What Might Covid-19 Mean For The Housing Market?

By Gordon Campbell

10th April 2020

This blog was published on 10^th April and reflects our market view at that time.

This view may change as the situation develops and the policy response becomes clearer.

What Effect Will It Have?

The effect of Covid-19 on the housing market is likely to come from three areas:

• The impact it has on sentiment, making all but the most committed buyers more cautious in the short term, at least until global stock markets stabilise.
• The practical impact it has on buyers’ and sellers’ ability to transact, as it limits people’s ability to go about their normal business.
• Its impact on the economy and the traditional drivers of affordability.

On this last point, few forecasters have been prepared to nail their colours to the mast to date, though Capital Economics has suggested that a short sharp recession is currently the worst-case scenario.

The emergency cut in the bank base rate, economic stimulus from government spending pledges and the willingness of mortgage lenders to take a considerate view of short-term mortgage arrears, are designed to mitigate the impact. 

Meanwhile, the security of a bricks-and-mortar investment in times of uncertainty should help to underpin values.

All of this points to a hiatus in the housing market, without necessarily affecting longer term prospects.

The fundamentals that underpin our medium-term view remain; if anything mortgage debt is likely to remain cheaper for longer, while prime property remains relatively good value in a global and historical context.

These factors point to the continuation of demand when we see signs of the Covid-19 effect disappears.

What About Property in Glasgow Being Effected?

While, it may appear that the housing market is successfully socially distancing itself, with the Registers of Scotland effectively closing and mortgage lenders pulling back from lending, that does not mean the real estate sector has gone completely quiet.

But first some context…

 Key Findings

• The Registers of Scotland has largely shut down operations, placing much of the Scottish housing market on hold.
• Experiences of other housing markets hit by public health outbreaks suggest transactions rather than values see the immediate fall. Transaction falls during major crises are typically between 40% to 70%. In Scotland the number of new properties listed for sale in the first week of April has dropped 90% year-on-year.
• Airbnb has seen a 27% fall in available listings in Edinburgh between Q4 2019 and March 2020.
• Listings in on Citylets- the rental portal- for long term rentals are up almost 50% this year, and 119% at the start of March.
• It is difficult to see when circumstances will be back to normal, until there is a date for the end of the lockdown.
• The economic fundamentals of the Glasgow housing market was strong before the crisis (price growth of 4.2% at the start of the year), and this should support the subsequent recovery.
• That is also being supported by the very strong economic activity in Glasgow of new job creation, large construction projects for major businesses expanding and moving to Glasgow and the city being the second financial capital; of the UK.

What Are The Property ‘Experts’ Opinion?

Many commentators believe the Government’s intervention and furlough scheme, combined with strong underlying fundamentals, will see a comparatively quick recovery compared to recessions caused by major economic imbalances such as the Global Financial Crisis (GFC) of 2008/09 and Dot Com Crash of 2000/02.

It does appear likely though that we are witnessing a collapse in transactions rather than house prices and this has been the response in other UK housing market crises.

We are in a better position than we were in 2008/09, when the entire international capitalist system was under real threat.

The banking sector is much more robust and the economic fundamentals give some encouragement to a ‘V’ rather than a ‘U’ or ‘L’ shaped recovery once we get to the other side of the pandemic.

What About Previous Market Volume & Value Responses

While the UK housing market has not seen the effects of a pandemic since the 1918 Spanish Flu, which actually saw house prices rise during the period – Link Here to the Report - there have been recent market downturns from which we can learn.

Fig.1 below, shows the changes in UK house prices in previous recessions – actual and inflation adjusted.

Each line starts at the house price peak before the downturn and then tracks the fall in average values.

What History Tells Us About Stock Market Crashes

A recession, if not already here, is imminent and there has been a rout across the world’s stock markets.

Generally, the wrong thing to do when markets fall by a reasonable margin is to panic and sell out of the market – this just means you have taken the loss.

There are a few lessons from recent history which back this up.

For these examples we assumed you’d invested at the highest point before the market started to fall.

Black Friday (1987)

19 October 1987 holds a place in the record books for being one of the biggest market drops ever. The US stock market saw its biggest ever one day drop in value of 20.4% and the UK market fell by around 10% on the day – before falling further in the following days.

Within a month, UK stocks had fallen 33% and it took over three years for shares to recover. However, within five years, by 1993, the UK market was worth 33% more than it had been going into Black Friday.

Dotcom Bust(1999)

The market was soaring before what we now know as the Dotcom Bust in 1999. One month on, shares were down by almost 40% on the UK stock exchange.

Again, they recovered in three years and were in positive territory by almost 15% within five years.

Global financial crash (2008)

In essence, the 2008 financial crisis was a crisis in confidence. Concerns that started in the US mortgage market spread to the entire financial system.

The collapse of Lehman Brothers, a large Wall Street investment bank, on 15 September 2008 was the watershed moment of the crisis, and within a month, the UK stock market had fallen by 37%.

However, fast forward just one year and that drop had reduced to around 11%. Three years on, by 2011, UK stocks were back in the green – worth 3.8% more than they had been going into the crash.

By 2013, five years on, shares were worth 31% more than they had been that September day when Lehmans collapsed.

Fig.2 below highlights these changes in the market

Anticipating Change

Activity is still happening in the Scottish Housing Market.

However, the effective closing of Registers of Scotland means that it is very difficult to process transactions except in special circumstances.

The lenders have also heavily restricted mortgage finance (especially on new mortgages) as they battle with reduced staff numbers and dealing with customers who want to take mortgage holidays.

That will change as the restrictions are lifted and the pent up demand for sales, purchases and for more rental demand gets back to normality.

Looking Ahead

Where this is heading is anyone’s guess and forums like Twitter have everyone guessing, often generating more heat than light.

For now, we are prisoners of fortune to nature.

As we learn more over the next few weeks regarding the duration of the lockdown and the depth of its economic impact, there will be greater potential to model likely outcomes.

What does remain true are the strong underlying fundamentals of the Scottish market, which supported 4.2% year-on-year price growth in the Scottish market in January 2020.

Time To grow

There will be times of market volatility. Market falls are a natural feature of stock market investing. During these times, it is possible that emotions overcome sound investment decisions – it is best to stay focused on your long-term goals.

The golden rule to investing is allowing your investments sufficient time to achieve their potential. Warren Buffett, the American investor and philanthropist, puts it very succinctly:

‘Our favourite holding period is forever.’

Be prepared to view the occasional downturns simply as part of a long-term investment strategy, but stay focused on your goal.

Historically, the longer you stay invested, the smaller the likelihood you will lose money and the greater the chance you will make money.

Last Thoughts

We are in a far better position than we were in 2008/09, when the entire international capitalist system was under real threat.

The banking sector is much more robust and the economic fundamentals give some encouragement to a ‘V’ rather than a ‘U’ or ‘L’ shaped recovery once we get to the other side of the pandemic.

The sooner Registers can re-open and the lenders can get back to lending again, the quicker we will bounce back. In saying this, there will undoubtedly be hits to people’s wages and savings, and businesses’ accounts and supply chains.

It will take time for people, businesses and the entire economy to regather after this.

We will have another blog coming out next week on The Opportunity Ahead.

Watch this space.

In the meantime, Keep Safe.