Month: September 2020

High house prices paint a partial picture of UK real estate

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The UK is slowly adjusting to the biggest economic and social shock of the past 75 years. Each week brings more news of job losses and damage to the economy, but it also brings news of a booming housing market. The question many are asking is why the housing market seems immune to the effects of Covid-19. Will house prices never go down? The answer is complicated. It is possible for house prices to fall. Recessions and house-price corrections have gone together in decades past.

As Britain went into lockdown in March it was widely predicted that there would be a fall in house prices. The market shutdown appeared to provide some insulation from the immediate impact of a recession, but job loses, falls in income and a credit crunch all foretold a period of gloom. Yet since the housing market reopened, there have instead been signs of a boom over the normally quiet summer months.  This can be seen in both the continued rise in prices and a bounce in activity in the market. Nationwide, the Building Society, reported that UK house prices hit an all-time high in August and Zoopla, the property listing website, reported the number of sales agreed in August were 76 per cent above their five-year average. Bank of England data showed a V-shaped recovery in mortgage approvals in July.

A boom may seem irrational given the impact of the pandemic, particularly because other expensive housing markets, such as San Francisco and New York, are seeing a reversal. But there are several reasons why UK house prices have not fallen (yet).

This time it really was different. For perhaps the first time in 50 years, the UK’s housing market was not responsible for, or directly implicated in, the downturn. There are lots of problems with housing, but it was not a bubble fit to burst as in 1989 or 2007. While house prices are high relative to incomes, they were not unreasonable given attractive lending conditions. Since the crisis began, furlough schemes and mortgage payment holidays have delayed the negative impact on the market.

It is also worth remembering that house prices are based on sales that happen. If someone cannot afford to buy, their inability does not count in house price statistics. Unfortunately, it appears the pandemic’s economic fallout has mostly been felt by the young and low earners — those already least able to buy. The credit crunch limiting mortgages for first-time buyers is also widening the economic divide. The fact that more people are priced out of the market will not have an impact on house prices.

Meanwhile, those who have seen no financial impact from the pandemic are able to pay the same price for a home as before. They may even be able to offer more if their savings have risen thanks to spending less during lockdown. It is these buyers who are currently driving the rise in house prices. With the number of transactions low, it does not take many additional purchases to push up prices in any given month. Equally, it would not take many forced sales to push house prices down but, for the time being, low mortgage rates and payment holidays mean most homeowners will sit tight if they can’t sell for the price they want or need.

The old estate agent adage that location is the most important feature of any home also appears to be undergoing a rethink thanks to the pandemic. Being stuck at home has led some potential buyers to rethink what they want and need from a property. Many have discovered that working from home, for at least part of the week, is a newly viable option. At least some of the current boom can be put down to these people looking for a garden, home office, or just more space in general at the expense of a central location. With the added boost of a stamp duty holiday, lockdown has made moving to a new house a much less daunting prospect for those who can afford to. Wealthier buyers quitting London appear to be a big part of this trend, which is also apparent in other global megacities.

And so house prices and market activity push higher. Yet it seems unlikely that the market can remain immune forever. The failure of a Covid-19 vaccine to appear in the coming months and a no-deal Brexit are both real possibilities. Furloughs, bans on repossessions, mortgage holidays and the stamp duty holiday will all end. Even so, a future of persistently high house prices at much lower transaction levels are a real possibility.

House sales surge in England despite threat of recession

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Sales of new homes in England are continuing to rise despite significant economic uncertainty, according to Vistry Group, one of the country’s largest housebuilders. “I’ve not been this happy since the start of the year,” said Greg Fitzgerald, the Chief Executive, after the company announced its results for the six months to June on Tuesday. The housebuilder, formerly Bevis Homes, is selling 0.73 homes per site per week, compared with 0.61 homes a year earlier — “the highest rate we can ever remember”, said Mr Fitzgerald. However, Vistry swung to a loss before tax of £12.2m for the half year, having posted a £72.5m profit in the same period in 2019.  Its share price fell 2.5 per cent in early trading. “In keeping with the other housebuilders, Covid has impacted Vistry’s short-term financials hard, but it does appear the group is emerging from this exceptional situation faster than most,” said analysts from Numis.

