When looking at the fallout from the Covid-19 pandemic and the subsequent lockdown; one area that has had less airtime is the on-going effect on the housing market.

This includes the effect on the building of houses, the secondary housing market and businesses & industries linked with these. Building sites have closed; house sales have been suspended; house viewings have been put on hold; and the opportunities for changing borrowing requirements were put under pressure as banks and mortgage lenders reduced lending prospects.

As houses are a large part of both individual’s wealth and a large proportion of borrowing in the form of mortgages for UK residents, the effect of the Covid-19 pandemic on the housing market is hugely important. Not just from the housing market perspective, but also spending availability, debt management and banking moving forward.

Unlike in previous downturns, residential property has not been the root cause this time.  In previous global recessions, the blame could be pinned on the housing bubble burst. Years of over leveraged homeowners and over-investment in the housing market set the stage for house prices to fall at the first sight of liquidity issues or defaults in the system. Leverage has always been the downfall for housing markets, as was shown in 2008. Lenders provided too much credit to homeowners who had no means of repayment. Higher interest rates and too much debt led house prices to fall to dramatically low levels and liquidity dried up in the banking sector as debts could not be repaid. This resulted in a huge banking crisis which paved the way for a post crisis economic and banking landscape which led to greater regulation, less leverage and far more stringent lending requirements. This has meant that the effect of the global recession we are now entering into has and will have on house prices is far less damaging.

So, what do we expect for the housing market and house prices moving through the pandemic?

We do not believe that house prices will escape this recession unscathed. However, if the lockdown period can end without any need of further measures, then house price falls will occur but not to the lows made in previous recessions. The reasons for this are as follows:

Firstly, policy measures should minimise the risk of mass job losses over a sustained period. Stricter affordability checks over the last decade mean that households are better able to cope with debt repayments. Mortgage holidays, coupled with lower interest rates and government income support, mean that homeowners have more room to cover the short-term implications of the lockdown. All this should limit the scale of forced selling by those unable to meet their obligations to creditors.

Secondly, supply chain disruptions and a largely furloughed workforce have hindered the supply of new homes for sales by developers. So, while housing demand may fall, there could be some offsetting effect on prices from restrictions to supply. There continues to be a demand for housing and a shortage of new home builds which should pick up as lockdown measures ease. However, this will take time to reach pre lockdown levels, giving house prices a floor from a supply perspective.

Thirdly, macroeconomic forecasts imply that much of the hit to housing demand will be short-lived. The current market assumption is that containment measures will soon be eased, which will allow economies to begin recovering quicker, especially compared to the more drawn-out slump in the aftermath of the global financial crisis. A recovery in demand in the second half of 2020 should put a floor under house prices.

Finally, in the UK, annual house prices increased 3.7 per cent in April, so the average UK home rose from £219,583 to £222,915. This includes mortgages that were submitted before the lockdown and processed in April, but, it does indicate house prices were recovering from Brexit uncertainty before lockdown began. Many transactions that were due to take place over the past few weeks have been put on hold, as opposed to cancelled. Once lockdown is eased, many of these transactions will go ahead. The furlough income schemes that have been put in place and lower borrowing costs available, will allow for many of these to still to go through and the pent-up demand will be released.

In conclusion

There are downside risks to this view, and much is dependent on the easing of lockdown measures in a reasonable manner without any need to implement further lockdown strategies in the future. However, if this is not the case, there will be a short term hit to prices due to social distancing measures, rising unemployment, a drop-in income and decreasing borrowing. However, we believe over time house prices should recover along with a pick up in housing sales and the building of properties, in line with the advancing economy.