Property market values have seen their fair share of movement during the first half of 2020 – some good and some bad – but in the face of continuing uncertainty, there is sure to be further changes in property values ahead. In this article, as we reach the halfway point of the year, we’ll look at what average house prices have been doing, and where they might go next.
2020 Market Values: Looking Back
In the lead-up to January 2020, activity in the UK market had been heavily subdued as potential buyers awaited the results of the General Election. The spectre of Brexit had been looming over the housing market for years but, once the uncertainty was past, buyers emerged in unprecedented numbers. Transaction numbers soared, and they brought market values up with them.
On the 20th January, one article in The Guardian led with the dramatic news: “UK house prices rise at fastest rate on record.” Quoting data from Rightmove, the paper said that average prices had jumped by 2.3% in a single month. Figures from Hometrack’s UK Cities Index told a similar story: property market values 2020 in UK cities had risen by an impressive 3.9% year-on-year.
Much of the property market data was published in February and, by the middle of the month, the general sentiment was bullish. However, activity began to dip again over the next couple of weeks as most countries began to recognise the seriousness of the coronavirus threat. In a matter of days, market activity went from one extreme to another as a nationwide lockdown prevented viewings and left countless shops and businesses empty. An estimated £82 billion worth of property transactions were put on hold.
Sales volumes nosedived in March, but prices didn’t fall with them, showing no downward changes in property values. Partly, perhaps, this was because so few transactions were taking place; it meant that any sales were statistically insignificant. For some weeks, in fact, the dearth of activity caused a number of organisations, including the ONS, to hold off on publishing any house price data at all. Nevertheless, those that did keep track found that average price growth had stayed positive, though the numbers were doing nothing very spectacular.
Hometrack, for example, maintained its UK Cities Index, which offered the following figures for year-on-year changes in average property market values.
Property Market Values Year on Year
January 2020: 3.9%
The company’s June figures weren’t available at the time of writing but it’s interesting to take note of that gradual upswelling of average prices in March 2020 and beyond. It points to the UK’s second market rebound, which occurred once the lockdown had been lifted.
As we’ve said in previous posts, the lockdown didn’t kill demand for housing; it simply contained it while the pressure grew. When the lid came off, we saw another surge in transactions, which precipitated a second upturn in average prices.
According to Zoopla’s UK House Price Index for May 2020, average values rose by 2.4% year-on-year. The pattern of activity varied by region, with cities in northern England and the Midlands leading the recovery. The best performer overall was Nottingham which saw price gains of 4.3%.
The erratic market fluctuations of the first half of 2020 certainly gave rise to some unusual data, but many commentators now expect fewer sharp peaks and troughs as time goes on. Zoopla, for example, states: “The average asking price for homes marked as sold … is 7% higher than a year ago… (However,) we do not expect the rate of growth in the Zoopla House Price Index to reach this level. Rather, it is expected to hold steady at 2% in the coming months.”
At the end of June, Richard Donnell, Zoopla’s director of research and insight, explained the rationale behind this prediction. He said:
“Activity in the market has risen strongly. Buyer demand across the UK is now 46% higher than pre-lockdown levels... One day after the market opened in Wales on 22 June, we saw buyer demand there bounce up by 41%. So, the market is busy with buyers progressing with purchases that they put on hold during lockdown.
“Although the number of home listings for sale and rent have risen in recent months, it is still down 15% compared to this point last year. This lower level of supply, coupled with strong levels of demand, is underpinning pricing at present.”
Donnell noted that the rental market was witnessing a similar trend, pointing out that “we have also seen tenant demand and tenancies-agreed rise strongly over the last seven weeks. Rental activity is now higher than at this stage of the year in 2019 and 2018.”
The company’s comments have been widely featured in newspapers and industry journals, but Zoopla is not alone in sensing a certain robustness to the housing market.
