United Kingdom / Coronavirus Insights
Demand Downsizes: COVID-19 and the Property Market

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by Biagio Olivieri, Industry Analyst
Jun 11 2020

The picture so far

The effect of the COVID-19 (coronavirus) outbreak on the housing sector is twofold: the immediate impact on real estate activity and the long-term recovery. Before the pandemic swept the United Kingdom, the housing market was gathering steam. Owing to robust labour market conditions, low borrowing costs and a more stable political climate following the December 2019 general election, transaction and price growth were gaining momentum. Then the coronavirus struck, putting the property market on ice, just when estate agents are usually at their busiest in spring. Under the government’s lockdown rules, the homebuying process was effectively halted, as buyers, sellers, estate agents and surveyors were instructed to stop viewings and inspecting occupied properties.

According to provisional seasonally adjusted figures from HMRC, there were 46,440 residential property transactions in April 2020. This was less than half the level seen in the same month last year, and even lower than that recorded during the 2008 global financial crisis. These figures, however, could paint too bright a picture and are likely to be revised down when more data becomes available, as they include completions of contracts exchanged in January and February, before the coronavirus took hold, which has artificially boosted numbers. Worse is therefore likely in store, with further pain expected in May.

This market paralysis is expected to hit house prices. Nationwide recorded a month-on-month house price decline of 1.7% in May, the sharpest monthly fall in 11 years, while annual house price growth halved from 3.7% to 1.8%, the slowest since December. While the data so far does point to a dip in UK property prices, changes tend to take time to fully emerge, and a much greater slump later in 2020 cannot be ruled out. According to the Bank of England’s (BoE) latest financial stability report, UK residential property prices could slide by as much as 16% in the current year, a drop similar to that seen during the 2007-08 global financial crisis. However, the BoE urges caution regarding these figures, presenting them as an ‘illustrative scenario’ rather than as an official forecast, given the uncertainty surrounding the model’s underlying assumptions.

What is already apparent, however, is that the mortgage market has taken a tremendous hit. If household borrowing trends are anything to go by, recent data points to an unprecedented collapse in activity in the housing market. The BoE recorded fewer than 16,000 house purchase mortgage approvals in April, less than 50% of those registered during the depths of the global financial crisis, and the lowest monthly figure since comparable records began in 1993.

Short-term recovery

After seven weeks of lockdown, the housing market reopened on 13 May. Restrictions were eased, allowing a return to sales and lettings and for construction activity to resume. People are now able to move house, removal companies can operate, estate agent offices have reopened, and in-person property viewings have resumed, all subject to hygiene and social distancing guidelines. Since then, early signs of an uptick in demand have materialised in the form of increased volumes of searches via online property portals. Rightmove, for instance, reported a return to pre-crisis levels of browsing and enquiries from potential home buyers. Similarly, Zoopla recorded an 88% increase in demand in the week that estate agents resumed viewings.

These positive signs are to be read with caution, however, as actual sales remain sluggish in an adverse economy, with many losing their jobs, leading to lower disposable incomes, and uncertainty over personal finances and borrowers’ ability to service debt. Households will also encounter difficulties in terms of the availability of mortgage products from lenders, as stricter lending criteria are introduced. Many lenders are assessing mortgage eligibility based on the lower income level of furloughed employees, while bonuses, commissions and overtime may no longer be taken into account. Banks and building societies have also restricted their loan-to-value product offerings, removing those with higher risk. In particular, this is expected to be felt by first-time buyers, who rely more heavily on low-deposit, higher-risk mortgages.

Medium-term outlook

Medium-term forecasting is difficult at the best of times, with current economic uncertainty further muddying the waters. The Office for National Statistics has temporarily suspended the publication of its official house price index, as the coronavirus crisis has effectively frozen market activity and data on which to base any estimates is lacking. The speed at which the housing market recovers will be dependent upon a variety of factors, including the effectiveness of government support policies to protect businesses and jobs, as well as the BoE’s historic attempts to keep borrowing costs down. These measures should set the stage for a rebound.

On the demand side, many homebuyers are postponing purchases rather than cancelling them altogether, which may lead to a more crowded market once the coronavirus crisis abates. Pressure is also on the government to assist buyers through a range of policies, including dropping stamp duty and extending the Help to Buy scheme beyond 2023. Should Brexit uncertainty dissipate, this would also provide much-needed confidence for potential home-buyers, further supporting demand.

On the supply side, the pandemic has exacerbated the undersupply of new homes, mainly due to the temporary closure of construction sites, a problem particularly pronounced in prime areas such as London. Nonetheless, while a drop in new builds is certain, it may not be as sharp as first feared, as construction activity resumed earlier than originally expected. The government has also recently recommitted to its longstanding target of building 300,000 new homes per year by the mid-2020s.

Rental market

With regard to the rental market, business is booming. The sector is majorly benefiting from pent-up demand due to the lockdown, while constrained incomes from a reeling economy and the stress on relationships resulting from weeks of confinement are driving more and more people to seek alternative rental accommodation. As restrictions are gradually relaxed and government employee support schemes wound back, strong demand is expected to continue. In response, buy-to-let investors may seek long-term opportunities in the current property recession, buying cheap in a lacklustre market and hoping to benefit from the recovery to come.

Long-term trends

The lockdown has also brought about a change in what people are looking for in a potential new home, with many consumers prioritising indoor and outdoor space over proximity to city centres and transport links. This is reflected in a recent study by Rightmove, which found that renters are increasingly seeking larger properties instead of studio flats, while buyers are also hunting for more space. As remote working becomes a more permanent feature of our lives and the pandemic causes people to reassess what they want from their homes, these changes could be here to stay. Whether this is only a temporary phenomenon or a permanent shift, only time will tell.

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