The housing market has re-opened for business. In England, at least.
Those living in England can once again view, buy and sell properties. (I imagine the rest of the UK will follow on given time, but we’ll see).
Valuers can value. Surveyors can survey. Removal vans can remove. Just as long as everyone keeps a safe distance from one another.
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The practicalities of all this may be a little daunting. But given that it’s just one more stressful layer to add onto a famously stressful process, I don’t think it’ll put anyone off. If you’ve held off this long, I suspect your move is going to go ahead, come hell or high water.
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But beyond the initial thaw, what are the prospects for the market in the longer run?
Covid-19 will change some things, but not our desire to move house
Last time I wrote about house prices here I asked for your views on the market, and you very generously delivered. We got nearly 100 emails in total. I’ve read them all, and there was a lot of interesting material in there.
I’m going to pull together some of the most interesting snippets to go out with this Saturday’s Money Morning, so thanks again – you’re a very responsive audience.
I’d say the upshot of your emails was that most readers who were already in the middle of transactions were not rushing to pull out. But there were concerns about what would happen to prices, with employment a particular worry on that front.
So now that the housing market has re-opened, the big question is: what happens now?
I don’t feel that there’s much point in talking about the various house price indices at the moment. All of the compilers have acknowledged that they’re not much use just now as very few deals have been done, which skews the data horribly.
I think the only thing we can safely say is that the market really was showing signs of perking up before the coronavirus struck.
Perhaps a tiny bit more useful is the latest survey from the Royal Institution of Chartered Surveyors. Roughly 80% of its members said they had seen buyers and sellers pull out of transactions last month (presumably the other 20% didn’t have any business to lose).
Most surveyors expect prices to fall, with 40% predicting a drop of more than 4%, reports Reuters. And, perhaps predictably, about two-thirds reckon a temporary cut in stamp duty would help the market to bounce back.
You can see why property specialists might be feeling a bit negative just now. You can also see why they’d be calling for a stamp duty holiday. (On the latter, I can see it happening if the housing market really runs into trouble but it would be a very tricky sell for the government, given that lots of people are starting to wonder how we’re going to pay for all the temporary lockdown measures).
But one thing to remember about markets is that people overestimate the importance of sentiment. Mood swings might have a short-term impact. But in the long run, it’s the fundamentals that matter.
I’m willing to believe that coronavirus might permanently tweak our working patterns (more people will work from home more regularly). That will have a potential effect on where people want to live. We may well have reached “peak city” for now (as my colleague Dominic discussed the other day).
But it’s not going to stop us from moving house. People will still want and need to move house for all the usual reasons and Covid-19 has not changed that (indeed, the disruption has come about due to the response to Covid-19, not the bug itself).
What can the last two crashes teach us about prospects for house prices?
So if we want to know what the outlook is for prices, maybe we just need to focus on the fundamentals, and try not to let the fog of the shutdown distract us.
On that front, can we learn anything from previous crashes? Maybe.
The researchers at BuiltPlace have done some interesting work on previous UK house price crashes. We’ll look at the crashes of the 1970s and early 1980s another time (prices during those only fell in “real” terms – after inflation – rather than nominal terms, which does make a difference).
For today we’ll focus on the crashes that many of you will be most familiar with – the crash of the early 1990s, and the one that followed the 2007-2009 financial crisis – because I think those are the most pertinent to today’s outlook.
What did those two crashes have in common? Three things. First, they were recessions, so people lost their jobs. That creates people who can’t pay their mortgages and thus become forced sellers. It also means there are fewer potential buyers.
Secondly, credit dried up. In the 1990s, interest rates spiked – in 2008, the banks nearly went bust. However it happens, people can’t get mortgages. And of course, in recessions, banks aren’t writing as much business because the backdrop is riskier, which in turn feeds on itself.
What’s the third thing? Well it’s easy to forget, but the other factor those crashes had in common is that there was a big run-up in house prices beforehand. In the 1980s, it was all about people rushing to buy while they could still get tax relief on mortgage interest payments. In the 2000s, it was a property bubble, driven partly by buy-to-let.
The one big difference between these two bubbles and busts is probably the difference in interest rate regimes. In the 1990s crash, people’s mortgages became unaffordable. In the post-2008 crash, interest rates were cut sharply and so that mitigated the number of repossessions.
What this means for today’s housing market
So what can we say about the current situation? On the job front, the furlough process is making it hard to say what the long term outcome will be. The risk is that the longer the economy is shut, the more entrenched the damage becomes.
That said, while I struggle to see how we get out of this without a big rise in unemployment, I’m not sure how long the downturn will be. I think there will be more demand out there than we expect once people are off the leash.
So the jury is out on this one. But on balance, I don’t think that this needs to be as crushing as the 2008 downturn was – I’m not betting on a V-shape (I think it’s too late for that), but I think we can get a quicker recovery, depending on how much longer the lockdown lasts.
As for credit availability – interest rates aren’t going to surge any time soon. So that makes a 1990s soaring repossessions scenario less likely. Banks are being encouraged to be both forbearing and generous. So I think that anyone with a secure employment situation and a decent deposit will be able to get a mortgage cheaply.
So while I can see a certain tightening of credit availability, we’re not going to get a credit drought as we did in 2008, or utterly unaffordable home loans as we did in the 1990s.
And finally – much as I think that house prices in certain parts of the UK are ridiculously high, it’s hard to argue that we’ve been in a house-price boom period. Prices spent most of last year falling in real terms, particularly in the most overpriced area, the Southeast.
In other words, while it might sound wildly optimistic (and it does, even as I write it), it’s not clear to me that the conditions for a major house price crash are in place.
We haven’t just come out of a massive boom. We aren’t going to see a complete meltdown of the mortgage market. And while I’m worried about the unemployment situation – for me, that’s the real uncertainty here – I think that with a combination of furloughing, forbearance, and a near-term end to the lockdown, we might even avoid the worst potential outcome there.
What does all of that point to? I don’t see prices booming by any means (I hope they don’t, that’s what’s caused a lot of our woes in the first place). But currently, I see gentle stagnation as the most likely outcome – and probably the disparity between London and the rest of the UK continuing to close as people feel less need to be within the event horizon of the commuter belt black hole.
Do keep your emails coming. Tell me why I’m wrong, or what I’m missing here. Ping me at editor@moneyweek.com.
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• An apology – in the original version of this article, we said that the UK housing market was open. That’s not correct – it’s only the English housing market that’s open so far. Sincere apologies to readers in Scotland, Northern Ireland, and Wales for any confusion.
