Should I be worried about the future or should I go ahead and buy?
Similarities with the Global Financial Crisis
My previous article looked at how the UK property market was impacted by the Global Financial Crisis (GFC). The circumstances leading to the GFC were very different to the COVID-19 pandemic. Sub-prime mortgage transactions was a major contributing factor to the GFC property decline, by 15% in Q4 2008!
We have not seen such a drastic decline in the property market post COVID-19 due to pent-up demand. On the contrary, we have seen high asking prices in some locations. COVID-19 put a stop to property transactions leaving many potential house buyers on standby. Once the property market opened-up, demand for properties outstripped supply.
Current property market landscape
Banks removed their high LTV / riskiest mortgage products from the shelves (i.e. 85% — 95% LTV mortgages) as they are worried that house prices will fall, and homeowners will fall into negative equity. Currently, only a few banks provide the highest LTV mortgage product at 90% LTV.
Unemployment rate is expected to increase to 4.1% in Q3 2020. The furlough scheme changes in August 2020, which might worsen it. Increased unemployment rate is likely to stagnate house price growth.
The 8 months stamp-duty holiday announced by Rishi Sunak has given the UK property market a fighting chance, increasing property transactions and buyer’s confidence.
Interest rates have gone to record low levels (0.1%) in March 2020. Good for homeowners, particularly those who want to re-mortgage but not good for savers. More people are sitting on their cash right now and limiting investments (particularly in properties) due to low confidence in the property market and the economy.
Currently, UK house prices have increased by 1.7% in July 2020, compared to July 2020, and up by 1.5% compared to July 2019.
My view on the property market
I think the pent-up demand for houses is temporary and it will slow down towards the end of 2020. We might see lower demand for properties as people are trying to gauge which way property prices are going.
Furthermore, a rising unemployment rate will lower demand as people are not earning enough and those that are, might not feel secure in their jobs.
I believe the worst-case scenario will be a c.7% market drop and the market will recover in 2022. Consumer confidence would have increased, people build up higher deposits, found new jobs, and higher LTV mortgage products come back into the market in 2021.
My points of advice
Trust your instincts: If you are trying to buy a property now, take the words of estate agents with a ‘pinch of salt’, especially those that tell you there won’t be a market downturn. Remember they earn money by selling the property. Instead, use the online property tools (e.g. Rightmove, Zoopla) and track how much houses were sold for in your area of interest, in recent times — to drive negotiations.
Buy below market value: Getting a property below market value helps you hedge against the risk of a market downturn, especially if you want to sell your property on in the short term (2–4 years).
How long do you intend on staying in the property? If buying a residential property and you intend to live there for the long-term, then I would personally go ahead and buy. If you do intend on living in the property within the short term (2–4 years), then I would be very cautious. Worth asking yourself the following questions…
- Can I negotiate prices below market value?
- Should I get a 2-year fixed rate or a longer fixed-rate term to weather the storm coming?
- Location: Are there shops, schools, and accessible transport links that can help stabilise the property value?
In summary, I think house prices could fall by 3% — 7% from Q4 2020 to 2021, slowly recovering in 2022. Approach the property market with caution as a first-time buyer and taking a slightly ‘risk-averse’ approach in your investment strategy is best, in my opinion.
Source(s): Nationwide HPI data, City A.M, Ade’s analysis