What impact has coronavirus had on the UK housing market?

The effect of coronavirus on the UK housing market

To date, coronavirus has had a negative effect on the UK housing market. Growth has slowed, house moves have almost ground to a complete stop and mortgage approvals have fallen sharply. The decline in mortgage approvals is particularly interesting, because it suggests that activity in the UK housing market has been adversely affected by the pandemic.

Mortgage approvals in the UK

Based on the most recent house price index (HPI) data,¹ property prices have fallen by 0.2% across the UK. But, this doesn’t necessarily mean that houses have become more affordable.

That’s because saving pots have been dipped into in the face of rising unemployment and to subsidise the government’s furlough scheme. In turn, this means that people might have a reduced ability to put down a deposit on a property.

Looking ahead, on 8 July 2020, the Chancellor of the Exchequer Rishi Sunak announced that there will be no stamp duty charges for property purchases under £500,000. George Bear, assistant portfolio manager at IG, says that the announcement is likely to stimulate demand within the housing market as buyers can potentially save up to £15,000 on their purchase.

Additionally, the number of houses on the market might increase as sellers could be more inclined to sell their property now. That’s because they could up their asking price as buyers have more cash to spend, or because they want to avoid a slump in demand when the freeze is lifted in March 2021.

Finally, the savings from stamp duty might have a knock-on effect in the wider economy. People might spend the money they have saved on stamp duty on property renovations, new furniture, or other things for their house, which could stimulate other sectors that rely on housing.

Housing price comparison across the UK

Average house prices vary across the UK depending on the country. For example, based on the most recent HPI data,¹ the average price for a house in England is over £100,000 more than the average price in Northern Ireland.

What’s also interesting from this data, is that year-on-year (YoY), average house prices increased the most in Northern Ireland out of all the countries in the UK. House prices increased the least in Wales, and the average gain for the year across all countries was 2.15%. But, all countries still saw an increase YoY despite the effects of coronavirus on UK housing.

UK house prices in 2020

As a small case study, we analysed the change in average house prices in the most expensive and least expensive regions to buy a house in the UK using the most recent HPI data.¹ The most expensive region was Kensington, while the least expensive was Burnley.

What’s striking from the data, is that the average house price in Kensington has increased, while the average house price in Burnley has decreased. Kensington housing prices have increased so much in fact, that for the difference from February 2020 to March 2020, you could buy a house in Burnley.

While it might be too early to speculate over whether it is appropriate to short the housing market in the UK, some traders are open to the idea. A short position on the UK housing market will turn a profit if the market drops and house prices continue to decline.

Popular ways to short the housing market are through opening a short position on a real estate investment trust (REIT), or by shorting the stock of companies that are directly involved in the UK housing market.

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REIT performance during coronavirus

To analyse the performance of REITs during the coronavirus, we picked five of the UK’s leading REITs and looked at their performance from 1 January to 1 June 2020. The data can be found in the table below:

All five of these REITs experienced a drop in the first six months of 2020 – providing an opportunity to go short for traders looking to capitalise on the pessimistic outlook for the UK housing market.

Ben Habib – chief executive officer (CEO) at First Property Group – was interviewed as part of the IG Trading the Markets podcast for his take on how coronavirus will impact the UK property market.

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He said that ‘what you've got here is people recognising that whilst British Land's retail property may have been hit quite hard as a result of the Covid-19 crisis, actually asset values are going to be underpinned in the medium to long term because of this ultra-loose monetary policy, which is now here to stay for the foreseeable future'.

Company share performance during coronavirus

To analyse the performance of companies and their share prices during the coronavirus, we picked a handful of companies that are directly involved in the UK housing sector – from letting agents to builders and building suppliers. Again, the period used was 1 January to 1 June 2020, and the data can be seen in the table below:

These companies all experienced a decline in their share prices for the first six months of 2020.

Comparing 2020 to 2008

As another case study, we compared the data of the performance for REITs and companies in the housing sector from 2020 with data from 2008.

The data from 2020 was given in the previous section, but we’ve included it again here for clarity of comparison. We used a six-month period from 1 August 2008 until 1 January 2009 for the 2008 figures, and a six-month period from 1 January 2020 to 1 June 2020 for the 2020 figures.

For a bit of context, the 2008 crisis was caused by the collapse of the US subprime mortgage market – so we could rightfully expect a more significant drop in 2008 compared to 2020. But, this is in no way said to downplay the effects that the coronavirus has had on the UK housing market.

First, let’s look at REITs:

What this data comparison shows in terms of REITs is that 2008 had a more damaging effect on the performance of these REITs in every case except for the British Land company, which actually performed worse in the six-month period for 2020.

The most obvious difference in 2008 to 2020 is Sirius Real Estate, which dropped 11% in 2020 compared to a massive 64% decline in 2008.

Now, let’s take a look at the share performance of those same four companies we previously looked at, comparing 2008 to 2020.

