UK housing market review: the year so far and our forecasts for the rest of 2020

The year so far

Writing a housing market review for 2020 is not going to be filled with the normal information. Let’s face it, no one saw Coronavirus coming.

At the beginning of 2020 the housing market was performing well. Interest rates were low, banks were lending again tightening borrowing criteria and a lower tolerance to risk following the 2008 crash. And with the economy in good shape confidence was good and people were looking for homes to buy.

And with the growing demand for housing and not enough stock, buy to let businesses had opportunities to build property portfolios and increase rental yields.

Increased demand means higher purchase prices of course, but with interest rates as low as 0.25% at the beginning of 2020, the cost of borrowing was low.

Some areas of the UK presented greater opportunities for the savvy property investor.

Earlier this year we published 3 blogs that looked at those opportunities:

1. Midlands Engine drives Property Investment
2. 3 Top Reasons to Invest in the North East of England
3. Should you Invest in the North West

So in the early stages of 2020 the outlook for property investors was looking good.

As expected taxation on the interest on buy to let mortgages changed.

That presented an issue to investors who hadn’t thought about the structure of their business. Those people with one property perhaps inherited and rented out. At the time we anticipated that there would be opportunities for investors to pick up lower-than-market-value properties to add to their portfolios. We shared our insights and advice at the time with this blog:

2020: New Tax Rules: New Opportunities

And then in March Coronavirus struck and the UK entered lockdown. The housing market effectively stopped. Without the ability to carry out valuations or surveys lenders were unable to calculate property values or assess the level of risk fully.

Many lenders opted for desktop valuations but there was a delay, and for the residential mortgage market that meant the loss of 9 out of 10 small deposit mortgages (5%-10% deposits)

The buy to let market suffered a similar fate, although sales on properties underway and valued continued. And of course, the closure of ‘UK PLC’ resulted in furlough and the associated issues of tenants unable to meet rent payments. Some landlords have been able to work with their tenants, and with some Government support available buy to let businesses have weathered the storm reasonably well. Others have not fared well so in this regard there has been a very mixed bag of responses to the crisis.

Interest Rates

The biggest change and the biggest opportunity has been the reduction of the Bank of England Base Rate to 0.1% Lenders quickly followed suit and lowered their rates. The cost of borrowing fell.

What’s happening now

Valuations and surveys resumed in June, and that has led to a mini-boom in the housing market. People who had put sales on hold resumed, and the market generally has lifted in June and July. The key drivers are:

1. Interest rates at a historic low
2. the resumption of on-site valuations and surveys and increased desktop valuations
3. the relaxation of lockdown so that viewings can restart
4. The reduction of stamp duty on properties below £500k which also applies to the buy to let market

And it’s a fair assumption that people want to begin returning to normal as well.

In terms of the buy to let market, property investors are now investing again as market conditions ease.

Early indications have shown a mixed bag. Rightmove has reported an increase of 2.4% in June of house prices year-on-year. That’s based on the asking price rather than the selling price, but sellers seem to be standing firm.

However, Nationwide has reported a fall in prices of 0.1%, and Halifax an increase of 2.5%.

Q3 & Q4 of 2020

Most property analysts are predicting a lift in property prices and sales, followed by a sharp drop towards the end of the year. However, the market is anticipated to bounce back during 2021. We expect a drop of 1.5% – 3% this year and recovery beginning early in 2021 of 2% – 4%. Our estimate sits within the estimated ranges of economists specialist in the housing market, based on our experience of market fluctuations over the years.

The Opportunities for Property Investors

For the savvy investor there will always be opportunities, and 2020 is no different.

There are a number of challenges:

1. Economic conditions affecting rental yields
2. Short term house price rises
3. Lender nervousness

But there are also advantages to current trading conditions:

1. Interest rates at 0.1%
2. Stamp duty cuts
3. ‘Hobby’ landlords selling at below market value

Finally, the construction industry has restarted and continues to complete developments. In the North and Midlands where house prices are lower and there is strong demand for housing. The opportunities are plain to see.

The housing market has suffered a turbulent few months and will continue to do so. But there is much to be positive about going forward for the property investor prepared to look carefully, carry out their due diligence and work with partners to identify the best opportunities.