"It will take months before buyer and seller confidence is restored nationwide. Of course, some sub-sectors may recover quicker than others."
The active discouragement of new sales by the government brought transaction levels to an almost standstill. Big banks also retreated from the market, with some refusing to accept new applications and others taking certain mortgage products off the shelf entirely.
We are still not sure what long-term impact the Covid-19 lockdown will have on real estate. So, what do current projections say? According to Savills, the pandemic will have a short and sharp impact on house prices—the global real estate agency anticipates UK house prices will fall by as much as 10% by the end of 2020. However, they explain further that this will be followed by a swift recovery in the years to come, with a cumulative house price rise of 15% over the next five years.
In this low interest rate environment, recent house price indexes have also revealed that the impact of Covid-19 has been marginal. Nationwide’s house price index for April noted a 0.10% month-on-month drop in the rate of house price growth. However, Nationwide also recorded an annual increase of 3.7%—the highest pace recorded in three years. While these indexes do not take fully into account the impact of social distancing measures, they nonetheless demonstrate that demand for real estate is strong.
Restarting the property market
On Wednesday, 13 May, some of the lockdown measures in England were relaxed. As part of the government’s plan to restart the property market, it was also announced that people can once again move home so long as they abide to social distancing. So far, the market’s reaction has been positive. Pent-up demand is slowly being released, with estate agents reporting a surge in demand, enquiries and viewings.
Nonetheless, we must be realistic about the future. Covid-19 remains a formidable threat, and there are fears that a relaxing of lockdown measures could spark a second wave of outbreaks. I also expect mortgage providers and big banks who initially retreated from the market are not about to make an immediate return. They will be watching the situation and only return once they are confident that the market is on a path to recovery. This does not mean brokers and prospective homebuyers cannot access finance—many specialist mortgage providers are still accepting applications and filling the void left by big banks.
Prime central London
One sub-sector of the property market that has received a lot of interest is prime central London (PCL) real estate. At the beginning of the year, there was a significant rise in the number of wealthy buyers looking for PCL investment opportunities, which was partially due to the surge in optimism sweeping the market in the aftermath of the 2019 general election.
In the 2020 Spring Budget, the chancellor announced an additional 2% Stamp Duty Land Tax (SDLT) surcharge that would be introduced for overseas buyers of UK property in April 2021. Given that international buyers make up over half of all transactions in the PCL property market, one would anticipate transactions to pick up prior to the surcharge coming into force to avoid this additional cost.
The Covid-19 pandemic has naturally limited the number of prime property transactions taking place. However, prime property mortgage providers like Butterfield Mortgages Limited are still receiving enquiries and processing applications. The reason being that deploying mortgages for wealthy individuals with complicated income structures requires sophisticated due diligence and time to ensure the mortgage meets the needs of the borrower.
While Knight Frank is anticipating a 5% drop in house prices in PCL, it is confident that prices will pick up again should lockdown measures be lifted in H2 2020.
The beginning of a recovery?
If we are indeed witnessing the beginning of a recovery, we must be realistic. The performance we were witnessing at the beginning of the year will not return over night. Instead, it will take months before buyer and seller confidence is restored nationwide. Of course, some sub-sectors may recover quicker than others. The UK chancellor will deliver a second 2020 budget in the autumn, where he may well announce the changes to SDLT that were originally touted for his speech in March.
In short, there is indeed light at the end of the tunnel and the initial signs are positive for the property market. Past crises have shown real estate is able to recover from periods of economic volatility, and I see no reason why this will not be the case post-pandemic. However, we should still tread with caution in the short-term given the uncertainty the market still faces.