In mid-June, in an article entitled “Early signs show English property market bouncing back,” Rightmove noted that “The average asking price of property being listed for sale is up by an average of 1.9% (+£6,266), compared to March, before the housing market was put on hold…. Whilst it’s still early days, our statistics covering 95% of the market indicate far more resilience than had been expected.”
The company’s property commentator, Miles Shipsides said: “There are no signs of panic selling or even a price dip… On this evidence, buyers may now be trying to exchange quickly, as there are signs of high pent-up demand and upwards price pressure, rather than downwards.”
Property Market Values 2020 - Q3 & Q4
The general thrust of those arguing in favour of the housing market’s resilience is that pent-up demand and a continuing shortfall in supply will sustain prices for several months.
For now, it’s apparent that there’s strong demand on the part of would-be house buyers. However, there’s also little doubt that the coronavirus lockdown must eventually have an impact. Very few commentators expect property values to stay on an uninterrupted upward trajectory. The reason for that is that many people will have lost jobs by the second half of the year, and at least 9 million others will have been living for several months on reduced incomes. That inevitably reduces total spending power within the economy and since ‘market demand’ only really counts if it’s backed by an ability to pay, that could eventually exert downward pressure on average prices.
Zoopla’s Richard Donnell explains this as follows:
“An imbalance between supply and demand is likely to support pricing in the short term, before the wider economic landscape causes house prices to fall toward the end of the year…. We expect the annual rate of house price growth to remain around 2% to 3% until approximately the end of September 2020. However, the cloudier outlook for the economy may start to pull house prices down towards the end of the year and into 2021.”
As a general rule, house prices tend to rise or fall in sympathy with real-terms average disposable incomes. Consequently, the future direction of house prices depends to a large extent on the speed of economic recovery and, just as importantly, how quickly any additional money finds its way through to ordinary house-buyers and tenants.
Relatively poor wage growth and lower levels of national production have seen real-terms earnings remain tightly supressed in recent years, as the Institute for Fiscal Studies reported in 2018. It said that: “Median real earnings for employees are, remarkably, still 3% below where they were in 2008.” More recently, in March 2020, ONS published figures showing that real mean disposable incomes were no higher in 2018-19 than they had been in 2007-08. This may well be one reason why, given such a shortfall in supply, house prices have not risen much faster than they have.
Historically, earnings and house prices have always affected one another, so there’s certainly a risk that job-losses and contractions in the economy will tend to counteract house price inflation in the latter half of the year. However, the fundamentals of the UK housing market are strong: demand is still high and supply is still low, which is invariably a recipe for price growth.
If we assume that these underlying forces will stay more or less unchanged, then the big question is how long it will take for the economy to recover.
Prospects for Economic Recovery And The Impact on Property Market Values
The UK government introduced a furlough scheme for employed people towards the end of March 2020. Though it has been a big drain on the public purse, it was given cross-party support, and many would agree that it should ultimately save far more money than it costs by protecting essential parts of the economy from collapse. If it’s successful in that, the economy should recover more quickly from the lockdown than it would otherwise have done.
Without that significant financial support, many employers may have been forced to lay off large numbers of employees, just as they have done in the United States. In Britain, the obvious consequence of that would be a huge loss in earnings for perhaps millions of people. That alone would cause the economy to shrink, because all those families and individuals would have less money to spend, and a whole host of shops and businesses would suffer from a loss of trade. That could kick-start a vicious spiral of decline, in which house prices and rental values would also be likely to fall.
Another consequence of mass lay-offs would be a longer-term burden on public spending, because many more people would be unemployed, paying fewer taxes, and calling on the public sector for income support and a host of related benefits. By keeping people in work, the programme has prevented that scenario and, in time, returning workers should be earning their full taxable incomes again. As a result, both public and private sectors should benefit, putting the country in better shape for a recovery.
