Residential Market Outlook
Week Beginning 20 April 2020
6 minutes to read
UK context
While the number of confirmed Covid-19 cases continues to rise in the UK, we may have seen the peak in new daily cases. On Wednesday Chris Whitty, England’s chief medical officer, confirmed that the pace of new infections was flattening.
On Thursday Dominic Raab announced that lockdown restrictions would remain in place until at least 7th May as he outlined five tests that must be met before restrictions are lifted.
Last week we published a blog post showing the wide range of GDP estimates forecast for 2020 an 2021. For the UK GDP is forecast to fall between 3.9% and 7.8% in 2020 and bounce back with growth between 0.9% and 8.5% in 2021.
The IMFs latest World Economic Outlook estimates a contraction of 5.9% in 2020 followed by growth of 6.1% in 2021 with unemployment growing to 4.8% in 2020.
Meanwhile, the Office for Budget Responsibility, the UK's spending watchdog, published a scenario that assumed a three-month lockdown leading to a remarkable economic contraction in Q2 this year, with the UK economy shrinking by around a third, and with unemployment temporarily rising to as much as 10%.
Residential sales market
We have published our latest view on the outlook for residential transactions, pricing and rental levels here.
Transactions
The forecast drop in transactions for 2020 will not be uniform across the year. The most notable fall in transactions is likely to be recorded in June and July, given the low number of new deals getting underway in April and May.
For now with an existing pipeline of activity, as Knight Frank Head of London sales James Clarke points out, “you’d be surprised by how much activity there still is.”
The vast majority of buyers are taking a pragmatic approach and holding their nerve, meaning that only one in five sales has fallen apart. Meanwhile, so-called “Coronavirus Event” clauses are being written into contracts to keep sales on track.
If lockdown measures are relaxed from June, we would expect deal volumes to climb as we move towards the end of the year. Media reports suggest estate agents could be among an initial wave of businesses allowed to re-open, possibly in May.
According to reports, the government will be urged to focus on businesses that have the “greatest multiplier effects” on the economy with the least risk. Moving house has clear knock-on benefits for the wider economy, which is why Knight Frank, together with the RICS, has called for a stamp duty holiday or cut.
As the market re-opens, does this mean some buyers will forgo a much-needed holiday to secure their dream property? This possible departure from normal seasonal patterns of buying and letting activity is something we have explored in more detail here.
Prices
Despite the fact that Covid-19 clauses are helping to keep sales on track, price renegotiations are common. However, this is only happening on a case-by-case basis and not based on comparable market evidence. While market conditions remain so atypical, the expression that “a property is worth what a buyer is prepared to pay” is a useful rule to apply.
Any recent pricing data still largely pre-dates the Covid-19 pandemic and reflects the bounce the market experienced after the general election.
Once normal activity resumes, the jobs market and consumer sentiment will have an impact on prices. However, the relatively finite timespan of the crisis (despite the possible presence of some social distancing measures), combined with the previous strength of the market, will limit declines.
London rental market
In similar fashion to the sales market, analysis from Knight Frank shows the lettings market did not enter a deep freeze once government restrictions were announced.
Indeed, in a time of greater reliance on virtual viewings, activity levels have been relatively more buoyant for new-build or newly-refurbished properties.
“Such properties, often in apartment blocks, fill potential tenants with more confidence they will resemble what they look like on screen in real life,” says Gary Hall, Knight Frank’s head of lettings. “It means lettings markets in areas like King’s Cross, east London and along the River Thames are performing better at the moment.”
In the three weeks since lockdown measures were imposed, the number of tenancies begun in the City, east London and Riverside area increased 23% versus the five-year average, Knight Frank data shows. This compared to a 2% fall across the whole of London and the Home Counties.
Around half the tenancies were agreed before lockdown measures were introduced, which explains why the figures are up on last year, says Hall.
Residential development
Currently, housebuilders are scaling back their operations temporarily, but others are continuing, and current government advice is that they can still operate, though circumstances are liable to change.
In the meantime, lower demand, slower build out rates, a perception of heightened risk and a weaker jobs market could take their toll. Government support could be key to a faster recovery period once the lockdown has passed.
An extension of time to implement existing and pending planning permissions, given current barriers to developers starting on sites, would be a start, and one that has the backing of the HBF, the trade body for the home building industry. There is also a precedent with the government having granted similar temporary powers between 2009 and 2012 following the financial crisis.
Greater flexibility should also be encouraged with regards to the payment of planning obligations, such as section 106 and Community Infrastructure Levy (CIL) payments. Such outlays are generally paid up-front and a move to allow practical staggering or staged payments would be welcome.
There is, however, some positive news from the planning system, which appears to still be moving. Data from Glenigan suggests that 430 sites received consent for residential development in March across the UK, compared with the February figure of 327.
Meanwhile, the Ministry of Housing, Communities and Local Government (MHCLG) has announced that work to remove unsafe cladding on high rise buildings during the coronavirus crisis will continue where safe working practices are demonstrated
Finance and mortgage markets
Lenders have cut the number of mortgage products available in half and many have tightened their lending criteria in an attempt to control the incoming flow of business while they grapple with the fallout from the pandemic.
Challenges have included operating with skeleton staff, dealing with the shutdown of many international-based processing centres and attempting to avoid a build-up of mortgage applications while it remains difficult to conduct in-person valuations.
Though the peak of product overhauls and retrenching to lower loan-to-value ratios (LTVs) has now passed - Thursday was the first day Knight Frank Finance saw no new restrictions on LTVs from lenders - some banks continue to add restrictions, most notably caps on income multiples at which they are willing to offer.
Others, however, are gaining market share by continuing to lend at high LTVs and are increasingly offering bespoke lending solutions. As a result, a gulf has emerged between these lenders and those that are most cautious. Borrowers are advised to be in regular contact with their bank or an informed broker in order to keep up-to-date with the latest developments.