Thu 16 Apr 2020
So now we are only a matter of a couple of weeks into lockdown, yet can you believe it, I am still speaking with agents from all over the UK. I do not jest, properties are still being sold and let even in these unprecedented times. I want to address the question I have been asked many times recently: “what will be the effect of COVID-19 on the Runcorn property market in the short, medium and long term?”
These are obviously unchartered times, yet we can look back ay history to give us clues and more recently, the bounce-back that is happening in China (and their property market). The COVID-19 situation will touch all parts of the Runcorn and UK property market. In this article, I will be considering its impact on Runcorn property prices, transaction numbers (i.e. the number of people that move home), Runcorn buy-to-let landlords and finally tenants and the rents they pay.
The Three Issues with the Virus and the Property Market
The first issue has to be the lockdown itself. Limitations on society’s capability to go about their normal working life will hinder the house buying/selling process. The practical difficulties of moving home and expediting the property sale; from the viewing itself, the Energy Performance Certificate being carried out, the surveyor checking the property for the lender, etc., are all issues. The estate agency and legal industries are coming up with some innovative solutions, from virtual viewings to legally watertight delayed completions, where the old owners stay in the house under licence during the lockdown, and the move will take place after the lockdown period.
Secondly, the UK housing market has never liked ambiguity or uncertainty, and this virus will play a part in people’s feelings and sentiment towards moving home (or not).
Thirdly and finally, there is the issue with the money people have, be that wages, whether they have a job (or not) and their overall affluence, on the back of the 29.4% stock market decreases in the last two months (correct at the time of writing this article).
The Background Economics
The economy drives everything, including the housing market. The overall measure of the economy is the Gross Domestic Product figure or the GDP (the GDP is basically the total value of all the goods and services created by the whole UK economy in one year and it currently stands at £2.15 trillion).
Looking at what has happened in China, most economists believe the UK will experience a short, yet sharp economic shrinkage in Q2 2020 with GDP set drop by 4% to 7% in the one quarter depending on the extent of the lockdown. Then GDP is expected to level out in Q3 2020, and then a significant ricochet (how significant depends on who you listen to) in Q4 2020/Q1 2021.
Putting politics aside, I have been impressed with Boris Johnson’s response with wide-ranging support for the UK economy and businesses. While it’s far from perfect, help has been in the guise of the Bank of England reactivating its Contingent Term Repo Facility, increasing liquidity and keeping the money markets going (important as that was what the issue was with the credit crunch). Additionally, business grants and government-backed loans, together with telling lenders to take a compassionate line to those unable to make mortgage holidays and finally the furloughing of staff, all work towards allowing a quicker recovery in the economy.
What Will Happen to Runcorn Property Values?
There are a few doom-monger economists predicting Armageddon, yet I feel a lot of that is to get column inches in the newspapers. The Runcorn property market is less exposed than it was in the previous four historical property crashes in 1972, 1979, 1988 and 2008. This is because of the following reasons:
- Before each of the four crashes, there had been a significant upward spike in property values prior to the crash. We have not experienced that over the last 12 months.
- Mortgage interest as a percentage of household income (nationally) was a massive 32% in 1988, 18% in 2008 – yet now it stands at just under 8% (because interest rates are so low).
This is all assuming we don’t have high unemployment. Yet historically, it has been proved house price falls are not caused by high unemployment. It is in fact, that it happens the other way round, that a housing downturn can (not always) create unemployment – yet with the government furloughing people – this shouldn’t be such so much of an issue.
The value of an average Runcorn home currently stands at £154,850
As I will explain in the next section, the biggest effect will be on transaction numbers, not on property values. I suspect in the summer there will be some Runcorn homeowners who will want to sell at all costs, and not care what price they achieve. Savvy property buyers will swoop on those properties and drive a hard bargain, meaning there will be some short-term localised reductions in what properties sell in the summer for those that want to sell at any cost.
Yet, these reductions will artificially amplify the effect of the property value indexes in a downward direction in the autumn (the ones the newspapers mention when they talk about property value changes) because they will be based on the very low levels of property transactions that will take place in the summer (because there is always a lag). Interestingly we have seen this many times over the years because just about every spring for the last 20 years, we have often seen negative or very subdued figures in the House Price Indexes in the months of January/February. This is because of the lack of property sales on the run-up to Christmas a few months before. To give this all some context, property values in Runcorn are 24.7% higher than 10 years ago – and nobody was complaining about those. To give you an idea what that is in pound notes.
The average Runcorn home has risen in value by £30,700 in the last 10 years
The swiftness of recovery in the autumn/winter from that point will depend on the state of the wider economy. With the measures (mentioned above) implemented by the government, household incomes should continue to remain steady. While holidays and luxuries may be shelved for a year, people in Runcorn who have been locked up in their homes for weeks on end might just consider making that move later in 2020, taking advantage of the ultra-low interest rates. This, in turn, ought to encourage a return to sturdier levels of house price growth in the medium term (2021/2 onwards).
