Coronavirus and the Impact it will have on the UK Property Market in 2020
by Robert Jones. Director, Property Investments UK
15th April 2020
The world is in shock.
The coronavirus epidemic is having a wide-reaching impact on our physical and mental health and is something, the-likes-of-which, we haven't experienced in a century. The financial impact will also be far-reaching. Even with government stimulus, the situation we see before us is wholly unpredictable and every one of us will be impacted.
This article is written on 15th April 2020. It isn’t going to be dark, downbeat or gloomy. Quiet the opposite. What we want to do is to help you cut through conjecture and opinion and find the data you'll need to navigate the UK property market, throughout the year.
We will aim to distil insights we've gleaned from various conversations we've had, since the beginning of the lockdown, with stakeholders throughout the industry; from mortgage brokers to developers; new build home builders to estate agents; auction companies to surveyors; buyers to sellers.
And from those conversations, at different levels of the industry, we have perhaps learned a few things about how other companies - other people - are working through the current situation; where they are being risk-aversed and where they are seeing positivity.
Combining this information with our market data sources has given us a few insights into what we all could expect for the rest of 2020. And we're sharing, in the hope that it might be useful to anyone who needs to think carefully about what the lockdown could mean for national and local housing markets over the medium-term.
But of course, even a good combination of reference points, in the right context and timeframe can't help predict everything that's coming our way. News and updates are coming daily. So, while it is essential to try and predict and make plans, it is equally essential to stay open to the idea of change and be ready to adapt.
With that in mind, let's have look at what could happen for the rest of the year, starting with next couple of months and what remains of spring, April and May.
Spring (April and May)
Market State: Constricted
The market during this period is likely to experience the greatest shock due to the current lockdown and the forced closure of a lot of businesses.
We could say, much of the property market is closed and not by want or choice. Both buyers and sellers, who wish to transact, can't in most traditional settings. High street estate agents have seen their offices close and while some have team members who are working remotely - taking calls and queries and offering support - viewings are not possible and sales, unlikely.
In the estate agency sector, many teams in the industry are being furloughed with businesses put almost entirely hold, leading to a tight constriction of the market.
The market is seeing heavily-reduced transaction volume across the board, with some sectors seeing a reduction of 30-50%. This is not a reduction in prices but a reduction in the actual number of properties being sold.
Social distancing is certainly constricting the ‘traditional market’ where houses or flats are sold to a would-be homeowner. But for the investor market - where virtual viewings are more-common, where houses and flats are sold off-plan, where houses are sold with tenants in situ and access was never part of the deal anyway - there is still plenty of activity.
In some ways, it's worth considering, that even as viewings have dropped to practically zero in many parts of the industry, the fact that sales are still happening at all, is very positive. Homeowner sales are still happening and these aren't only sales that were close to completion before the lockdown but from new enquiries, since it started.
Markets do adapt and continue, even under stress and the UK property market is no different. Forgive the hackneyed simile but the property market is like a stream, finding ways to continue flowing around whatever's put in its way.
As we'd perhaps expect, a large percentage of would-be buyers in the mainstream market, that don’t necessarily ‘need’ to buy a home, are cautiously preserving their cash; holding on and waiting to see what happens.
Ultimately, many aren’t even quite sure of what they are even waiting for. For some, it’s simply for the state of confusion to pass. By not wanting to make the wrong decision, they make no decision at all. In some instances, this is absolutely the right thing to do, as information on how long this lockdown may go on for and what comes after, is far from concrete.
There are signs of restrictions being lifted in many countries. However, in the UK and as of today, it’s still very much an unknown quantity; with some estimations being that the lockdown is likely to be extended, at least until mid-may.
However, some people are still actively buying and despite everything, that makes sense. In a world where everything is uncertain, properties have tangible value; providing much-needed shelter, homes and accommodation.
And our perspective on all of this?
Whatever the short-term shocks and shifts the market sees, we can look to a future where the underlying need for homes is still there.
With uncertainty being prevalent amongst sellers too, supply is a real problem.
What it means that there are far fewer properties coming onto the market and this constriction of supply is limiting the options for those buyers who are active. This creates a chain reaction which goes on to impact those would-be sellers, wanting to upsize or downsize.
With limited new options coming to the market, even those sellers that wish to sell are forced to sit and wait as a lack of options is preventing them from finding somewhere else to purchase and move to.
It’s not all bad news and in this article, we will be rounding up our analysis of each season, with the green shoots (the positives or the possibilities) we are seeing or anticipate in 2020. Hopefully, these are things that will assist the housing market and its stakeholder; something perhaps to look forward to whether you are buying or selling properties.
And currently, we are still seeing interest from buyers.
People still want to buy. The investors that we are speaking to, think very much in the medium to long term and are very much interested in the long-term benefits of investing in property and providing homes for their tenants.
And while shockwaves from current events will almost certainly be felt well into the future, It is the practical stuff of the very near short term that is causing the most disruption.
