Back when I was a student in the early 1990s, I remember watching a slapstick comedy with Joe Pesci, in which he played an unscrupulous slum landlord. It wasn’t the greatest film in the world. I didn’t even remember the title until I looked it up just now (The Super), but there was a line in it that always stuck with me.
Pesci was lecturing somebody about the three things always to look for in a property. I was expecting him to say, “location, location, location”, of course. The gag was that, instead, the character, bereft of all humanity, said, “death, destitution and divorce”.
Sadly, the Pesci character was right. The ruthless property buyer will often get a better price if there is death, destitution or divorce involved on the sell side. And I am afraid the terrible tragedy of Covid-19 is that we are going to be seeing rather a lot of all three Ds in the months (hopefully not years) ahead.
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This time the UK housing market is in serious trouble
We don’t yet know what the Covid-19 death toll will be, and estimates vary wildly. Professor Neil Ferguson of Imperial College, the government’s key adviser, outlined one scenario in which the figure would reach half a million, and another scenario in which it would be 20,000.
So far the figure is 1,789, although there is a substantial grey area: some have died of the virus, but others with it. The virus might have accelerated things, but was not necessarily the primary cause of death.
I don’t know where to start with the destitution. So many have lost their jobs or their businesses. The value of investments and pensions has been decimated. There might be some businesses which have actually benefited – supermarkets; tech companies that aid remote living and working such as Zoom; and Getty images and Shutterstock are having a field day, I gather, now that filming has been halted – but these are exceptions.
The fallout has shown just how dependent we all are on each other, and how much upset can be caused by disruptions in supply chains. Economies need human beings to move about, to congregate, to trade and exchange – and for the time being, that is not possible.
Then there is the third of Joe Pesci’s ‘Ds’ – divorce. “Literally” is an overused word, but, literally as I was writing this paragraph, a friend texted me to say that her sister, one week into lockdown, is asking her husband for a divorce.
Many couples are going to emerge from the lockdown closer than ever before, but many others are going to divorce as a result. Divorce and separation rates are going to spiral. Prosperous times lie ahead for divorce lawyers.
We have then, Pesci’s perfect storm: death, destitution and divorce – but at a national level. It does not bode at all well for the housing market.
The market is already effectively frozen, as John noted the other day. Viewings are not allowed; the government has urged that transactions and mortgage offers be put on hold; removal companies have, I gather, all but shut up shop; and lenders have pretty much scrapped all mortgages where equity is below 40%. It’s probably a sensible move to reduce risk in this way, when future incomes look so uncertain.
Property website Zoopla said that demand in the week to 22 March fell by 40% from the week before and predicted that housing transactions would drop by up to 60% over the next three months. One week on, those estimates look conservative.
Here’s why this is different to 2008
After 2008 – the last time the world faced a crisis of such scale – many thought that the British housing market would follow the same pear-shaped route as the American market. It did in parts of the country, but in others, the south-east especially, there followed a boom that took people’s breath away.
Several factors drove it. The cheap pound resulted in an influx of foreign buying, especially from Asia. Interest rates were slashed, meaning that money became cheap and mortgages easy to service. Lending might have tightened for some after 2008 – particularly at the lower end of the market – but credit was a lot cheaper for those who could get hold of it. So, unlike the crash of 1989-1993 there were few forced sellers, which meant very little extra supply hitting the market.
Meanwhile, the cost of moving and the difficulties of arranging new mortgages meant that many more chose to stay put and perhaps improve their current accomodation. That put more pressure on supply.
The vast sums of newly-created money from all the quantitative easing made its way into the financial sector and into the property in which it lived, putting further upward pressure on prices. And the government introduced the subsidy for housebuilding companies known as Help to Buy.
This time around circumstances are different. The job losses and closed businesses are far more widespread than they were the last time, and now they are in the “real” economy. Recovery looks (at least at the moment) like it will be slower, with appetite for risk minimal.
It seems fewer people will have the well-paid jobs that justify the loans that will keep house prices high. Even with all the bailouts and mortgage holidays, there are going to be more forced sellers. Some will need to realise the capital. Second homes might no longer be affordable. There won’t be the influx of foreign buyers.
There is also the outside risk that all of this money-printing that has gone on to bail out the system leads to serious inflation, perhaps even a run on the pound, which can only be defended with higher interest rates. That would put pressure on mortgage holders.
Successive governments, whether of the left or right, have shown themselves willing to bail out the housing market at all costs. None wants a house price crash on their hands. Do not underestimate the lengths they will go to to bail it out this time. Nobody had heard of quantitative easing before 2008. No doubt some fancy new word will be invented for the next wheeze invented to bail out the system.
High house prices are, as we have said so many times on these pages, as much as anything a consequence of cheap and easy credit. Houses are as much financial instruments as they are bricks and mortar.
But the real economy is also a major factor, and the real economy is in trouble.
There’s an outside chance that the government will use the crisis as an excuse to let house prices fall. That could give us the lower prices that this country so badly needs if housing is to become affordable again to anyone born after around 1985. But I’d say it was unlikely.
We’ll have a clearer idea of where house prices are going once the market unlocks. I wouldn’t be at all surprised to see many of the existing transactions currently on hold fall through due to the sudden change in economic circumstances.
The UK housing market, with some exceptions, has proved the most improbably resilient market over the 50 years of my existence on this good earth. But its time may finally have come.
Daylight Robbery – How Tax Shaped The Past And Will Change The Future is available at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere. If you want a signed copy, you can order one here.
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
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