Residential Market Outlook Week Beginning 18 May 2020
Assessing Covid-19’s impact
6 minutes to read
Summary
UK context
The number of daily cases hit the lowest level since 31 March at the end of last week.
Last week the UK government published its plan to ease the lockdown in phases which started 13 May, including measures to restart activity in the housing market. Anyone in England is now allowed one-to-one contact with people other than those they live with, as long as they remain outside and two metres apart, and workers should consider returning to work where it is safe to do so. Primary schools in England may begin opening from the 1st of June.
Official figures released show that GDP fell 5.8% in March, the largest monthly fall since the series began, and 2% in Q1 overall. With the full lockdown only being enforced from 23 March, evidence points to a far larger decline in Q2.
To continue to support employment the Chancellor of the Exchequer Rishi Sunak extended the furlough scheme until at least October, adding an extra £35 billion to the cost of the program.
An antibody test, to determine whether someone has had Covid-19, made by the Swiss firm Roche passed Public Health England checks in a long-awaited development that Boris Johnson previously said would be a “game-changer”. The tests show those who may have a degree of immunity, meaning those people can potentially resume social contact with others – although scientists still aren't sure having antibodies indicates long-term immunity.
Transactions
With estate agents now open for business, following government guidance on how property transactions can proceed safely, we will monitor the longer-term impact on transaction volumes but a number of sales on hold will now proceed, producing a short-term spike in activity.
Buyers and sellers had already moved into recovery mode after an uncertain response at the start of the lockdown. The number of enquiries via all internet and social media channels is now back above the levels seen before lockdown measures were introduced.
Stock markets remain volatile but the broad upwards trajectory has increased the firepower and appetite of buyers.
The total potential spend of all buyers registered with Knight Frank in London is £52 billion, a rise of 20% from the same point last year. Data for the capital also points to narrowing declines in the number of new prospective buyers and exchanges over the period the lockdown. Now that viewings are allowed, this trend should accelerate markedly.
Prices
Knight Frank has revised down its 2020 forecasts based on transactional evidence and the fact government restrictions will not be lifted as quickly as anticipated.
We forecast a decline of 7% in UK markets and 5% in prime London markets. However much of this adjustment has already taken place and further declines over the summer, as the GDP data continues to break records, will be more limited before more marked upwards pressure returns from the autumn.
If we add in to the mix the fact that we have low new-build rates coming through in 2020, low inventory and low interest rates, it becomes less likely we will see significant further falls from here.
The basis for our revised assessment is the widening gap between asking prices and achieved prices. The average ratio is currently 95%, with offers frequently coming in at more than 10% below the asking price.
London and Home Counties rental market
Renters in London and the Home Counties are also firmly turning their attention to life after lockdown.
The number of new registrations for prospective tenants was 59% below the five-year average in the first week of the lockdown (week ending 28 March) but that decline had narrowed to 35% by the week ending 9 May. The total figure has doubled over that time.
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 8% increase by the week ending 9 May.
In a sign of how activity is picking up, in the City, East and Riverside region of London, 105 virtual viewings took place during the first week of May, which led to 21 offers. This compared to 51 viewings and 7 offers in the week before lockdown measures were imposed.
Rental values are subject to ad hoc renegotiation but thin trading means there is a lack of comparable evidence that points to a clear trajectory.
Knight Frank’s prime central London rental index fell 0.4% between March and April, which was the largest monthly decline since October 2016. It meant annual growth slipped to 0.7%, which ended a run of progressively stronger figures that began last June.
In prime outer London, rents were broadly unchanged over the last 12 months after a decline of 0.2% between March and April, the biggest monthly fall since December 2018.
Residential development
In updating its guidance for the housing market on Wednesday, 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. As part of this, firms will be able to apply to extend hours until 9pm Monday to Saturday in residential areas, and “beyond that” in non-residential areas.
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. In this regard, news that sales offices and show homes, alongside estate agents, can re-open is a welcome, and logical, step forward. After all, the fact remains that housebuilders will only build what they can sell. The announcement also untangles one of the main sticking points for the market; an inability to conduct viewings and difficulties getting mortgage valuers on site has unquestionably curtailed activity.
In addition to the effective re-opening of the market, other measures, including allowing local councils and developers to publicise planning applications through social media instead of having to rely on posters and leaflets, have been announced. Local councils have also been given flexibility to support smaller developers by allowing them to defer Community Infrastructure Levy payments.
Elsewhere, much has been written about the impact Covid-19 is having on the university sector with question marks over term start dates as well as international student numbers. Last week, the Knight Frank’s Student Property and Research teams hosted guest speakers from across the industry to discuss the outlook for the sector. Over 650 attendees from 20 different countries joined the call, itself a good barometer of the ongoing strength and interest in the sector.
Finance and mortgage markets
The resumption of housing market activity has transformed the lending landscape, with banks now able to begin physical inspections that will allow them to clear a backlog of mortgage applications.
Accord were the first lender to say physical valuations would resume, followed swiftly by Nationwide, Halifx, HSBC and Santander. This comes as a broad range of banks increased their maximum loan sizes, loan-to-value ratios, and property values they are willing to lend to.
For borrowers, this widens the options available. Those hoping for quick decisions were previously limited to lenders that would accept remote and desktop valuations.
In late March, lenders significantly cut their product offering to stem the flow of business amid a clamour for mortgage holidays and tracker mortgages. In the past fortnight, product availability has started to creep up again, and the number of products available now stands about 45% lower than the pre-crisis peak.
ESIS volumes – a proxy for mortgage market activity – climbed 8.4% during the week ending May 17th and have climbed 12.4% since the lowest point, according to lending technology company Mortgage Brain.