2020 UK Housing Update
Here in the UK we’re obsessed with what the housing market is going to do next. People are endlessly fascinated by it, and everyone has an opinion on what’ll happen next.
Seeing how I’ve been involved in a couple of billion (with a B) worth of residential transactions and am currently looking at investing a further billion into the sector, I’m vaguely up to date with what everyone else thinks, and have a reasonable idea myself.
That said, all anyone can do is guess at what’s going to happen. Well, that’s a lie.
What will happen to the UK Housing market in 2020 and beyond?
The housing market will definitely go down. And it will definitely go up. Just nobody knows when, in which order, and by how much. So this is my round up of what I think will happen.
I'm going to look at the following areas, so feel free to skip to one you might be interested in.
If you own a house right now. Don’t worry about what’s going to happen. It makes no difference. Your home isn’t an investment. Your house might go up or down in value, unless you sell up and live in a box, it doesn’t matter. You still need it.
Selling up and going into rented to then time the market to jump back in at a lower price… piss off. You aren’t smart enough to do that and the transaction cost is too high to make it worthwhile for most.
If you’re thinking of buying a bigger place, then focus on keeping your mortgage payment history clean, and make sure your income is as secure and consistent as possible.
The next 18 months or so will probably present opportunities to buy. Just remember to negotiate the same % discount, not £ amount.
So if your place is worth £100k and it drops by 10% = £90k, then if the place you want to buy is currently worth £200k, make sure you pay 10% less, or £180k.
Interest rates can’t get much lower, but there is slightly less competition in the lending market right now. So rates might drop when more players move back into the market, but if it were me, I’d be looking at fixing my mortgage rates for a decently long period of time. There are 5, 7, 10, even a couple of 15 year fixed deals out there. They will be more expensive than 2 / 3 year rates, so do the calculations to see if it makes sense for you to go that route (or ask someone smart to do it for you).
Buy to Let investors, hold your nerve. My belief is if you’re going to bother with property, then you should have a minimum of 5 properties and be investing for 20 years+. That way you’ve got some economies of scale, you’ve got some diversification, and you’re not over a barrel if one property goes a bit wrong.
If the idea of having that many puts you off, probably sell up and invest in something else.
A whole bunch of recent legal and tax changes has made it less appealing for smaller investors, and has made first time buyers better off when competing with you for the same properties. Now is the time to be a professional about it.
Provided you’re looking at investing for a couple of decades, then whether you invest now or in a year or two, it won’t make a huge difference. Probably 2021, early 2022 will have the best bargains to pick up, but you’ll have competition from first time buyers. At the moment and early 2021 you’ll probably have less competition from homeowners, so might be able to snap up a bargain.
Just make sure your investments are cash flow positive. Don’t buy just for capital appreciation, and don’t buy hoping interest rates stay where they are, they won’t. Look at the cost of finance over longer terms and remember to include the arrangement fees when calculating your annual equivalent rate.
If you want to stay renting, stay renting. If you’re hoping to get onto the housing ladder, start paying some attention. Get your deposit sorted out, make sure your income is consistent and dependable - self employed people, you can get away with 1 years worth of accounts, but 3 years is the ideal.
If you’ve been furloughed, you might face some difficulties until you’re back to full pay and have been for 3 months. Speak to lenders to see what they are offering you so you know what your budget is.
Once you’ve got your budget, feel free to look for things about 10% above that. House builders are going to be keen to shift stock, so will be open to negotiation. People putting their house on the market during a downturn are generally doing so for a reason, so (without being a tool) take advantage of that and negotiate hard.
2021 will be a good year for house hunting for you.
The economy in the UK is screwed. Bit like everywhere else in the world to be fair. We've also got some Brexit issues to deal with, but that pales into insignificance when you consider the impact Covid-19 is going to have on the worldwide economies.
What does it mean for house prices? Well, if businesses fail - people lose jobs or get pay cuts - people can't afford mortgages - people don't want debt - demand for houses decreases - house prices decrease.
