Property buying agents pride themselves on their ability to negotiate good deals for their clients on a new home.
But such is the ferocity of demand in the UK housing market today, that they are struggling to deploy their more combative skills — even when buying for themselves.
Roarie Scarisbrick has been looking to move from south-west London to a larger family home with a bigger garden in Berkshire or Hampshire. But though his plans were formed well before the pandemic, the kind of house he is seeking has become the prime object of desire for UK homebuyers in the pandemic. And that has limited his opportunities to play hardball on price.
“I’m buying into a competitive market so I’ve had to park the really sharp tools of the trade and negotiate accordingly,” says the partner and buying agent at Property Vision.
The feverish demand in property has stood out in the gloom of the wider economy. After lockdown brought the homebuying process to a near standstill in March, it roared back to life from May, fuelled by the desire for bigger, more comfortable properties triggered by the shift to working from home and the nine-month stamp duty holiday announced in July.
Activity is expected to remain at a high pitch while the stamp duty holiday continues until the end of March, but the overall picture for 2021 and beyond is much harder to predict.
Will today’s buyers see prices slide next year if the economic news worsens? What impact will a vaccine rollout have on the demand for homes to suit changing patterns of work? Will mortgage lenders loosen the constraints imposed on swaths of borrowers?
As the pandemic continues to wreak havoc on business, investment and the public finances, FT Money assesses the outlook for buyers and sellers in a turbulent market.
Market of three parts
The current boom took even seasoned market watchers by surprise in its intensity and breadth after lockdown ended — reinforced by the stamp duty holiday, which waives the charge on the first £500,000 of any home purchase, saving buyers up to £15,000.
A classic V-shaped recovery ensued, reflected in sharp rises in sales agreed, mortgage approvals and house prices. It was the busiest October for housing transactions in five years, according to HM Revenue & Customs.
But as the rush to complete during the stamp duty holiday gathers pace, expectations are growing that the conditions that have fuelled the market recovery may be tested to destruction after March 31, when it ends. And this is not the only reason to regard this date as significant.
It is the day on which the government’s Help to Buy equity loan scheme, which has driven sales of new homes in recent years, will be barred to all but first time buyers from April 1. Second, overseas buyers will find themselves paying an extra 2 per cent in stamp duty on homes in England and Northern Ireland — in addition to the 3 per cent surcharge they would pay if they already own a home anywhere in the world.
Just a month later, at the end of April, the government furlough scheme ends, bringing with it the risk of higher unemployment and lower earnings, factors historically linked to housing market activity.
These are the known changes; others are less predictable but potentially significant. Given the effect of the pandemic measures in hoisting UK national debt to record levels, for instance, taxes are likely to be raised or introduced in the years ahead, sparking a debate that has already broached the idea of a wealth tax on assets including property. The outcome of Brexit negotiations could also result in a significant economic hit in the short term.
Putting these factors together, Lucian Cook, residential research director at estate agent Savills, is predicting “a year of three parts”. Activity will be sustained initially by buyers rushing to beat the stamp duty deadline. “Thereafter you will undoubtedly see a lull in activity. You may see some of the gains in house prices unwind,” he says. Later in the year, though, he suspects transaction levels and house price growth will revive as levels of unemployment fall and the vaccine programme takes effect.
Zoopla, the property website, forecasts a slower recovery, projecting completion levels will be 20 to 30 per cent below normal levels in the three months from April, because of the distorting effect of the stamp duty holiday. Thereafter, it predicts transactions will run 10 per cent below 2019 levels until the end of the year.
“This reflects economic factors impacting market sentiment and the fact that a proportion of sales are likely to have been brought forward into 2020 and 2021 Q1.” But it adds a strong caveat. “Much depends upon the economic outlook and progress for a national vaccine to suppress the pandemic.”
Making medium-term predictions about house prices and transactions is nonetheless a precarious business, as demonstrated by wide-of-the-mark forecasts of falling prices made in March. A large array of factors will feed into the market in 2021, says Neal Hudson, director of market research company Residential Analysts: on the one hand, the vaccine programme will stimulate recovery, and the government is likely to “run the economy hot” to protect companies. Interest rates are forecast to stay low, easing the repayment burden for borrowers.
Against this are the counteracting forces of Brexit and underlying economic weakness as the UK recovers from the pandemic. “That could result in a longer term drag on incomes, leaving the boom to peter out after the stamp duty holiday ends. We could then go into a more stagnant market where prices and transactions remain flat,” he says.
The vaccine effect
The pandemic caused a surge in people moving into homes that would better suit their needs under lockdown, as a place to work, live and enjoy outdoor space. Much of this demand was focused on countryside areas: Savills research found the number of £1m-plus sales agreed since June in South Oxfordshire was on a par with those in Westminster, Kensington & Chelsea and Camden combined. Other red-hot spots included Cornwall, Harrogate, Guildford and Tunbridge Wells, where sales agreed were all comfortably more than double the 2019 total over the same period.
The vaccine programme promises not only to save lives but to prompt a return to more normal pre-pandemic ways of behaviour. In the context of the housing market, this raises questions about the persistence of current trends. If it leads employees to return to the office and city centres, putting the brakes on homeworking, a vaccine could neutralise the urge to move to the country or commuterland, or the broader desire for outside space or larger properties.
