Comparing the downturns

Every housing market downturn has its own unique characteristics. What caused a drop in prices at the end of the last market cycle and drove or stalled any subsequent recovery does not necessarily apply to the next.

Take 2008 for example, a recession fuelled by sub-prime mortgage lending, high levels of household debt and deeply rooted weak spots in the economy. That’s not the case now.

And whilst it is still too early to tell the scale of the direct economic impact of coronavirus, the upheaval caused by the outbreak is not expected to be as damaging or long-lasting as in the years following the financial crisis.

Indeed, many economists are predicting a short, sharp crunch followed by a quick and strong recovery. They are hoping for a faster revival than the 2008 recession, potentially a “V” or "U"-shaped recession, rather than a prolonged “L”, such as was seen in the wake of 2008.

The underlying economic forecast we have adopted points to a contraction of GDP of 4% in 2020 and growth of 4.5% in 2021. The actual outturn will be determined by the timeframe imposed by the lockdown.

Government stimulus

A number of factors underpin this view, the first being pledges of unprecedented levels of government support. The Chancellor has, to date, loosened fiscal policy and announced a £350bn lifeline for the economy.

The support includes a furloughed workers scheme paying 80% of salaries to retain workers as well as a Coronavirus Business Interruption Loan Scheme to help small and medium sized firms weather the impact of coronavirus.

Importantly for the housing market, these kinds of interventions - if successful - should ease the pressure on mortgages, preventing the kind of defaults that led to a glut of repossessions and forced sales such as those that were seen following the financial crisis.

Expected low inflation and loose fiscal and monetary policy should also provide a sizeable boost to household spending power in late 2020 and early 2021, driving that expected bounce back.

As will low borrowing costs. The Bank of England acted quickly in March, making two emergency interest rate cuts, first to 0.25% and later to 0.1%.

Record low rates and the availability of relatively cheap credit have been two big factors underpinning property markets over the last decade and these moves suggest that this lower for longer environment will remain in place. Oxford Economics expects rates will stay below 1% until Q1 2023, and only rise to 1.5% in Q4 2024.

There are, of course, other issues around lending which were not present back in 2008. Restrictions on movement and surveyors’ inability to visit properties has resulted in some lenders cutting back on new mortgage products or demanding higher deposits.

However, lenders continue to show appetite to lend, with some doing automated or desktop valuations. New mortgage lending, meanwhile, hit a six-year high in February, the month before the coronavirus outbreak took hold in the UK, which points to a fairly strong and active market pre-crisis.

Unemployment

What happens to unemployment rates in the coming months will be key in determining the direction the economy and property market heads. For now, pledges of unprecedented levels of government support are keeping unemployment forecasts relatively low.

Oxford Economics expects unemployment levels will rise to 4.17% later this year but recover to current low levels by next year, though reports of a leap in new claims for Universal Credit mean this peak is likely to be revised, with the numbers suggesting that the unemployment rate could jump to about 5.5% in April.

For context, post-2008 unemployment peaked in 2011 at 8.5%, having risen from around 5.2%.

Activity

It is important to remember that the housing market was in a relatively good position at the turn of the year, buoyed by the certainty of a Conservative election win and subsequent moves forward on Brexit. A sharp uptick in sales and price growth was seen across the UK, with even the prime central London market seeing a reversal of a five-year long price decline. The arrival of Covid-19 and the government-enforced lockdown put this recovery on hold.

If we assume that the current lockdown is maintained through to the end of May this will obviously have a dramatic impact on sales volumes. Sales will slow sharply over the next quarter before an uptick in the final half of the year. 

Our view is that sales across the UK will total around 734,000 for the full year, a 38% decline from the level seen in 2019, and not quite as steep a drop as the c.45% fall seen post-2008.

And indeed, we expect the revival in activity will continue, with volumes next year expected to be 18% above the level seen in 2019, though this expansion in sales in 2021 will not fully offset the losses seen this year.

For the government to see a full recovery of the market, with all of these “lost” sales carried forward, there will be a need for substantial incentives to ease market liquidity - including a reduction in stamp duty.

There is in reality only one issue which will determine the performance of the UK economy, however - and that is the route the government takes out of the current lockdown. 

Our outlook is based on the assumption that the current very restrictive lockdown will remain in place through April and May with a gradual lifting through June. Any loosening of movement restrictions before this time will imply an improvement in the activity levels and price movements we are forecasting.