Should you hold off on purchases or act quickly with remortgages? Our take on these unusual times. The impact on the housing market, mortgages and remortgages.
We can now process buy to let, residential purchases and remortgages without a physical valuation. There are some lenders who will value the property remotely for cases up to 85% loan-to-value. This is what’s referred to as a ‘desktop valuation’. This means we can process a mortgage or remortgage from start to finish completely remotely. Perfect for releasing capital while on lockdown, or getting a purchase through while others can’t.
This blog is a summary of publicly available information, generally accepted economic consensus and opinion from the Author. It is not intended as advice, if you want financial advice please contact a Financial Advisor.
Since the early days of the crisis I have been asked ifhouse prices will fall. When, how much by and when to ‘call the bottom’ are questions I receive on most client calls. I don’t know, nobody does. Nor am I an economist (though they don’t seem to know either). However, I am close to the subject matter. I’ve taken care to read every report and press release available over the past few weeks. This Blog is a summary of public information and a discussion of what we know about real estate prices, what fundamentally drives them and how they’ve behaved in the past. When we hit the unknown we might not have enough information to calculate a drop of X%. But we can go back to basics, open old textbooks and see where they might apply.
There are two main sections to this blog:
1 – What we know – a summary of publicly availableinformation
2 – Fundamentals - what drives prices and what this tells usabout COVID
Thanks to my marketing creative Joe for this slightly flamboyant visual:
In times of crisis it’s natural to look to authority for direction. There have been numerous newspaper articles and house price reports issued. Most press articles focus on one or two sources of information, perhaps a report from an estate agent and then a comment from an industry leader. The problem here is that predictions vary quite a bit and two sources don’t give the big picture. Reading an article today could give you a different impression to the one published a few days later. Here’s a headline I read recently:
So prices are either rising or falling, not very useful. Reading into the article you can see the Nationwide figure has been driven by mortgage approvals, which are a lagging indicator. In other words Nationwide’s figures look positive, but they’re really talking about what happened last month. Recently, the Bank of England issued an opinion. The BOE does not have a profit motive and therefore does not need to be rose-tinted in its predictions.
Here’s a list of all the house price predictions issued post-COVID that I’m aware of, along with their predictions for prices:
Not included in this list are all the industry participants who have, quite wisely, chosen to not to comment.
The government issued advice asking UK citizens not to proceed with property purchases and Valuers can no longer visit properties (with the odd exception). Unsurprisingly, there’s not many sales completing.
Property price measurements are slow, in an environment where there’s not enough information we can look to other sources for indication. These can not be taken too literally, but getting a feel is better than flying blind. For Example:
Of the sales currently in process, there is debate over how many will complete and how many will fall through. A fair portion of those clients will no longer be able to get mortgages now LTVs have reduced. Some agents have spoken about the coronavirus being a short, sharp shock which will create ‘pentup demand’ (like we saw after Brexit). If everything gets back to normal quickly this will be true. However, this feels like a marathon not a sprint. Scientists say to expect a 10-18 month wait for a vaccine.
The crisis brought an immediate 57% fall in rental demand, this bounced a little but demand is still down 42%. There were a few headlines talking about a 30% increase in demand, but this is 30% up from it’s low at the start of April. To Illustrate:
It’s always useful to go back to basics. For this next section I’ve literally opened my old textbooks. There is strong consensus on what drives property prices, these parts are objective. I’ll also share my thoughts on what these might mean for COVID, but this is entirely subjective. Each reader will have their own views about individual factors, going down the list will be a useful exercise.
After the turmoil of 2008 prices declined around 15%, made a recovery and then have been fairly flat since 2017. Here’s a chart showing the yearly % price growth:
At the same time have wages have grown less. This has meant property prices are high compared people’s income. Mortgage Lenders have stretched their affordability. When I started working in 2006 we could do mortgages for people at around 3.5x their income. Now the market standard is 4.5x, with some Lenders at 5.5x. The same is true in the Buy to Let market, rents have grown slower than prices so now some Landlords struggle to meet standard affordability stress tests. Here’s a chart that demonstrates this point, it shows property values as a multiple of incomes:
With slowing price growth and affordability stretched some economists were already predicting a price fall in 2020. A rise in confidence from an absent Brexit-disaster gave us a quick boost in early 2020 before COVID hit.
Behind every price is a plethora of information. Supply and demand balance out to price that works for both Buyer and Seller. Let’s look at both of these perspectives.
Here’s the major factors on the demand side along with their basic impact on prices, my opinion and the effect on values.
And here’s the other side of the coin:
There are numerous other factors that could be included here. The unenviable job of an Economist would be to put a number to each of the these effects and come out with a prediction like ‘I believe prices will fall by X%’. It’s entirely unsurprising that predictions are sparse and varied. We know too little. But, we can see how the basic factors are changing and keep a close eye on them.
A now frequently asked question is when will the market bottom-out? Investors keen to buy when prices are at their lowest would make a killing ‘on the bounce’. I would say to predict the bottom we would need an accurate prediction of how this pandemic will pan out. It depends on people’s wages, social distancing requirements, Banks’ health, the waiting time for a vaccine, global supply chains and so on. This is not a normal recession. In my opinion trying to call the bottom is precisely is a mistake. We will almost certainly be wrong, and could miss out on a good opportunity. Less risky is buying at ‘good’ price, rather than the ‘perfect’ price. You may miss out on say 3% of a price increase, but better the devil you know. When you add up the numbers, the risk of not calling the bottom perfectly may be the same as a couple of months’ rent. The cost of waiting could be no deal at all.
There will likely be a drop, then probably a bounce. It’s going to be very of a hard to call the timing on that, so I wouldn’t use it as a core strategy. I would take an educated guess that we will see price falls by July, and mild price increases by May 2020. What happens inbetween those two dates is hard to say. If I was an Investor I would be looking at picking up a bargain property that generates most of its return in rental income, not price growth. Rents will survive relatively well, prices will be hard to predict. Then if prices do jump up, it’s a bonus.
I hope this is useful to whoever is reading it. I have to stress again that I do not know what will happen, but I hope this general discussion starts off some thought processes. I’ve included my opinons here not as advice, but to start a conversation about where things could go. I will almost certainly be wrong about some of this in hindsight, but I hope that collectively we can share our knowledge to navigate our way through 2020 and with luck break into 2021 having secured a few prime opportunities.