One of the top questions on the mind of consumers at present is ‘what will happen to house prices as a result of COVID-19 and the lockdown?’
The short answer is that it is too early to tell. The housing market has effectively gone into suspended animation and there is little if any new pricing information available. While some have suggested house prices will fall five or 10 per cent in 2020, it isn’t possible to know what the economic impact will be.
Housing market activity levels hit more than prices
The impact of COVID-19 is hitting housing market activity more so than prices. Our own data shows buyer demand, or demand from sales 'applicants', has dropped 70 per cent since March 7 2020, the date when concerns over the virus really started to impact consumer activity.
The impact on sales agreed and new listings coming to the market was slightly delayed. This really started to kick in as the government shutdown started to bite from March 24, and estate agents closed for business. The chart below shows sales agreed for Zoopla listings since March 1 compared to the average for the last two years.
We are not going to 'zero sales', some transactions will still happen, but in the coming months we are likely to see levels of completed sales transactions down 75 to 80 per cent compared to the levels recorded last year. Overall, we expect housing sales to be around half the levels last year at around 600,000. This will hit agents' revenue not just into Q2 2020 but also into Q3 (July-September).
Price signals comes from completed sales
House prices are a function of agreed sales prices and completed transactions. The value of a property is what a willing buyer and a willing seller agree as the price for a property after a reasonable marketing period.
Under normal market conditions, there is a three to six month gap between a home coming to the market for sale on Zoopla, then being marked as sold ‘subject to contract’ and finally making it through the valuation and legal process to a completed sale.
Fewer sales agreed and housing completions means the amount of information on which to inform the price of a home has declined rapidly. It is going to be harder for published house price indices to accurately track price changes in the months ahead as a result of fewer data points and more volatile pricing for agreed sales.
What about 2020?
Record-low mortgage rates, mortgage payment holidays and Government support for business means that we are unlikely to see a big increase in forced sellers (who would have to accept lower prices) in the near term. As such, we do not expect any big movement in house prices while the lockdown lasts. Beyond that, it depends upon how long the market remains disrupted and any longer-lasting economic impact.
In previous years, when levels of housing activity have fallen, but the economy has continued to grow, we have seen the rate of house price growth slow, rather than turn negative. Housing sales volumes fell in 5 of the 10 years between 1998 and 2007 but annual house price growth remained positive
What is the current outlook for house prices?
This latest shock to the market is unprecedented.
Only once the lockdown is lifted will we start to get any sense of the impact on pricing. Most important will be how much 'applicant' demand starts to return to the market, how quickly sales agreed start to rise and how the pricing of new property listed for sale compares to earlier in the year. These will tell us how the ending of a suspension of market activity is starting to impact prices.
Our current expectation is that the Government measures support business and that pricing levels will largely pick up from where they left off at the start of March. Buyers who dropped out of deals or new buyers coming into the market will be cautious and try to negotiate harder on the discount to asking price to achieve a sale. Our own data shows the current gap is around two per cent which is relatively small meaning there is some slack to absorb any price sensitivity.
Levels of house price growth are already low by long run standards (two per cent in 2019) so any prolonged downward pressure on prices, even modest, could push annual growth into single digit negative territory - this may be more a function of far fewer sales price points and more price volatility than short term falls in demand.
Huge housing equity buffer to absorb any price falls
One piece of positive news is that there is a huge amount of so-called 'housing equity' to absorb the impact of any house price falls. While there are £1,100 billion of outstanding mortgages in the UK, the total value of all UK homes, according to the Hometrack valuation model which powers our Zoopla home valuations, is more than five times higher. This is a large cushion to absorb any decline in prices.
Tougher mortgage regulations mean most people taking new mortgages in recent years have put in 15 per cent-plus deposits, so the likelihood of negative equity is low even if prices were to post larger than expected falls.
We will be keeping a close eye on the data so will keep you posted as the market situation evolves.