As the data shows, these companies all fared worse in 2008 than in 2020. Rightmove for example, experienced a 39% drop in 2008, compared to a 7% drop in 2020. Taylor Wimpey also experienced a more dramatic drop in 2008, falling 67% compared to falling 22% in 2020.

What we can conclude from this data is that while the coronavirus has no doubt had a negative effect on the performance of REITs and companies that are directly involved in the UK housing sector, it pales in comparison for the most part compared to the effect of the 2008 financial crisis.

Buying and selling behaviour during coronavirus

Buying and selling behaviour in the UK housing market has been affected by coronavirus. Early on during the pandemic, new moves and relocations were halted by government order – which put a stop to buying and selling.

Zoopla reported that new sales being agreed had fallen by 70% between 24 March and 8 April as estate agents were forced to temporarily close. Zoopla also notes that demand for houses from buyers dropped equally and bottomed out at around 70% during this period.⁴ It’s worth noting though, that this was right at the start of the government lockdowns across the UK, so a sharp drop in this period was to be expected.

To back this up, suggestions are that 373,000 property transactions that would otherwise have taken place were put on hold due to the coronavirus lockdown – amounting to an estimated value of £82 billion.

With lockdowns easing and restrictions on house hunting starting to be lifted in some areas of the UK, people are beginning to look at buying and selling once again – but their plans may have changed. Some buyers are electing to move to different locations, while others are looking for different criteria – such as larger gardens or more space for relatives.

An important metric to look at when attempting to gauge a potential recovery will be an increase in the number of mortgage approvals in the UK. If this increases, then activity in the UK housing market could be beginning to pick up again. As the mortgage comparison table in the first section of this article shows, there has been a marked decrease in mortgage approvals in the UK from the usual average.

The effect of coronavirus on landlords

Now, you might be thinking about the effect that coronavirus has had on landlords in the UK. While they are often seen as some of the better off in society thanks to their property holdings, the value of property portfolios could decrease in the coming months to years.

Businesses might be looking to downsize their office space now that the ease with which employees can work from home has been proven. This means that demand on larger properties and spaces might decline.

But, Ben Habib, in another excerpt from the IG Trading the Markets podcast, took a contrary view.

He said: ‘I don't think the Covid-19 crisis is going to be the ultimate death knell (for office working). I think that there's nothing that substitutes good face-to-face contact, brainstorming that takes place when you meet people and that can only take place in an office.’

‘The need for an office, the need to communicate with your peers, the need to brainstorm, the need for bosses to simply keep an eye on what their staff are doing, these needs don't evaporate. I don't think it's the end for offices.’

‘Actually, what we might see – because of the need for social distancing and therefore a push for greater areas required – we might see demand for office space rising paradoxically.’

Listen to the full podcast on Apple, Google, Spotify and YouTube.

As for residential landlords, so far, perhaps the biggest effect of coronavirus been the ban on evictions in the UK since March 2020, which is set to last until August 2020.

As a result, some landlords might be facing up to five months without receiving rent from their properties, which could put a strain on those who rely heavily on the income from their properties. The National Residential Landlords Association (NRLA) has said that the move to extend the ban might force some landlords out of the sector.⁵

Fewer landlords could be seen as a negative thing for the UK housing market. That’s because it could concentrate the power to control rents and lettings in the hands of fewer landlords – those who have the resources to buy up the properties of landlords who are forced out of the sector.

But, it might also give current renters the ability to buy their rental property off their landlord – providing that they can afford it.

How affordable is it to buy a house in this market?

As mentioned earlier in this article, while house prices might be falling, so too are real wages and savings. This means that for those on low incomes or younger people just starting out in their careers, houses are still unaffordable for the most part.

But, for people who have been able to work throughout the coronavirus pandemic with little to no impact on their real wages, houses have become more affordable. It bears remembering however, that the drop in house prices from the most recent HPI was only -0.2% on average across all property types in the UK. The timeframe available for this data is comparing February 2020 to March 2020.

The biggest drop in house prices have been on terraced houses, which have seen a -0.8% decline from February 2020 to March 2020. On the other hand, flats and maisonettes have risen in price by 0.9% in the same period.⁶

What next for the UK housing market?

The UK HPI has been suspended until further notice following the release of the March 2020 data in May 2020. As a result, it may prove difficult to effectively gauge the effects of the coronavirus on the UK housing market in the coming months.

What is certain, is that coronavirus will continue to have an unprecedented impact on all aspects of society, not just the housing market in the UK. For example, coronavirus has impacted the stock market, with record levels of volatility seen throughout 2020. And, it has meant that a vast majority of us have had to find new ways to work.

The housing market is no different in this respect, and now with lockdowns across the UK being eased and restrictions on house viewings being lifted, it remains to be seen just how severe the fallout of coronavirus will be on house prices in the UK.

Footnotes

¹ The UK government halted the publication of the HPI in May 2020 – meaning that the most recent numbers are for March 2020.
² GOV.UK, 2020
³ UK House Price Index, March 2020
⁴ Zoopla, 2020
⁵ National Residential Landlords Association, 2020
⁶ Land Registry, 2020