We are seeing sellers who 'must' sell as soon as possible as already starting to adjust their expectations on what is possible and it is these property owners that will drive sales (and much of the market) forward in the summer, once we’re out of lockdown (or at least free of its current phase). The truth is, their need to sell, in many cases, will trump any short-term financial consideration, with speed and certainty, for them, being the larger priorities.
Sellers are all essentially asking themselves the same key questions:
- How long could a sale take?
- What price is possible?
- What kind of person is likely to buy?
The answers to all of these questions are, of course, to some degree unknown but house-buying companies and cash-buying investors are still very much operational and able to buy from homeowners or other investors, quickly.
The answers are therefore as following with regard to this particular type of market:
- Cash-buyers can buy a property in just a few weeks.
- Buyers will still transact for the right property at full market value. If it has great fundamentals, has great potential and is seen as a long term plan. Those buyers that are trying their hand on reductions are offering in the region of 85-90% of market value on deals that they would like to buy but don’t need as they try and secure an early deal.
- Cash buyers are still and always will be favourable to mortgage buyers.
For our part, buyers are asking us regularly if now is a good time to buy. For ‘average’ properties, we tend to suggest they hold back and wait. And why rush in?
But when a property fulfils your criteria and ticks the boxes for a good investment then now could still be a great time to buy.
Because if you think a property might be perfect; in terms of yield, location, property type and terms, then if you wait you risk losing that opportunity.
Currently, we see short-term property investing (flipping houses and refurbishment projects) as the riskiest and most difficult-to-predict form of investment, right now, but if you are taking a medium to long-term view then purchasing property, even now, is still worthy of consideration.
Summer (June to August)
Market State: Slow Release
There are many stakeholders and industry professionals that are championing the prospect of a fast bounce back in summer; the result of pent-up supply and demand. In other words, so the theory goes, that at the first opportunity, sellers who couldn't sell during the spring and buyers who couldn't buy will all move forward, quickly.
Given our position in the property industry, it would be easy, convenient and even profitable for us to wish, hope for and rave about this same idea.
But looking at the data from multiple reference points; for the UK's property market and the markets of other countries (ahead of us in the Coronavirus curve) such as China, Singapore, South Korea and Hong Kong, we don't think it's going to pan-out that way.
While we completely agree that pent up buyer demand will be there and have an impact, we believe a scenario that sees a much slower release of activity, is more likely.
There will be many who want to transact, there will be pent up demand. But uncertainty will still underpin the market (and the property market is a slow-moving ship). With large amounts of money involved and generally speaking, long timeframes to sale, buying property can't easily be compared to instant transactions like buying goods or even compared with investing in stocks and shares.
Confidence and sentiment are very much the fuel that drives the housing market. Need will always be there but demand can vary, seasonally and as a reaction to external factors, an example of which is the virus.
But more than an issue with demand, the property market has a unique problem with equilibration and as such we anticipate that the market will find it hard to balance expectation with prices.
In one regard, what this means is that the prices properties will be marketed at will likely be quite different from the sales prices that are actually achieved (thinking in terms of 'typical' sales via high street estate agents).
This will, most likely, be especially true where properties have been on the market for a long time and were incorrectly valued at too high a price to begin with, prior to the lockdown.
And yet, the reality is that not all industry sectors are going to be affected, equally.
We may see, for instance, that rental property and real estate, valued on yield, see no real change in value as owners hold their investments and reap the benefits of an income.
Land or properties in need of refurbishment, on the other hand, already require a competitive market to achieve a good price. So, this side of the market could struggle to return to early 2020 values.
What we are looking at, in summer, is a stand-off between buyers and sellers with regards to prices; in some parts of the industry and in some parts of the country. And in our opinion, this factor will stop there from being a radical jump in transaction volumes during this period, nationally.
But that's a birds-eye-view.
Because due to this pent up demand, there will be movement and some locations and some styles of properties will bounce back to normality; previous market levels and buoyancy.
There will always be some quality locations with quality properties, that can be matched to active buyers; homeowners looking to relocate; first-time buyers wanting to get on the ladder...
And of course, mainstream, yield-focussed investors, looking for properties to help them hedge against a volatile market.
One potential sticking point for buyers could be surveyors. Even with the best intent in the world; from buyers, sellers, agents and lenders, if surveyors are cautious (and they are by nature) then property valuations could take a hit. This hit is unlikely to be at the 2008 financial crisis level but a reduced valuation of 5% or even 10% can make a real difference on a property transaction.
So it’s important for buyers that are wishing to go ahead that they have enough capital to not only cover their purchase costs but with some in reserve so they can proceed with confidence should they find that the property becomes more expensive as they move forward. Because a property listed at below its market value will attract the attention of other buyers, willing to make higher offers.
It will be those sellers that started to adjust their expectations in April and May, that will drive sales, during the summer months.
Some developers and new-build homebuilders who are highly leveraged, having high holding costs, will need to sell their stock and may reduce prices, in an attempt to achieve faster sales.
In this same part of the industry, there are other developers who will have a decent level of capital in reserve and these companies may choose to keep their prices firm and ride it out.
