Week Beginning 13 April 2020
Global context
The volume of stimulus being employed by governments continues to expand. Last week Japan announced a two stage stimulus equal to a fifth of GDP, and there was musings of further stimulus from the US, with The Federal Reserve announcing they were launching a $2.3tn loan package.
Despite continued fiscal and monetary injections global growth is expected to contract by between 2% and 3.5% in 2020, but then rebound with growth of up to 8% in 2021.
Despite the expectation of a rapid recovery, there is likely to be permanent ‘lost output’ and GDP will not return to a pre-crisis growth path for some years.
This deeper contraction is being partially driven by the expected upswing in unemployment. The International Labour Organization estimates job losses of around 25 million worldwide this year. Even this number may be an underestimate, in the US alone the last three weeks have seen 16 million new jobless claims, equating to 10% of the workforce.
Many countries in Europe, including Italy and Spain seem to have turned a corner with the pandemic with the number of new Covi-19 cases falling recently. The Czech Republic, Austria and Denmark are set to lead Europe out of lockdown, with some shops reopening on 9 April in the Czech Republic.
UK context
While the number of confirmed Covid-19 cases continues to rise in the UK, there are growing hopes that the peak in new cases will be reached soon after the Easter weekend.
Our outlook for the UK housing market, discussed below, is based on the assumption that the current lockdown remains in place through April and May with a gradual lifting through June.
The underlying economic inputs we have adopted for our housing market forecast are for a contraction of GDP of 4% in 2020 and growth of 4.5% in 2021. However, this week there were revisions to many forecasts with Oxford Economics adopting a 5.1% contraction as their baseline for 2020 GDP, with a 10% contraction as their downside scenario. Their view is that growth will rebound in 2021 between 3% and 6%. KPMG has a more pessimistic near-term forecast with a fall of 7.8% in 2020 and rebound of 8.4% in 2021.
Unemployment, which stood at 3.9% in December 2019, will be a key indicator to watch. The updated forecast from Oxford Economics put the jobless rate to end 2020 at 6%. As we noted last week the latest new claims for Universal Credit suggested that the unemployment rate could jump to about 5.5% in April.
UK residential market
We published our latest view on the outlook for residential transaction, pricing and rental levels last week.
Transactions update
As we noted last week, pre-lockdown transaction volumes across all price points were strengthening. The number of super-prime (£10 million-plus) sales in London reached a three-year high in the first quarter of 2020, provisional data from Knight Frank shows.
Our latest analysis however confirms how abrupt the impact of Covid-19 has been for property market transactions. Pre-lockdown, in the week ended 14 March, there were 45% more exchanges in the prime London market than in the same week in 2019. By the following week a drop of 47% was recorded, and by the week ended 11 April, the number of exchanges was 69% below the figure for the equivalent week last year.
Pricing update
Even the most recent pricing data from published indices is still largely from the pre-Covid-19 period. The latest prime country house index from Knight Frank points to an increase of 0.2% in prices in the first three-months of 2020, compared to a decline of 0.8% in the same period last year.
Meanwhile, annual price growth in Edinburgh was 3.1% in the year to March, boosted by an increase of 1.7% in the first three months of this year. It was the strongest rate of quarterly growth in the city since Q3 2018.
With the market largely on hold, evidence of the pricing impact of Covid-19 will remain sparse in the near-term. Some ad hoc price renegotiation is taking place for transactions underway.
Once the current crisis passes and activity begins to resume, we have to expect that weaker economic activity in the first half of 2020, the dislocation in the jobs market and weakened consumer sentiment will impact on prices, however the relatively finite timespan of the crisis means declines will be limited.
Rental update
Rental values in prime central London increased 1.2% in the year to March, data collected before government movement restrictions shows.
This was the biggest increase in more than a year and reflects how rental values had been strengthening due to lower levels of supply as some landlords exited the sector due to a rising tax and regulatory burden.
Average rents grew by 1.1% in the year to March in prime outer London, which was the largest such increase since September 2015.
Residential development update
As a response to the Covid-19 outbreak, many of the UK’s major home builders have halted construction on sites in order to safeguard staff and prevent the spread of the virus. A survey of architects and surveyors conducted by RIBA last week found that 80% of its members are reporting project delays and over 33% have had schemes cancelled.
The full impact of the hiatus will depend on the duration of current movement restrictions and on economic conditions once these are lifted. Our current view remains that the disruption will be relatively short-term and, indeed, developers are still pursuing land opportunities.
Moves designed to keep the planning system moving have been made, with the Coronavirus Bill (which received Royal Assent on 25th March) effectively allowing councils to hold virtual planning meetings, and data from Glenigan suggests that permissions continue to be granted.
Finance and mortgage markets
After scrambling to adjust to two Bank of England emergency rate cuts, the introduction of three-month mortgage holidays and the closure of many of their processing centres, lenders are settling into the new conditions with a reduced range of products.
Last week there were 10,097 products available, down 31% on the previous week, according to lending technology company Mortgage Brain. While many have placed caps on loan sizes and reduced their maximum loan-to-value (LTV) ratios to between 60% and 70%, others are taking the opportunity to gain market share and continue lending up to LTVs of 90%.
Despite the latest Bank of England rate cut to 0.1%, the price of many tracker rate mortgages has crept up as the lenders’ cost of financing has increased.
We are now seeing private banks – particularly those with larger balance sheets – reassess their approach to remote and desktop valuations while restrictions on movement remain in place. Previously only accepted by the high street lenders, private banks have approached Knight Frank’s valuations team to better understand what is required to provide robust desktop valuations and have expressed interest in lending from £1 million to as much as £30 million.
Bank of England approvals data for house purchases in February, before the onset of the crisis, reached the highest level since 2014, highlighting the momentum that had been gathering amid the competitive lending environment.
