The COVID-19 lockdown has put the UK’s housing market on hold. Find out what impact this could have on you, whether you’re hoping to buy, sell, move home or just remortgage – and how long it might last. Article by Nick Green.
The UK government has defied King Canute, and held back the UK’s most powerful tide: the property market. Recognising that the coronavirus lockdown makes many aspects of buying and selling homes either impossible or extremely difficult, the government has effectively hit ‘Pause’ on the whole market to avert a house price crash.
Without specifically banning property transactions, the government has urged buyers and sellers to delay, while lenders have been asked to put mortgage offers on hold. Alok Sharma the Business Secretary said, ‘People will understand that at this time they should, where it’s at all possible, move their dates for completion but also their dates moving into new homes.’ For the vast majority of people, of course, completion day and moving day are the same, unless one happens to own two or more homes.
Demand from buyers fell by 40 per cent in the week before 22 March, according to Zoopla, which also forecast an overall drop of 60 per cent in the coming quarter. However, the official pausing of the property market should help to soften the impact of this on prices. Nevertheless, house prices are expected to be lower at the end of the lockdown period. First-time buyers may see this as an opportunity – sellers, not so much.
I’m in the middle of buying a home – what will happen to me?
The latest guidance from the Ministry of Housing states that ‘there is no need to pull out of transactions’, but also stresses that the lockdown rules must be followed. The practical implication is that, in the vast majority of cases, the advice is simply to wait until the lockdown is over before proceeding any further.
Buyers who are concerned that their current mortgage offer may expire in the meantime can take some assurance from Sharma. The Business Secretary said that the government was encouraging mortgage lenders to extend existing mortgage offers to take account of the delay. This should mean that anyone with a valid mortgage offer will not need to renew it within the usual timeframe, provided that their material circumstances remain the same. A mortgage broker should be able to tell you more about this.
What if we’ve already exchanged contracts?
For buyers and sellers who have exchanged contracts and set a completion date, the advice is the same: to delay if possible until the lockdown is lifted. The trade body for mortgage lenders, UK Finance, has likewise stated that providers will help customers who have already exchanged contracts to extend their mortgage offers by up to three months. At present it is not known whether the lockdown will last longer than this, but if it does, then it is likely that further allowances will be made to prevent the housing market from seizing up.
What if my chain has broken?
One of the unavoidable side effects of pausing the entire property market will be the breaking of many housing chains. Some homeowners are already deciding they no longer want to sell in the current circumstances, causing headaches for others in their chain – some of whom may have exchanged contracts while others in the chain have not. In many cases, chains may break from the bottom as first-time buyers pull out – the stock market crash has dented many Help-to-Buy ISAs and Lifetime ISAs, where buyers save up their deposits, and lenders’ criteria has also tightened up in the face of the crisis. Against that, interest rates are now at an all-time low, so once the lockdown is over it can be hoped that other first-time buyers will be there waiting to fill the gaps and repair some broken housing chains.
How has the lockdown affected mortgage lending?
Many mortgage lenders were already scaling back their lending even before the announcement from the government. Barclays has stopped accepting applications with a loan-to-value (LTV) above 60 per cent, and the largest lender Lloyds (which includes Halifax and Bank of Scotland) has cut back to a similar degree. This effectively rules out most first-time buyers, since few can afford deposits of 40 per cent.
However, around 60 per cent of the mortgage market consists of remortgaging, and it seems likely that this area will be less severely impacted. Remortgaging does not require people to be physically present, and usually does not even require a new valuation survey. Furthermore, many remortgage applications will involve smaller LTV ratios, so it should still be possible to pick up new mortgage deals in this area. That said, a potential dip in house prices may still make some lenders cautious, and could affect remortgaging criteria.
What effect will the pause have on house prices?
The reluctance of lenders to consider high LTV loans is a sure sign of their nervousness over house prices. Banks and building societies are visibly preparing for a fall in the market, which increases their risk of lending against current property values. Broker Savills Plc is forecasting that house prices may drop by 10 per cent this year – though not everyone agrees. Niraj Shah, an economist at Bloomberg Economics, says any fall in house prices will depend on broader factors such as the state of the economy after the lockdown, rather than on the lockdown itself. Shah describes the current situation as ‘a shutdown, not a crash’ and likens it to ‘an induced coma’ for the whole housing market to limit the damage to it. The effect on prices will hinge on whether unemployment surges in the meantime, and whether stricter lending criteria remain in place once the market re-opens.
However, one key side effect may be on the building of new homes. Large falls in property prices are typically bad news for housebuilders, with every 1 per cent fall reducing their profits by around 5.2 per cent, according to stockbroking firm Peel Hunt. Some of the big names in housebuilding, including are Taylor Wimpey and Persimmon, have already braced themselves for a shrinking market by holding back from buying new land. If the lockdown is followed by a general economic downturn or recession, then this could reduce the number of new-build properties coming onto the market. That in turn may drive prices back up again.
The outlook for home buyers and sellers
The current pausing of the market is certainly a big upset for anyone hoping to buy or sell a home, but it should not in itself be a cause for alarm. Depending on how well the UK economy weathers the coronavirus, there is every reason to suppose the housing market will pick up more or less from where it left off. The real risk, as many commentators have pointed out, is that any economic slowdown as a result of the virus (or other factors, such as a no-deal Brexit) could cause a loss of confidence in the market overall. Meanwhile, buyers and sellers across the nation will just have to sit tight, wait and see.
If you are remortgaging, you may still find plenty of good deals out there by contacting a mortgage broker.