Residential Outlook Q1 2020
At the end of 2019, the UK’s housing markets were starting to emerge from a long period of ‘wait and see’. By January, UK sales expectations were the highest they’d been since the end of 2015. But before the quarter ended, COVID-19 brought transactions levels to an immediate halt. Here, we assess the potential impact on housing throughout the rest of the year.
While issues with Brexit potentially remained in play for the rest of 2020, the expectation was that Q1 2020 would provide the first robust data confirming that markets across the country were picking up.
In March, Nationwide reported the largest month-on-month increase in UK house prices since summer 2017. Up to February the mortgage approval data from the Bank of England had looked positive, with four consecutive months of growth for the first time since late 2016, but the impact of Coronavirus was seen clearly in the March data with a 24% fall.
Note both seasonally adjusted
In January, the RICS Housing Market Survey recorded its highest levels for sales expectations (i.e. transaction levels) for the UK since the end of 2015. But, with the quarter not even finished, the ability to transact has been hugely curtailed by the COVID-19 crisis. The March RICS data duly reported a net balance of -92 for sales expectations – for reference the lowest figure during the 2008/09 downturn was only -19.
The sentiment measured by the RICS survey is often a good predictor of short-term trends. Figure 2 below shows the survey data plotted against two measures of actual transaction levels. The ‘Agreed Sales’ measure, lagged by nine months, appears to approximate the actual sales data quite accurately, although it underestimated the size of the previous downturn. Projecting the latest figures forward suggests that annual transactions at the end of 2020 could be less than half of their 2019 level.
Note: RICS figures lagged 9 months. RICS, BoE and HMRC figures seasonally adjusted
Other reports back up these estimates. Zoopla’s demand measure suggested sales activity had fallen 70% in April and they reported that the average daily number of new listings was around 90% lower than a year earlier. Some producers of house price indices have indicated that their data will be unreliable (Rightmove), or reportedly even paused altogether (LSL Acadata), for the next few months as activity is likely to be too low in Q2 2020 for their models.
So, the evidence on transactions is clear – they are going to be a lot lower this year. But people need to move so it appears likely that there will be some bounce-back once the market is unlocked. The scale of this recovery in transactions is hard to predict while the lockdown continues and the damage to the economy is still unknown.
Even harder to predict is the impact on pricing, both immediately on the resumption of activity and over the medium term. Again, the RICS survey data has been a good leading indicator in the past, but the nature of the market shutdown is unprecedented – even in a severe downturn buying and selling can proceed as normal if both parties are willing – so its predictive power should be treated cautiously.
Figure 3 shows the RICS net balance of opinion for price expectations compared to two measures of house prices. The chart shows that the survey respondents have often had a negative view of prices over the past fifteen years yet actual values have resisted (nominal) falls on many of these occasions. But assuming the previous relationship approximately holds, current sentiment already indicates potential falls of over 10% this year.