The Number of People Moving Home in Runcorn Will Significantly Drop in 2020
I foresee the number of people moving home (i.e. the number of household transactions) in Runcorn will significantly drop in 2020. This will only really affect the pockets of estate agents (as they charge their fee when people move – so if fewer people are moving, they will earn less) and the people associated with house moving.
Even with virtual viewings and creative legal work, the number of property transactions will be considerably obstructed over the next couple of months. Interestingly, in the Chinese cities that removed the lockdown first (in the middle of March), I have read in the press that the number of property transactions has already bounced back to around the half of the medium-term average after only three weeks!
Interestingly, there was already a good level of pent-up demand in the property market before we went into lockdown. This was caused by people delaying their move because of the ‘B’ word (Brexit) over the last 12/18 months, which interestingly saw a massive upsurge with the Boris Bounce in December/January and February.
Worse case scenarios suggested by economists state transactions will drop to 20% of the normal 10-year average number of transactions until the end of Q3 2020, return to 65% by Q1 2021, increase to 100% by the end of Q2 2021 and then 120% in 2022. Most sensible economists (and often those that stay out of the limelight and don’t go chasing headlines) believe transactions will reduce to 45% to 50% of the 10-year average until the end of Q3 2020, improve to 80% in Q4 2020 and 100% by Q2 2021 with potential for higher transactions numbers in the order of 110% to 130% in 2022.
It all sounds rather grim doesn’t it, until you dig deeper.
Remarkably, it must be stated the number of property transactions over the last 12 months in Runcorn is at 74.9% of the 10-year Runcorn average, and this was before COVID-19.
In the last 12 months, there have been 457 property transactions in Runcorn, compared to a 10-year average of 610 per year
Let’s not forget, these predictions are from the 10-year long term average, and as it can quite clearly be seen, transaction levels are already at a low, even without COVID-19, and nobody was complaining about that apart from estate agents and removal vans!
With the number of people in Runcorn moving being held back, I would anticipate seeing a build-up of suppressed demand for Runcorn property from COVID-19, on top of the pent-up demand from Brexit. Especially with many Runcorn families realising their homes aren’t large enough to contain them as the lockdown experience will push many households in Runcorn to move in late 2020 or possibly 2021. As every economics student knows, when demand outstrips supply (because we can’t all of a sudden build more houses), prices go up.
How Will This Affect Runcorn First Time Buyers, Those Trading up, Downsizers and Landlords & Tenants?
FIRST TIME BUYERS – I believe the banks will be a little warier when lending money to first buyers with their need for large percentage mortgages. The demand for the Help to Buy scheme has been increasing year-on-year, yet its pace of growth has been declining in the last couple of years – I foresee demand accelerating in the later parts of 2020. There could be some good deals to be had from new home builders looking to release cash in Q3 and Q4 later in the year? Maybe the Bank of Mum and Dad might be able to help, yet they too will be stretched, although they might be able to release equity down the generations to their children and grandchildren (see the downsizers section).
TRADING UP – Many Runcorn homeowners in their starter homes will be going stir-crazy in their smaller homes, and with interest rates at ultralow levels, some Runcorn homeowners might forgo holidays and entertainment, and consider putting their weight and finances into moving upmarket in Runcorn. That might also be easier if the Runcorn downsizers start to move as well.
DOWNSIZERS – There are many retired people in Runcorn, rattling around their large Runcorn home, with their children having flown the nest and possibly moved away years ago. These people don’t need to move, and so are considered ‘optional home-movers’ – yet the COVID-19 crisis could be the catalyst to make them finally move to be nearer their family around the UK – releasing good-sized family homes onto the Runcorn property market for the ‘trading uppers’ to buy.
LANDLORDS & TENANTS – I suspect there won’t be many Runcorn tenants moving in the next three to four months. Tenants have the peace of mind with a cessation on evictions until the summer and buy-to-let mortgage payment holidays for buy-to-let landlords whose tenants are in financial difficulty (note the tenants have to give proof to their landlord that they are unable to pay with their applications to Universal Credit). There might be small reductions in average rents, as some Runcorn landlords undertake to help their tenants in these chastened financial times, yet for most people, rents will continue to be paid for making no major impression on rental prices in 2020.
Let’s not forget, the level of average rents is directly related to tenants wages, and I can’t see why this relationship between rents and tenants wages should break after COVID-19. As wages are held back in the latter parts of 2020, the growth rents over the next year will be subdued. Finally, those Runcorn buy-to-let landlords sitting on cash might be able to bag a bargain in the summer from a desperate seller, before normality returns in Q3 and Q4 2020.
We are in unchartered territory. Assuming there are no other seismic shocks in the coming weeks and months – in a few years’ time – this will be seen as a bump (albeit a rather big bump) – another part of the roller coaster ride of the UK and Runcorn property market.