We’ve talked a lot recently about the UK housing market’s seemingly miraculous immunity to COVID-19. But in case you’re unfamiliar with what’s going on, the story is as follows. Unlike the wider economy, which is currently in the throes of a potential double-dip recession, the housing market is flourishing.
Data from the Royal Institute of Chartered Surveyors (RICS) shows buyer enquiries recovering strongly in July which, due to transaction times, is positively influencing sale prices in September and early October. Meanwhile, Google search data reveals that as recently as early September, buyer interest remains well above pre-pandemic levels.
This has led many commentators, including the Bank of England, to label the phenomenon a ‘V-shaped’ recovery. But can the recovery last? Or are will the housing market eventually succumb in the same way the labour market and wider economy has? Let’s look at the case for continuing recovery and the case against.
Perhaps the best indicator that the recovery could be here to stay is that current activity isn’t being driven by backlogs. It was easy to put the initial bounce in activity we saw in the summer down to the pile-up of incomplete transactions from earlier in the year. However, even the most sluggish of transactions in the backlog would have completed by early August. After all, the housing market reopened in May.
Yet, the housing market continues to surprise. The building society, Nationwide, reports that UK house prices hit an all-time high in August. What’s more, Zoopla announced that the number of sales agreed in August were 76% above their five-year average. This, coupled with the Google search data we mentioned earlier, appears to point to a positive outlook for the rest of the year.
There could be several things driving these impressive numbers. It could be lockdown-induced itchy feet from buyers in smaller properties. Or maybe it’s down to middle-class urbanites taking the chance to move out of major cities as the switch to remote working continues (as we covered recently ). Perhaps it’s simply a case of those with capital seeking to invest in property – always seen as a safe option in a downturn.
Or maybe, just maybe, we’re headed for a fall.
Sadly, it’s time for some gloom. We know you’ve probably had enough to last a lifetime but, for the sake of balance, we need to cover why the V-shaped recovery could turn out to be a W.
In a w-shaped scenario, the peaks we’ve seen throughout the summer begin to gradually decline as we hit mid-to-late autumn. The theory goes like this. As pent-up demand for housing begins to subside, the housing market will begin to rely on ‘underlying’ demand. Or, to put it another way, the demand that isn’t being driven by delayed existing transactions from earlier in the year.
Most commentators think this underlying demand remains weak. Add this to conditions that include a weakened economy, tight credit conditions, mortgage lenders nervous about the future, and the end of stamp duty, and you have all the conditions for price stagnation in 2021. And this is before we even consider the dreaded ‘B-word’ and its potential effects on the housing market.
Some housing market experts have been predicting this for a while. JLL, the American commercial real estate services company, has long suggested that the UK could see an 8% drop in house prices by the end of 2020. Business management consultants, Capital Economics, go even further – predicting a year of stagnation in 2021.
Nevertheless, there is an upside to all this. The more eagle-eyed among you may have realised that for market activity to form a W, we need an upward trajectory once the decline and/or stagnation ends.
If we zoom out for a moment and look at the bigger picture, one of the longer-term effects of the COVID-19 has been to transform the way we all think of the workplace. It’s also very likely that these changes will be permanent. In short, many of us are going to be working from home (at least some of the time) from now on.
As we’ve already seen on a smaller scale with wantaway Londoners, this has the potential to trigger a structural increase in housing demand. Many people will be looking at the four walls they’ve spent much of the last year within and decide it’s time for a change – whether that’s buying a first home, moving out of the city or just moving somewhere a little bigger.
Of course, for this to really take off, confidence in the economy, labour market and housing will have to return. This will take time, and could mean a tough year for conveyancers, but the green shoots of a potential recovery are already there.
So, conveyancers take heart. A W might not be quite as promising as V, and things might have to get worse before they get better, but both lead to a recovery in the end.