That, at least, is the theory. The reality is that the UK is facing a series of big economic unknowns and, despite a host of will-intentioned stimulus measures, the timescale of any recovery is uncertain. The global economy has shrunk markedly, Britain’s own productivity has shrunk faster than at any time in living memory, and on top of all that, we yet have to face the prospect of a possible no-deal Brexit, which could sever vital international trade arrangements in January next year.
For now, however, such factors are simply uncertain. We cannot predict how things will play out, but we can at least monitor present economic performance against previous expectations. Happily, the Bank of England has been busy doing just that, and its findings give some grounds for optimism.
A V-Shaped Recovery For The Housing Markey
At the outset of the coronavirus pandemic, there was general agreement that the economy would shrink as the country went into lockdown. The bone of contention between economists was what sort of recovery would the country then experience?
Some predicted a long, slow, drawn-out return to normality; an economy weighed down by mass unemployment, low investor confidence and greatly restricted international trade. They spoke of this as a ‘U-shaped’ recovery.
Others were more upbeat and felt that the UK could make a faster ‘V-shaped’ recovery. Productivity would dip sharply and would quickly hit bottom, but then it would rebound with similar speed. After all, they argued, this was essentially a health crisis, not an economic one, and once the pandemic ceased to be a threat, there was no reason why the country couldn’t return fairly quickly to business as usual.
Both arguments are, of course, greatly simplified but they represent two possible outcomes. Neither has yet been proven to be right, but the Bank of England does at least find evidence to suggest that we might be heading for a faster recovery than expected.
On 30th June, the Bank of England’s economist Andy Haldane gave an online presentation in which he said the economy was on track to make a V-shaped recovery.
He said that positive economic data had emerged "somewhat sooner and materially faster" than expected, adding that there was evidence that the UK was benefitting from a surge in post-lockdown consumer spending. He also noted that if the rebound continued “on the same path” then the reduction in GDP might be significantly lower than the Bank had first feared – closer to 8% than the 17% it had forecast in May.
Market Value Predictions
These are undoubtedly difficult conditions in which to be making any predictions but Savills has made an attempt. On 17th June, before the Bank of England announced its encouraging findings, the property agent suggested that average values were likely to fall by 7.5% in 2020, but then to see “15.1% growth over the next 5 years.” In short, a sharp dip followed by a steady and sustained increase in average values.
Savills also highlights another relevant consequence of the lockdown, which relates to the Bank of England’s attempt to encourage growth by reducing the base rate to its current historic low. “Interest rates are expected to remain lower for longer,” it observes, “which will support mortgage affordability. This will be welcomed by households most impacted by the economic effects of the lockdown and its aftermath.”
House Prices by Region
Within Savills’ latest forecast are regional figures which show how prices might vary across the UK. The company assumes that all regions will suffer the same 7.5% contraction in the second half of 2020 but then clear winners will emerge in the following years.
Top of the list is the North West, which it expects to see rebounding by 8.5% next year, and by a total of 24.1% by 2024. Savills’ top six performers for house price growth include:
North West: 24.1%
Yorkshire & the Humber: 21.1%
North East: 19.9%
East Midlands: 18.4%
West Midlands: 18.3%
London takes bottom place in the table, with projected gains of just 4% by 2024.
Savills has based its data on predictions by Oxford Economics, which expects a net fall of 8.3% in GDP over the course of 2020. Savills therefore caveats its figures, noting that a slower economic recovery would produce a slower rebound in the housing market. It also lists some specific factors that could result in slower growth overall. Examples include “a hard Brexit”, further restrictions on mortgage availability, or an unexpected increase in the Bank of England’s base rate.
It expects “transactions to return to normal levels by 2021 Q3, followed by a year with more transactions than normal as we work through the pent-up demand that accumulated during 2020.”
The Future of Property Market Values
Predictions about property market values are difficult at the steadiest of times, and thus far, 2020 has been anything but steady. However, there is emerging evidence to suggest that, despite changes in property values, the fundamentals of the UK housing market will stay strong, and that over the medium to long term, residential property should retain its ability to deliver very rewarding capital gains.
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