Most ingredients are in place for a property crash later this year
05-24-2020
Larry Elliott
Rising unemployment is toxic for the property market and low interest rates may not be enough
Spring is usually the time when the property market comes out of hibernation.
This weekend marks the start of a truncated summer house buying season, the moment the residential property market comes out of hibernation.
Normally this happens at easter but, for obvious reasons, that has not been possible in 2020. Estate agents have been shuttered along with almost every other business, waiting impatiently for the lifting of the lockdown. This bank holiday weekend, with fine weather forecast, provides a chance to make up for lost time.
Well, perhaps. Britain’s love affair with rising house prices borders on the pathological so a mini boom can’t entirely be ruled out. The government did its best last week to give the market a boost by extending its mortgage holiday for the financially distressed for a further three months. That means those having trouble keeping up with their home loans won’t have to make a repayment until at least September.
That said, the notion that this is going to be a year of high turnover and rising house prices is wide of the mark. All the ingredients, bar one, is in place for a crash later in the year.
If you have been affected or have any information, we'd like to hear from you. You can get in touch by filling in the form below, anonymously if you wish or contact us via WhatsApp by clicking here or adding the contact +44(0)7867825056. Only the Guardian can see your contributions and one of our journalists may contact you to discuss further.
Let’s start with the obvious: the economy has been poleaxed by the Covid-19 pandemic. The official jobless figures – showing a rise to 2.1 million in claimant count unemployment – provide only a hint of the damage that has been caused to the labour market by the lockdown. A truer picture comes from the number of jobs furloughed under the Treasury’s wage subsidy scheme, which stands at 8m and counting.
Not every one of those furloughed workers is going to end up jobless, but some of them will. The number will depend, crucially, on how long it takes for the economy to return to something like normal. The slower the process the more businesses will close permanently.
Rishi Sunak announced earlier this month that the furloughing scheme will be kept going until the end of October, but from the start of August employers will be asked to foot part of the wage bill themselves. At present, the government is paying 80% of wages up to a monthly maximum of £2,500, an expensive commitment that helps explain why the state borrowed almost as much in April (£62bn) as in the whole of the last financial year.
The chancellor will announce in the next few days how big a contribution employers will need to make, but at a minimum they can expect to pay 20% of an employee’s wages. This will be the moment of truth for many businesses.
Rising unemployment is toxic for the property market. If people struggle to find another job quickly after losing their job they fall into mortgage arrears and eventually have their homes repossessed. That happened in the early 1990s and is one reason why a mortgage holiday has been introduced this time.
Hansen Lu, property economist at Capital Economics, has shown how a moratorium on home loan payments saves someone paying 2.5% on a £200,000 mortgage £5,400 over a six-month period. That’s quite a financial cushion because although the lender eventually has to be paid back, it means subsequent mortgage payments go up by about £30 a month.
Again, everything depends on the state of the labour market this autumn. The mortgage holiday will end at the same time as the furlough scheme, and already there will be many households who will be wondering how they will manage at that point.
Buying a house is the single biggest financial commitment most of us ever make. When people are deciding whether to buy or not, they think hard about whether they are going to be able to keep up the monthly payments. It is not just being unemployed that matters; it is the threat of unemployment. Surveys suggest, hardly surprisingly, that consumers are extremely wary of committing to big-ticket items.
Only one thing is missing from a perfect storm: sharply rising interest rates. A doubling of official interest rates was the trigger for recession and record home repossessions in the early 1990s, but there is not the slightest prospect of that happening this time. The Bank of England has cut interest rates to 0.1% and is debating whether to take them negative.
There are economists – the monetarist Tim Congdon, for example – who believe that the vast quantities of money the Bank is chucking at the economy will eventually lead to much higher inflation. In those circumstances Threadneedle Street would have a choice: raise interest rates aggressively to hit the government’s 2% inflation target and guarantee deep recession in the process; or go easy. If it chooses the first option the housing market will collapse because many owner occupiers can only service the debts they have had to to incur to afford expensive real estate if interest rates remain at historically low levels.
Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk
So here’s how things stack up. On the one hand, the economy has collapsed and is recovering only falteringly; unemployment, whether real or hidden by the furlough, is rocketing; incomes are being squeezed; consumer confidence is at a low ebb; and the ratio of house prices to earnings is high. On the other hand, interest rates are low and will stay low for some time. In the jargon of the economics profession, there are more downside than upside risks.
But let me personalise things a bit. A relative for whom I hold power of attorney is about to have his house put on the market to fund his care home fees. My intention is to take the first halfway decent offer that’s received, because my sense is that prices are heading lower. In the past I haven’t heeded my own advice and lived to regret it. Not this time, though.