House prices – what will really happen in 2020 -21

By TruePublica Editor: Bricks and mortar is something I know a lot about because this was the business I was in for 25 years. I bought, sold, managed and financed property for clients and employers in the ups and downs of the property market from the mid-1980s. I’ve managed portfolios worth hundreds of millions, bulk bought, bulk sold and everything in between. I’ve seen house price crashes first hand. I’ve seen why they happen, what happens in them and out the other side. I’ve seen the government heavily intervene in markets without the public knowing and all manner of technical and financial devices to manage how the markets work.

The year 2020 will go down in history for all sorts of things – and it will be no different in the commercial and residential property market.

The number of soured UK commercial property loans started rising in 2019 for the first time in eight years. Now it’s set to skyrocket, and with residential house prices set to fall, a domino effect will likely cause some real problems for the economy and for households struggling to balance everything else going on.

 

Commercial

Bloomberg reports that £10billion of losses and write-offs tied to stores and shopping malls will go sour – and that’s an increase on top of a slump in retail property that saw bad loans spike by a third last year.

And whilst that sector was known to be causing bad loans to increase, we can now add property connected to hotels and leisure, student housing and residential investment. All of which, will be greatly affected.

Retail property values have crashed as retailers seek to slash rent as they face rising staff costs, high property taxes and competition from online rivals. Fire sales have dramatically increased in the last year – but worse is yet to come. There are £43billion of commercial property loans to be refinanced in 2020 – and with cratering yields, its highly unlikely lenders will be in the queue to help out.

There is an additional £22billion lent to existing development projects that have all come to a standstill where delays will cause yet more loan defaults.

Overall, UK property lending fell 12 per cent last year alone with market uncertainties rising due to Brexit.

 

Residential

Widely published by the mainstream media are reports that the residential property market will fall in value by just 3 per cent this year and then rebound next year as if nothing happened. This is about as dishonest as can be. The report by Knight Frank who obviously has a heavy stake in talking the market up was somehow seen as the right thing to publish – “It forecast that mainstream UK house prices would fall 3% in 2020, but then bounce back by 5% in 2021.”

This is total nonsense.  House prices are a value of a number of factors, not least confidence and the price of land. They both fluctuate depending on the strength of the economy or market interventions by the government and they add up to confidence. When confidence in house prices falls – prices fall.

It is almost irrelevant what the full-year outturn of GDP is. Britain will enter a deep recession because of the lockdown. Before the COVID-19 pandemic arrived, the economy was on the brink of recession anyway because of Brexit. Brexit was going to deliver a 5 to 7 per cent dip in economic activity for a decade. Now add the C19 crisis into the equation. It will push unemployment up by probably one million. Maybe more. Earnings will fall, people will do what they can to save their jobs to protect their families and homes. Employers will be paying for increased debt to survive and will offer less to their employees to do so. Banks will recover bad loans through property repossessions, they will reduce loan-to-value ratios and hence – property prices will fall. The rate of descent will only be slowed by the fact that transaction numbers will also crater for this year and next – meaning that less on the market means less of a fall. People will not move house and take the risk unless employment demands it.

By the end of 2020, property transaction numbers from the beginning of Q3 to year-end will look like a cliff-dive. Expect a minimum price fall of 10 per cent of actual prices achieved, not asking prices as often quoted. As that happens, banks will tighten the criteria leading to a credit squeeze on property lending, further exacerbating prices for entry into 2021.

 

More tension strings

Online property portal Zoopla reported a 40 per cent decline in demand from buyers over the seven days to 22 March and forecast a 60 per cent fall in sales over the following three months.

Don’t forget that two-thirds of the mortgage market in the UK is made up of remortgages. Recent weeks have seen a sharp contraction in available mortgages, particularly for higher loan-to-value products. Give it another month and mortgage deals above 75 per cent loan to value will be non-existent in the UK.

A 1 per cent fall in property prices equates to a 5 per cent fall in profits for residential property builders, according to analysis by Peel Hunt. On this basis, housebuilding will stop and many ongoing projects will end up going into the private rented sector. Unsurprisingly, the UK’s listed housebuilders have rushed to conserve cash, which has meant halting land buying – meaning land prices will fall.

Distressed sales will quickly increase, again putting more pressure on falling prices.

The result of all these factors is that there have already been calls for the government to intervene and offer “substantial incentives” to ease market liquidity and prompt a full recovery of the market. This includes a reduction in stamp duty. This demonstrates the real fears of those exposed to high property debt, builders, lenders and so on.

Charcol mortgage brokers technical manager Ray Boulger expects prices to fall 10 per cent by the year-end as well, with transactions tumbling in the next three months alone to a figure lower than that recorded at the worst depths of the 2009 credit crunch. Boulger also makes a good point about confidence in the market.

“Many people who had planned to move home this year will delay their move until conditions stabilise, not least because it will become very difficult to put property chains together” suggests Boulger.

“This will put first time buyers in pole position and so when they decide the time is right to buy, they will be in a very strong negotiating position to secure their first home at a good price, an advantage that will dissipate when the market begins to recover”.

This also means that property transactions that are proceeding but not exchanged (contracts) have a very high chance of falling through – breaking chains. House buyers will then hold off waiting for market stabilisation – also known as – the best price.

One market analysis reports that the stock market is already pricing in a 12 per cent drop in house prices for 2020 and could possibly go as far as entering 2021 as much as 20 per cent lower. The same report polls its readers where 54 per cent agreed that 20 per cent was more likely than a 12 per cent fall.

KPMG published research last September (before the pandemic) that sees house prices falling between 5 and 7.5 per cent because of a no-deal Brexit. The markets are now looking to price a no-deal Brexit by the end of 2020 probably before the end of July.

All of these factors are weighing in on the possibilities of a big price correction. There is considerable potential for residential property prices to fall further than 10 per cent over this year and next.

 

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