So, because of this and other factors, we don't anticipate that there will be wide-scale price reductions on housing. There will be some reductions but they will be specific to certain regions, industry sectors, and even specific to the company selling the stock.
And as mentioned above, it will be 'must sell' owners, with realistic expectations, that will drive the market early on including those that are experiencing debt and divorce or tragically, the death of a loved one.
Fundamentally, we believe that during the summer there will still be demand in the market.
Many other countries are seeing reduced transactions, but, they are seeing sales, without wide-scale reductions in property values.
This crisis simply isn’t and isn't going to become the same as other, recent recessions.
Buyers that have the means and the desire to buy - from homeowners through to investors - will continue to make progress.
Where the market might be slow to turn it around is with high-street estate agents, who will be dealing with 'price-sensitive' stock but we expect that property auctions and direct-to-developer sales will see an influx of buyer-interest as investors look to property as a way to diversify and therefore limit their exposure to other markets and industries.
Autumn (September to November)
Market State: Imbalance of High Demand and Reduced Supply
Traditionally speaking, autumn is the time of year where UK housing market peaks, in terms of transactions, house price growth and general activity.
It’s a time where, after the summer holidays, the public are back to their day-to-day lives and more focussed on their futures and there's no real reason that 2020 won't see the same.
If the lockdown has ended fully or is only partially in place (say, rolling lockdowns and large-scale testing for the coronavirus) then people will be able to move about and buy and sell property.
But while the means and desire to transact will be there, there is also the potential for there to be an imbalance of supply and demand, due to almost two-quarters of limited activity across the whole industry, including fewer homes having been built.
This inactivity will ripple throughout all areas of the industry - from disruptions in the supply of building materials to development sites through to the impacts caused by the closure of key companies who would normally compete for delivery of services - and there could be unexpected consequences and problems.
Less supply for materials and services could lead to overflows of demand in some areas and won't hit all industry areas and geographical locations in anything like a uniform way.
If social distancing, even if intermittent, continues, then estate agents will continue to be affected more than, say, mortgage brokers (the latter being able to operate electronically and the former still requiring face-to-face interactions).
So, whatever way we look at it, the market in autumn might be sound, in principle, but there are likely to be bottlenecks across the industry.
Demand in the property market could well be back in autumn after a few months of relative inaction.
However, the process of purchasing, combined with a lack of supply of new properties still may prove to be somewhat limiting. Ordinarily, what a scenario like this would lead to, would be a rise in property prices.
But it is unlikely that demand will return to pre-lockdown levels meaning we may well see parity between supply and demand.
While it will be true that lots of people who wanted to buy but couldn't over a number of months will all be entering the market at once, we can't discount that a lot of peoples' financial situation is being hurt and there will be many who, ordinarily, would have bought, who are no longer in a financial position to do so.
Even though buyers may be ready-to-buy and with the means, they may find access to finance, a limiting factor.
Unlike in 2008, which as much as anything was a crisis in lending and liquidity, there is, currently, money available for lending. However, we are already seeing a reduction in the mortgage products that are available and although banks will have the urge and ability to lend, something will change. More than likely this will involve a reduced loan to value.
Unlike late 2019 and early 2020, where a mortgage of 75% or even 80% for buy-to0let investors would be commonplace, we may be looking at 50-60% for mainstream products, as banks try to hedge against other risks.
So it will be the buyers in a good financial position, that will drive transactions in this marketplace.
By autumn some sellers will have postponed making the decision to sell for many months. Some, concerned about Brexit may have even been cautious about proceeding since 2019.
Sellers, now, may well be keen to test the market.
With reduced transaction volumes from Spring and with the market still playing catchup, we would expect to see an increase of ‘homeowner’ properties go on for sale. This will likely see an increase in properties available, through high-street estate agents.
And yet, in the aftermath of the lockdown period, there is likely to be a significant reduction in the estate agency brands, you may be used to. For reasons we've already outlined, estate agents are notably exposed in the current environment.
What is likely to replace many of these agents on-the-high-street are one-person agents; self-employed consultants, who will bring a new approach and to the industry and who are in a position to provide new user-experiences for buyers and sellers who opt into their services.
During autumn, property investors will be very active. Some having held-off, conserving their cash during the Spring and Summer months, will now be looking to make their move.
Value-driven property assets will gain a lot of interest and high yield, already-income-generating properties will also have an appeal.
Also, mixed-use residential/commercial locations that have weathered the storm well, will be sought after as-will residential properties that have stable tenant profiles (like key-worker professionals or students) in popular university cities.
How to Get at the Data
Now we have an overview of how 2020 may play out. It’s important to consider how to find the data that will help us make key decisions throughout the year.
Not only how to find it, but what to look for and why it’s relevant.
I’ve filmed a walkthrough video here for you which looks at key data sets:
- Average yields in an area (shows you how rents are comparing to asset values).
- House price ‘market value’ changes (shows you what sellers are expecting the market to be).
- Average time on market (shows you how competitive the prices are in the area).
- Buyer demand (shows you have active buyers are in the area).
You can then see the data at any time, for any location, in any part of the market so, you can buy with confidence, even in uncertain times.