Residential Market Outlook Week Beginning 25 May 2020
Assessing Covid-19’s impact
5 minutes to read
Summary
UK context
Confirmed cases and deaths continue to fall in the UK and London last week recorded no new cases of coronavirus for a full 24 hour period, according to Public Health England.
Economic surveys from Britain, the Eurozone and the US yesterday showed early signs that the worst of the economic impact of the pandemic has passed. IHS Markit’s composite purchasing managers’ index climbed to 28.9 in Britain, from 13.8 in April.
A Reuters poll of 70 economists suggested the British economy will contract 17.5% this quarter, a much sharper contraction than the 13.1% predicted last month, but the recovery will be stronger than previously thought, with growth of 11.9% next quarter, assuming at least some lockdown measures are lifted. That would result in a contraction of 7.7% this year, according to the poll, followed by growth of 5.2% in 2021.
The impact of lockdowns is beginning to be evident in employment. The number of people claiming unemployment benefits increased by the most since records began in April, with an additional 856,500 people signing up for universal credit and jobseeker’s allowance benefits, bringing the total to almost 2.1 million. This is in addition to around 8 million on the Coronavirus Job Retention (furlough) Scheme and 2 million currently receiving grants on the Self Employment Income Support Scheme.
The Bank of England is eyeing the introduction of negative interest rates for the first time in its 324-year history in an attempt to stimulate economic growth. Governor Andrew Bailey confirmed negative rates were under “active review” during questioning from MPs yesterday. Hours earlier, the UK sold £3.8bn of three-year gilts at a yield of minus 0.003% - the country's first negative yielding government bond.
Transactions
Activity levels have rebounded following the re-opening of the property market on 13 May.
In the week ending 17 May, the number of enquiries from the internet and social media was the highest it has been in a year and 8% above the previous peak in early February.
That means the uptick was more marked than the so-called ‘Boris Bounce’ that followed December’s general election.
Data for the first full week of trading after the market re-opened shows the number of new prospective buyers registering with Knight Frank was 28% above the five-year average in London, which compares to a fall of 77% in the first week of lockdown. In the Country, the figure was -18% compared to -84% in the first week of the lockdown.
Viewings in London were 56% below the five-year average last week and -53% outside the capital, which compares to the virtual shutdown since 23 March.
Demand for UK property is rising among overseas buyers as the pound comes under renewed pressure.
Prices
We are in the early stages of ‘price discovery’ in the UK residential property market.
In similar fashion to the period that followed the EU referendum, buyers and sellers are attempting to gauge correct pricing levels against a disorientating backdrop.
The average ratio between asking prices and achieved prices remains 95%, with offers frequently coming in at more than 10% below the asking price.
Needs-driven buyers and sellers will provide the early comparable evidence but as more discretionary buyers re-enter the market, momentum can shift quickly.
We forecast a decline of 7% in UK markets and 5% in prime London markets. Much of this adjustment has already taken place although the backdrop of record GDP declines over the summer will dampen sentiment.
London and Home Counties rental market
The number of new registrations for prospective tenants was 9% above the five-year average in week ending 23 May, in a clear sign the lettings market is quickly returning to some form of normality.
The decline compares to a 59% fall in the first week of lockdown. The weekly number of applicants has almost quadrupled over that time.
Viewings were 25% below the five-year average last week, which compares to the minimal level of activity since 23 March.
Meanwhile, web views are also on the rise. In the first week of the lockdown, the figure was 2% above the five-year average but this had grown to an 29% increase by the week ending 23 May.
Rental values are subject to ad hoc renegotiation but thin trading still means there is a lack of comparable evidence that points to a clear trajectory.
Residential development
In updating its guidance for the housing market earlier this month, the government also recognised that the construction industry will need to be able to adapt its normal working practices. Housebuilders will be allowed to keep sites open for longer in order to stagger builders’ arrival times and ease pressure on public transport so they can meet social distancing protocols, for example, whilst local councils have also been given flexibility to support smaller developers by allowing them to defer Community Infrastructure Levy payments, one of the key recommendations we outlined in our five-point plan to reignite the housing market post-Covid.
Of course, this alone won't unlock the market. What happens to sales values and volumes in the coming months will have an impact on delivery. Initial signs in this regard have been encouraging, but the big challenge now is how quickly housebuilders are able to gradually increase productivity - data from Build UK suggests that whilst 67% of residential sites have reopened, output remains down at about 65%.
Finance and mortgage markets
Mortgage lenders are reintroducing products withdrawn during the Covid-19 crisis following the resumption of property market activity.
In one example, Clydesdale last week said it would resume residential mortgage lending at 90% loan-to-value (LTV), and buy-to-let lending at 80% LTV. The lender said it will also withdraw the temporary limits on loan sizes and property values that it had put in place during the outbreak.
ESIS volumes, a proxy for mortgage market activity, have increased for three weeks in a row and are now 17.9% higher than their lowest point in the week ending 19th April, according to lending technology company Mortgage Brain.
The number of available mortgage products now stands at 8,203, up 10.5% on its lowest point five weeks ago, though still down almost 45% on pre-pandemic levels.