^ Super simplified economics there, but if you want to hear it explained in more detail, check out Ray Dalio explaining the Economic Machine.
Now normally when demand drops for something, the price drops until demand increases again to take up all of the supply. With housing in the UK there is already more demand than supply. So if people decide to tighten their belts and not buy a house, or not buy a bigger house, it actually takes quite a while for that to translate into a drop in house prices.
Imagine 3 people, all working in the same place, chasing the same house right now. The economy goes bad, one of them gets made redundant, one of them takes a pay cut (or doesn't get the pay rise they hoped for), the other one is unaffected.
The unemployed person is no longer trying to buy that house, and the one who didn't get a pay rise still wants the place, but can't afford to pay full asking price for the property. The final person can still proceed. So instead of 3 of them trying to out bid each other, there's only one real contender for the place now. This will probably translate to house prices staying about the same, +/- 3-5%.
Now flip it round to the sellers perspective. They had a price in mind for their property, let's say £250,000. They wanted to sell up so they could move to a bigger place for £450,000. But the three people bidding on their place dropped down to only one. Now they are only being offered £240,000. And although they can afford the £450,000 still, the outlook isn't looking brilliant in the UK, so they decide to stay put instead.
They have now reduced the supply side of the market by withdrawing their property for sale. So instead of accepting a 4% decrease in house price, they just refused to sell.
If the 3:1 ratio of buyers to sellers decreases to 2:1, but then the number of sellers also decreases... you can end up with the ratio remaining at 3:1 - meaning Price Elasticity of Demand doesn't really hold true for UK residential property.
^ Can you tell I did a finance degree? Neeeeeeeeeerd, basically all that means is if everytime demand drops for houses, sellers refuse to sell their house, which lowers supply. So the supply and demand ratio stays the same. All things being equal, that means prices stay the same.
This is why the UK has an almost guaranteed lowest possible price drop of around 15%. We are just TOO obsessed with house prices, pay way too much attention to what our houses are "worth", and refuse to ever accept lower than a price we heard once. Even if that price is no longer justified.
As of writing (August 2020) the Bank of England base rate is 0.1%. It started the year at 0.75% so it's had a fairly dramatic move. In recent years it was as high as 5.25% in 2008.
The Bank of England are even considering negative interest rates. This is where your bank charges you money for holding your savings. Its the Banks way of 'encouraging' you to spend money instead of horde it. I don't think it'll happen, but it might. It's happened in a number of major economies around the world.
Interest rates are used to stimulate or reign in spending within an economy. So if prices for things are going up too fast (inflation), then increasing interest rates makes you want to save money and watch it grow in your savings account.
If prices for things are stalling or dropping (deflation) then interest rates are lowered to make you less likely to save, and more likely to spend.
The problem is, when nobody is spending but inflation is still going on. By printing a shed load of money into the UK economy, that naturally causes inflation. If at the same time everyone is panicked about having a job and being able to afford food, that naturally causes people to want to save and not spend.
Interest rates are going to be fairly useless at stimulating the economy in this next cycle I think. So I can see interest rates staying low for quite a while longer. I wouldn't be surprised if we saw sub 1% for another 3 years.
Eventually though, interest rates will be increased. And likely quite quickly and quite sharply. The long term average (over like 150 years or something stupid), is about 5.5%. If we have 0.1% for 5 years, then mathmatically we'd need 5 years of interest rates at 10.9% for 5 years to balance it out. Eek!
Personally over the next 4 years I'll be looking to fix my mortgage interest rates for as long as possible. My buy to lets will be 5 year deals, IF I end up buying a place for myself - I'll opt for a 10 year mortgage deal.
Bank of England base rate drops, therefore all the lenders drop their interest rates... right?
Nope. Lenders are businesses who are obsessed with minimising risk. So yes they are influenced by the Bank base rate, but they aren't held to it. The drop from 0.75% to 0.25% to 0.1% wasn't mirrored by all of the lenders.
