Market Update from Residential Research
UK context
The number of confirmed cases in the UK related to Covid-19 seem to have plateaued, with the number of new cases reaching a two-week low on 21 April.
Across the UK, London’s services-based economy is likely to be least affected by the pandemic, with the West Midlands, home to many car manufacturers, likely to be most affected, according to regional forecasts published by KPMG. The report shows the scale of the recovery in 2021, which mirrors the steep contraction expected in 2020.
The first British human trials of a coronavirus vaccine started last week – one of about 100 vaccine projects in development around the world. Last month teams in China and the US both began testing on people, putting them about four weeks ahead of the Oxford team.
With attention turning to how the lockdown will be lifted the UK will be able to benefit from the experiences of other countries who are further along the pandemic’s trajectory. What is becoming clearer is that a secondary wave of infection will only be prevented by putting in place extensive testing and tracing programmes. With that in mind Public Health England is aiming to train thousands of contact tracers within three weeks to allow the country to exit the lockdown.
As lockdown continues to slow the economy more forecast are being updated. April’s flash Purchasing Managers Index (PMI) reported a collapse in activity in April, with a reading of 12.9 from 36.0 in March. All of the activity and output balances across the services and manufacturing sectors were far lower than ever seen before. These should be read cautiously as although businesses show direction of travel they can be harder to quantify scale.
The UK’s 2020 outlook now sits between a contraction of 5% to 12% with the bounce back in 2021 forecast to be between 1% and 10%. Unemployment will peak at 6.8% according to HSBC with Capital Economics forecasting that is could reach as high as 9% in 2020.
Residential sales market
We have published our latest view on the outlook for residential transactions, pricing and rental levels here.
Transactions
As we reported last week, the majority of sales underway when the pandemic struck are holding together. That’s not to say there won’t be a marked decline in numbers over the course of the year, with sellers currently unable to market their property in the normal way and buyers unable to view.
We expect more than 500,000 lost sales in 2020, which will have ramifications for the wider economy given the multiplier effect that moving house has. It is something we explore in more detail here.
For now, patience and pragmatism reign with so few new entrants into the property market. Buyers can sit tight because the fear of being gazumped is relatively low. This could change when the government signals a relaxation of current restrictions and new buyers return.
For some, this pause is being used tactically, which is a trend we shall explore in more detail. For example, if a buyer likes a property based on a virtual viewing, agreeing an offer could put them in an advantageous position for when restrictions are relaxed. For similar reasons, waiting lists for viewings are being drawn up across the country for when government guidelines change.
As part of this tactical thinking, could this mean some buyers will also forgo a much-needed holiday to secure their dream property when the market re-opens? This possible departure from normal seasonal patterns of buying and letting activity is something we explored in more detail here.
Estate agents are certainly having all sorts of conversations while the lockdown continues. Read an interview with Jess Bishop from Knight Frank’s Kensington office here and see what Moreas Madani from the PCL new homes team has to say about life under the lockdown here.
Prices
While annual price declines of more than 20% took place in 2008/09 in London, supply and demand dynamics are different this time round. Demand fell but supply rose during the last recession, which put downwards pressure on prices. With interest rates between 5% and 6% and higher mortgage costs, more owners felt a financial need to sell.
A decade of ultra-low rates means there is likely to be a different response, interestingly The RICS survey this month showed that demand and supply have fallen in unison, meaning the imbalance between the two could remain contained. The length and severity of government lockdown measures will be the key issue to determine the outcome for pricing.
London rental market
Sentiment has improved in the rental market over the last fortnight. At the beginning of the lockdown period, the extent of the uncertainty prevented prospective tenants from acting.
More clarity has since emerged around the government’s furlough scheme and while it has limited the budgets of some, others have felt secure enough to take decisions.
In the first week of lockdown, the number of new prospective tenants registering in London and the Home Counties fell 77% compared to the same week in 2019. In the week ending 18 April, the decline had narrowed to 46%.
Tenants are typically able to respond to changing circumstances more quickly than buyers and the figures include overseas students who are getting ready for the next academic year.
Social distancing restrictions mean there are still limits on what is taking place, but there is a sense that some are now moving into decision-making mode.
Residential development
As house builders begin to plan their return to work strategies, our new analysis reveals the dramatic impact Covid-19 has had on the construction sector.
We predict that total delivery on new homes will drop by 35% in 2020 compared with 2019. This will means private housing delivery in 2020 will be lower than in the years following the global financial crisis.
Nationally, housing delivery will stand at around 104,000 this year, a drop of 56,000 on last year. In London, we expect 8,000 fewer homes will be built compared to last year with private housing completions set to be 14,405 in 2020 – the lowest since 2014.
Barriers to delivery include issues related to the supply chain, as well as availability of building materials, delivery, distribution and labour. More intangibly, consumer sentiment will also impact the recovery. In the short-term, this will mean house builders prioritising sites where there are existing customer orders
Finance and mortgage markets
There is now a notable thaw underway across the UK mortgage market, with more widespread adoption of remote and desktop valuations and lenders raising the loan-to-values they are willing to lend at while competing for business.
This follows a hectic three weeks, when in response to the crisis lenders struggled to adapt to the closure of many international processing centres, skeleton staff, a clamour among customers for payment holidays or tracker mortgages, and restrictions on movement that rendered conducting in-person valuations on a large scale impossible.
The number of mortgage products available to borrowers has since tumbled 50%, stabilising last week at a little under 7,500 products, according to lending technology company Mortgage Brain.
We expect lenders to continue to adapt to the new conditions, with some following HSBC’s lead in accepting remote valuations at loan-to-value ratios of up to 90% as they try to replenish their business pipelines.
Knight Frank Finance is now receiving regular calls from private banks looking for business. Though many have tightened their criteria, often raising the income multiples they will lend at, it is clear appetite to lend is returning.