Vistry’s forward sales are at record levels, with £2.7bn of transactions agreed as at June 30 compared with £2.6bn a year earlier. Government interventions — the Help to Buy scheme and the introduction of a stamp duty holiday — and the release of pent-up buyer demand after property sales were in effect forbidden during lockdown, have led to a dramatic increase in sales across the industry.  Barratt Developments, another leading builder, is also selling homes far faster than it was last year.  Two closely watched indices published in the past week showed house prices had hit record levels, even as the UK faces its worst recession in modern history and the prospect of rising unemployment.  “We are a lucky industry: there are not enough houses for people to buy and the Government is supportive of the housing market,” said Mr Fitzgerald.

Almost a third of Vistry’s homes are currently sold to buyers using the Government’s Help to Buy equity loan scheme, which saves them from having to pull together a large deposit.  But there are fears the boom will not persist. Help to Buy will be restricted to first-time buyers and regional price caps introduced from April 2021, and the stamp duty holiday, which came into effect in July and will save buyers up to £15,000 on the purchase of a home, is set to end in March. “I think we will be incredibly busy up to March, then maybe a slightly slower April, May and June. Any units we aim to have complete by April, May or June I am asking to bring forward to catch the stamp duty holiday,” said Mr Fitzgerald.

Travis Perkins, the UK’s largest builders’ merchant, also reported its half-year results on Tuesday. Alan Williams, the Company’s Chief Financial Officer, said it was too soon to say, “whether the release of pent-up demand will be sustained”.  Travis Perkins, which announced in June it was cutting 2,500 jobs, about a tenth of its workforce, swung to an operating loss of £92m, from a profit of £62m a year earlier.  Shares in the company fell 7.5 per cent on Tuesday morning.

UK mortgage approvals jump as consumers resume spending

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UK mortgage approvals jumped to near pre-pandemic levels in July, while household borrowing rose for the first time in four months and bank deposits normalised, suggesting that consumers resumed spending after hoarding cash during the lockdown. The number of mortgages approved rose to 66,300 in July from 39,900 in June. The figure is well above the 54,800 forecasts by economists polled by Reuters and more than seven times higher than the trough of 9,300 in May. The July number was 10 per cent below the February level of 73,700 but broadly in line with the pre-pandemic annual average. The jump is partially the result of the government’s stamp duty holiday which began in July and runs to the end of March 2021. The housing market also benefited from the pent-up demand released with the end of the lockdown when viewings were banned.

The growth in application volumes, fuelled by the stamp duty holiday and pent up demand following lockdown, continues to have a tangible impact with more successful applications,” said David Ross, managing director of the mortgage insight company Home track. Data from the Bank of England also showed that consumer lending returned to growth in July, while household deposits rose at a slower rate than in previous months. Since the pandemic started households have hoarded cash in banks due to limited spending opportunities and fear of infection. Recommended Sarah O’Connor Goodbye to the ‘Preet economy’ and good luck to whatever replaces it Economists and policymakers closely watch spending and saving data as high household deposits threaten the pace of the economic recovery and prompt government measures to spend — such as the “eat out to help out” scheme — rather than policy aimed at sustaining incomes. In July, households’ deposits increased by £7.0bn, down from an increase of £11.7bn in June, and below an average £19.1bn between March and May. The figure is now only slightly stronger than the pre-pandemic period: in the six months to February 2020 household deposits rose by an average of £5.0bn a month. At the same time, households’ consumer credit borrowing rose by £1.2bn in July, the first increase after four months of net repayments. “July’s money and credit data confirm the resurgence in the housing market while recovering consumer credit suggests that households’ appetite for big ticket purchases is returning,” said Andrew Wishart, UK economist at Capital Economics, a consultancy. However, economists are concerned that the rebound in the property sector and the improved credit data could be short lived if the end of the job support scheme leads to a rise in unemployment and a resulting fall in income. FT Weekend Digital Festival Join the FT for 3 days of digital debate and entertainment, and your ultimate guide to our changed new world “We still think that the realisation of more job losses after the furlough scheme started to be wound up in August will cause the recovery to slow,” Mr Wishart added. Howard Archer, chief economic adviser at EY Item Club, warned that the housing market “is likely to come under pressure over the final months of 2020 and start of 2021 when there is likely to be a marked rise in unemployment”. Separate data from IHS Markit confirmed that UK manufacturing activity, as measured by its purchasing managers’ index, rose at the fastest pace in six years in August, although marginally lower than the initial estimates, as more factories reopened. However, the rise in factory activity was not enough to prevent job cuts, with the employment purchasing managers’ index recording one of the steepest declines in more than a decade.