In fact a lot of lenders just straight up stopped lending money out. They know that during times like these, the chances of people failing to pay their debts increases, so they need to make more profit on the people that do pay to offset for the losses they make on people that don't pay.
On the plus side, when interest rates do start to increase again, that could bring more lenders into the market. The increased competition then keeps rates low as they are all trying to get your business.
I reckon we've got a good few years of actual mortgage rates being pretty low. The best Buy to Let rates are around 1.5% and the best personal mortgage rates are around 1.2%. These rates all increase the longer you try to fix your deal for - because the banks know that rates will eventually increase.
If you want to get the benefit of all the major banks research into where they think interest rates will go, just take a look at their 2 year, 5 year and 10 year mortgage products.
Lol. Who even remembers this now? This kept house prices down to a small extent in London and some of the major cities, as international investors reduced how much they were investing to wait and see what would happen.
Chances are being in or out of Europe will be the least of our problems over the next decade, and investors know that. I can see a flight of capital to perceived safe havens like London over the next few years.
People who have some much money they don't care if their £200m drops to £150m. They just don't want to leave it in their own country where it could be taken off them, or leave it in another asset class that might drop to £50m. London (and it is it's own market) is still seen as a safe investment and a good store of wealth. That £150m will bounce back to £200m given enough time, and it can never drop to £0m so it provides a lot of comfort for major investors.
Housebuilders are right whingers. They always complain about planning permission holding up sites, but if you actually look at the stats, there are over 250k units that have been given permission where the housebuilder didn't bother building them anyway.
But, the Government has recently announced a major overhaul to the planning system, which effectively grants permission to house builders if the land they own is designated as 'Renewal' areas. This should speed things up, but will take a while to be worked out. The planning system is a right pain in the arse, but for good reason. It stops daft builders and individuals from making crap houses that nobody wants or nobody wants to see.
This might translate into more properties being built, but we haven't been building enough houses each year to keep up with the increase in demand for decades. In fact, ever since I've been paying attention to property it's been an issue in the UK.
The Government has just removed stamp duty on all property purchases up to £500,000 - which equates to about 95% of all residential property transactions in the UK. This is genuinely a great move to stimulate house buying.
This has up to a £15,000 benefit to people, and as it's a tax, that is £15,000 of hard cash. If you save £15k on a house, you usually only save 25% of that because you were probably getting a 75% mortgage. So this is a very big deal for house buyers.
It's only been removed until March 2021, so I can see this encouraging a lot of people who were on the fence about moving to pull their finger out.
But what we'll probably see is a drop in demand in April 2021 (assuming it's not extended), as it will just bring forward transactions that were planned for later in the year.
And it will buoy up house prices because people suddenly have an extra lump of cash to use on the purchase price.
Let's say you were buying a £400k house. It's pretty normal to have a £100k deposit and a £300k mortgage (75% LTV). You would have set aside £10k for stamp duty, but now you don't have to. You could add that £10k to your deposit, and along with a bit more mortgage, you can now afford a £440k house instead. That extra £30k mortgage is only going to cost you around £120 a month.
The Government has just allowed you to either buy a more expensive house, bid higher for the same house, or buy the place you wanted and spend more money on random stuff you don't need for the place.
It's a smart plan.
Help to Buy
This is up for renewal at the end of 2020, and there are already talks of extending the scheme. I can't see any measures that stimulate buying houses being scrapped by the current government, so I reckon this will be extended for another year at least.
The Help to Buy scheme - I wrote a blog on it here - is designed to help out housebuilders and designed to keep house prices where they are. It's another example of the government prioritising house price stability at almost any long term cost.
If it's not extended, then it only really impacts first time buyers anyway, and some of the schemes have been picked up by lenders anyway - like the 95% mortgage deals. I suspect some of the housebuilders might even become JV partners with first time buyers to keep a 20% stake in the properties for a number of years.
That's a better business proposition for them than reducing their prices!