Chris Sykes, consultant at mortgage broker Private Finance, says there are already signs that the pandemic exodus from city centres is slowing, with an increase in inquiries in London property in recent weeks and a fall in those looking to move out. “With the advent of the vaccine and a slow return to normality we believe we will see London property boom . . . The draw of cities is the nexus of labour, social and cultural factors and people have missed out a great deal on the latter two this past year.”
For many buyers, the pandemic may simply have brought forward pre-existing decisions to move out rather than transformed their thinking. In recent research quizzing 1,300 prospective “prime” buyers — those at the top end of the market — Savills found that two-thirds of them had made their initial decision to move before the pandemic struck.
Mr Scarisbrick of Property Vision believes Covid-19 gave many buyers the psychological push they needed by putting fears about Brexit in the shade. Buyers had been fearful of the Brexit effect on prices in the two years before the pandemic, but the coronavirus crystallised their rationale for moving to a larger or more functional home.
“From 2016, Brexit made a lot of those people who would normally have traded up far more cautious. One of the reasons we’ve had such a surge in activity is because the experience of Covid has overridden Brexit and brought them off the fence,” he says.
Why not wait?
The stamp duty holiday and the desire to trade up in lockdown have been blamed for pushing up prices. Halifax last week reported prices were rising by an annual 7.6 per cent at the end of November, a month-on-month rise of 1.2 per cent. The gain in prices over the five months since June was the strongest such period since 2004.
Given the distorting effects of pre-announced stamp duty changes, does it make sense for buyers to pay more today to secure the home of their dreams, or wait it out until at least the second quarter of 2021, when any price rises linked to the stamp duty holiday will have ended — or perhaps gone into reverse?
In their eagerness to meet the deadline, buyers may lose sight of what counts as reasonable value. Mr Cook says the promise of a stamp duty holiday can result in “slightly irrational behaviour.”
Market experts are agreed, however, that in the current market the so-called “speculative” buyer is in a slim minority. The great majority of purchasers face a practical imperative to move, whether because of the “three Ds” — divorce, debt or death — or jobs and schooling for children.
Nick Morrey, product technical manager at mortgage broker John Charcol, who has himself recently bought a new home for the latter reason, says there is a logic to moving now, quite apart from stamp duty considerations, even if prices are rising and demand is high. If you wait until prices fall, he says, sellers often take fright, go into retreat and reduce the choice available to buyers. For first-time buyers, waiting it out can also erode their purchasing power. “If you wait for 12 months, that’s 12 months more rent, and £12,000 you’ve just lost.”
In spite of the rollercoaster experience of the past 10 months, some experts say the conflicting forces expected to shape the coming period could end up striking a balance that leaves the market in a reasonable position in 2022, with turnover, prices and sentiment roughly matching 2019 averages.
Mr Hudson says: “When I’m sitting in my slippers by the fire in my retirement and I look back at the housing stats, 2020 is barely going to register. If you look across the year at the numbers of prices and transactions during the pandemic, you will hardly be able to see it because of the bounce back. It will be the crash that never happened,” he says, before adding, “at least until next year.”
Mortgage lenders loosen the reins even as thousands of households struggle
During the pandemic, banks and building societies withdrew from lending at higher, riskier percentages of a property’s purchase price for fear that prices might fall in the recession, casting borrowers into negative equity. Now, though, they are beginning to show greater willingness to lend mortgages to those with small deposits of 10 per cent.
In recent weeks Halifax, NatWest, Virgin Money and Nationwide have returned to the 90 per cent loan-to-value market or extended the availability of these loans. But they are keeping a lid on demand through pricing. “Lenders are still pretty wary,” says Sarah Coles, personal finance analyst at Hargreaves Lansdown. “The spread between the base rate and mortgage rates has been wider in 2020.”
Chris Sykes, consultant at mortgage broker Private Finance, says the interest rates now charged for 90 per cent loans are similar to those that dominated the market for 95 per cent loans before the pandemic. None are under 3 per cent and the cheapest is 3.24 per cent. But these too are starting to come down as lenders regain confidence and begin to compete for business.
“With the return of mainstream lenders to the 90 per cent market, it was only a matter of time before competition on rates ensued and there is now a downward trend in this part of the market, with major lenders such as Nationwide and TSB beginning to make cuts. We expect others to follow.”
However, lenders’ forbearance for those in difficulties remains a key factor in stabilising the market. Lenders have granted 2.7m mortgage payment deferrals since the start of the pandemic, according to industry group UK Finance, with 127,000 agreements still in place as of November 20. It says 89 per cent of customers whose mortgage payment holidays have ended have gone back to making repayments.
This suggests 283,000 still require support from their lender outside the formal payment holiday scheme, which ended on October 31. If even a relatively small proportion of these were repossessed and sold by lenders, this could hit prices across the market.
Banks have said they will continue to help customers facing Covid-related financial difficulties and Nick Morrey, product technical manager at mortgage broker John Charcol, says lenders have little appetite or reason to trigger widespread repossessions in the current climate.
“Lenders won’t want to start repossessions that quickly because it doesn’t help anyone. If the housing market is falling and they’re selling homes, are they going to get their money back? It could have an impact,” he says.
But since prices are determined by a relatively small portion of the overall market, the ramifications of forced sales should not be dismissed: out of 18m-20m households that own their own homes in the UK, only about 100,000 change hands every month on average. Neal Hudson, director of housing market research company Residential Analysts, says: “It takes very few people to create a boom. And conversely very few forced sales to create a crash.”