered and it would be a brave or foolish economist to predict how long or how deep this recession will endure. Capital Economics has predicted a fall of 12 percent in GDP in 2020 and that the current unemployment rate of 4% could reach 9% and that household income could slump by 10 percent. In its seasonally adjusted data – the first full month under lockdown HM Revenue and Customs said the number of transactions was 53.4% lower than in April 2019. Zoopla has reported that there are 373,000 transactions on hold in the UK during the lockdown and Lonres has reported that new instructions are down 72% between mid-march and the end of April compared to a year ago. The respected Royal Institute of Chartered Surveyors survey in April found that a large net balance of members believe that house prices will fall over the next 12 months (net balance of -38% opposed to a net balance of +21% predicting property price rises in February).
It is against this sobering background that Her Majesty’s government decided to revitalise the property market and construction industry, by lifting the restrictions on physical valuations, house viewings and home moves and allowing estate agents to open from 13th May providing social distancing and other precautions are observed.
So is it all doom and gloom and will property prices crash? The majority of independent economic forecasters and research departments of the major chain estate agencies are predicting prices falls in central London of between 2% and 5% in 2020 with a strong recovery in 2021. For our part, we do not believe that prices will crash for the following reasons.
Most of the Sellers in prime central London are discretionary sitting comfortably on large pots of equity and many have no mortgages so few are forced to sell. If prices do not meet their expectations, many of these Sellers will simply bide their time and wait for an improved market. Mortgage restrictions and affordability checks introduced by lenders after the crisis in 2008 has ensured lower loan to values and less forced Sellers.
There has been a considerable pent up demand in a market of low levels for transactions between 2015-2020 as activity was down to around 30% of the usual volume as buyers and sellers waited for the outcome of Brexit. According to the Office of National Statistics published last Tuesday average Uk house price growth in the 5 years ended to March this year was only 21% compared to a 59% rise in the 5 years to the beginning of the credit crunch. With a BoE interest rate of 0.1%, these are at historical lows and Lenders remain willing to lend with some of the cheapest loans and long term interest rate fixes on record. Ultra low-interest rates are doubly supportive of the market as they make properties more affordable for buyers (and often cheaper than renting) and also allow Sellers to hold their properties for longer without financial stress. Also, the extension by 3 months of mortgage payment holidays should limit the number of households forced to sell.
Sterling is weak as foreign buyers make up around 50% percent of buyers in London property remains very attractively priced in terms of foreign currency. If history is a guideline, after the 2008 financial crisis the market bounced back very strongly and quickly in prime central London with prices reaching their peak again by the end of 2010 after a fall of 21%. In troubled times there has always been a flight to quality assets and London bricks and mortar are considered a safe long term investment particularly given the huge volatility in other asset classes.
If independent commentators like the Bank of England and Capital economics are proved correct that there will be a strong economic recovery in the last two quarters of this year and in 2021, there are good grounds for optimism. My colleagues and I have seen sales going through at prices agreed pre-lockdown, new sales agreed post-lockdown and an encouraging level of viewing requests and general activity in the market. Several developers and property funds are now looking for opportunities in the market and we have noticed that some additional Sellers are willing to offer their properties on an “off-market” basis and at prices less than asking prices pre-COVID which is supportive of transaction volumes.
It would be foolish to underestimate the economic and social risks which could negatively impact the market as a result of the Pandemic. However, the early signs are encouraging that the market is indeed alive and kicking and that transaction levels are rising quickly as buyers enter back into the market and stalled transactions can now progress as mortgage lenders send out their valuers again.
If you would like to chat further please feel free to reach out for a candid conversation.
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