For the last few years we've been moving back to cities and living closer to where we work. And with more people living alone in their first time house as opposed to moving into a place when they get married, it's meant demand for smaller properties has been on the increase.
With lockdown there is a question over whether people will now value outdoor space and even living further away from cities and towns. If more people are comfortable working remotely over Zoom / Skype, then the requirement to be in a certain geographical location eases.
I can see the logic, but I do think it's a very short term phenomona. Businesses will be comfortable with people working remotely for a while, but ultimately being in an office does provide a number of benefits for companies. Most new ideas come from interacting with colleagues, which is just harder to do remotely.
So while I can see a reduction in demand for 1 bed city centre apartments for a year or two, I think the trend of living centrally will quickly return. However if you can get a place with some kind of external space - balcony, terrace, communal garden - then you've got some protection there as well.
Tenant demand has been increasing for years, and rental prices are still increasing year on year. For investors, this is great news. Tenants... not so much.
With more uncertainty around job security, the flexibility and lack of huge financial commitments is going to appeal to a lot of people. I can't see tenant demand dropping, even with all of the first time buyer stimulus that the Government is putting out there.
The type of property tenants want could change, as per the demographic shifts. So people with out of town properties might find an increase in demand for their properties and the city centre flats might become over saturated. I reckon this'll be short term, but it will likely impact the price of these different housing types over the next year or two.
The impact covid had on rental receipts in the residential sector was minimal. Over 95% of landlords received their full rent. Compare this to less than 50% of commercial and retail landlords getting full rent.
The main difference is you get to choose if you run a business. You don't get to choose if you live in a property or not. Of course you can move house, but if you have a bad track record with paying your rent, not many landlords will want to rent to you.
The local authorities don't have enough properties to house everyone, so the ability - and motivation - to keep on top of rental payments is extremely high!
If you're not a huge fan of investing directly in property, there are a few options to still get exposure to the UK residential sector without any of the hassle. But that's probably part of a longer conversation
So answer the question, what's going to happen?
OK, head on the chopping block time.
2020 will see continued indecision from people and house prices will bumble around with nobody knowing what to do. We'll probably see a small drop in prices, but that will be alongside a huge drop off in number of transactions.
2021 we'll have a bit more of an idea of the impact of Covid. A lot of companies will have disappeared, and a few will have done quite well. People who can will be trying their best to buy while stamp duty is cancelled. This will lead to an uptick in prices for Q1, then a drop in Q2 as nobody wants to buy for a while. Overall we'll see a flat housing market, around 2% growth.
2022 things will start to get back to normal and we'll see a relatively big increase in house price purchases. We'll have a couple of years worth of pent up demand coming out, and the housebuilders will have been busy building to meet this demand. I think we'll see more like 5% growth in 2022.
2023-2025 we'll be seeing house price gains of around 4-6% a year. Growth will increase the further into the future we get as inflation starts to kick in. This will increase the price of everything, but remember that's academic if it's the place you live!
*** Not financial advice remember ***
What should you do?
Do what you want.
If you're buying a home, then the movements in house price won't be that big a deal for you. I don't think we'll see a major 15%+ drop or gain in house prices for a few years. So if you pay £400k or £410k or £390k... it's not that big a deal in the grand scheme of things.
If you're investing in property, then you should be buying for an ROI calculated on the basis of the cash flow produced by the asset. Capital appreciation is a bonus! If you NEED the property go up by 4% a year for the investment to make sense, it's a crappy investment. Find a better one! So again, as long as you are happy with the return you'll make when you buy the place, there's no real need to delay in the hope you'll pick up a massively discounted property in a year or two.
Personally, I am selling a few rental places at the moment. That's part of my long term strategy that started a couple of years ago and won't be impacted by what's going on right now.
As a business I'm looking at investing significantly over the next 5 years. In the region of 3,000 - 15,000 units. So I'm generally quite positive about the long term investment proposition of the UK residential market.
Make of that what you want.