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Market Insight

Published 8 July 2020

Stick, twist or fold?


In addition to the Great Fire of London and World War II, some have suggested Nostradamus also predicted the coronavirus pandemic in 2020. What would prospective purchasers and sellers give now for a chat with the 16th Century apothecary?

After the endless discussions of economic uncertainty caused by Brexit, the ‘Boris bounce’ although refreshing was sadly short-lived emasculated by Covid-19, or was it…….?

The year started promisingly aided by a strong job market, low borrowing costs and a real desire to put Brexit and general elections firmly behind us. Rightmove was talking of property price increases of between 2-4% in the next 12 months, the RICS 2% and Halifax 1-3% and then the world changed and lockdown stopped the market in its tracks.

Reductions in the number of property transactions in 2020 by c 40% were anticipated and HMRC data already shows residential property transaction down 53% in April compared with April 2019; though hardly surprising given that transactional activity came to an abrupt halt and it was impossible to bring anything to market.

The Centre for Economic and Business Research suggested in mid-April that property prices would fall 13% by the end of 2020, revised in early June to a fall of 8.7%; Knight Frank and Savills both predict a 5-10% drop. Saying that, since lockdown has started to ease pent up demand appears to have fuelled extraordinary activity. Zoopla suggest demand is over 30% up on early March and many agents report that rural locations and properties with large gardens are particularly in vogue.

Yet financial uncertainty abounds and many are predicting that an ending of the furlough scheme will result in a huge swathe of redundancies. So, much like the bounce before it, this upturn may be brief in the extreme.

It is not yet clear how much of the recent activity is driven by desperation to gaze inside someone else’s world and behind someone else’s newly redecorated front door after months of ‘solitary confinement’ or a genuine interest in moving. Activity is reportedly up (markedly up in places but have you ever seen an agent talk the market down) but is this a case of window-shopping or are purchasers committing – is demand being met by willing sellers or is there in fact a disconnect between expectations with discounted offers being rejected and sellers standing firm?

The house price index from the Nationwide showed a reduction to the average house price of 1.7% in May, the biggest drop in 11 years. However, the UK house price index from the Office for National Statistics remains suspended (since April 2020) due to the greatly reduced level of housing transactions, making it very difficult “to produce a measure of UK house prices that would be representative of any true transaction activity”. So what is really happening across the country and in pockets will only be known with time when data becomes available.

Ever feel like you are stuck in a spin cycle or an examiner has let their imagination run riot - aggressive downward renegotiations in some areas appear to be running alongside a frenzy of sealed bidding in others; properties are being sold unseen and there is an obvious flight to rural and seaside locations, driven by the need for space and the new more flexible world of homeworking.

Some are suggesting this will give rise to an increase in both sales and renting in the short term, with purchasers readying themselves to strike if the market does drop; currently percentage reductions to purchase prices agreed before lockdown are reportedly not significant (a few percent only). However, negative equity is being mentioned again - Nationwide has confirmed that it will not lend to borrowers without at least a 15% deposit. And if you are a valuer, heed those sleepless nights; there is a reason why you are lying awake - be prudent, stick to the RICS guidance and include a material uncertainty clause in your valuation to mitigate risk where it is justified; assuming the client will allow you to!

On the commercial side, it is not a pretty picture either. Retail has been hit hard and the look of the high street will change noticeably. Online sales have been enough to keep some businesses afloat; the return of shoppers to the high street in mid-June was welcomed with open arms, but sadly too little too late for many. Casualties so far have included the likes of Debenhams, Go Outdoors, Cath Kidston, Laura Ashley, Monsoon and Victoria’s Secret.

Initial data suggests that less than 20% of commercial rents in the UK were collected by landlords on June quarter day. As rental payments dry up and property values drop, there has to be fallout, most recently shopping centre owner, Intu.

Investors understandably are also in a quandary with investment volumes very much down and average prime yields in most sectors (bar food stores and supermarkets) moving upwards.

The Chancellor is looking to inject billions into the economy as social-distancing rules ease to support jobs and businesses; interest rates may be at an historic low of 0.1% (the Bank of England has even recently mooted the prospect of negative rates) and there may be mortgage holidays but job security, the consequences of the furlough scheme finishing in October and the long term health of the economy will be of concern to many and, therefore, key to market confidence and ultimately influential on sales activity.

The market needs some time to reach its new equilibrium. Would Nostradamus recommend moving?

Authors

Charlie Bending

Charlie Bending

Bristol

+44 (0) 117 918 2289

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