When the house price will reflect the impact of economy tanking

[rabbitcarrot]

just noticed a few houses have been added to rightmove in past couple of weeks, the price is still pretty much like pre-lockdown..

Just wondering when the property market will be adjusted to reflect the impact of economy shrink?

Not for quite a while,not everyone is aware of the effect of the economy on house prices.

Following with interest

With any luck, it will be sharp down and sharp up again - and because house sales take quite a while, the impact will be fairly small. House prices had been held down by Brexit uncertainties and were on the rise before this all started. I’m looking to sell and buy simultaneously so not massively fussed as long as everywhere has the same up/down. I’ve decided not to sell and rent and hope prices fall, because I feel that is too much of a gamble!

House prices only come down due to a mix of factors, some are high unemployment, high interest rates, low availability of credit, at the moment people can have 3 months mortgage holidays plus being Furloughed on 80% pay til end of June possibly extended again, if people do not need to sell then they will not at a reduced price, they will try and get as much as they can for their house, if they are forced to then the market will dictate the price it sells for. I Rekon by the end of the year we should have a good idea of where prices should be at.

Lots of factors as the other poster has stated. Depends on things like location, the house itself, the owners' financial position, credit availability and etc.

Just because the houses are being advertised at pre-lockdown prices doesn't mean that they will sell at those prices per se. It'll depend on what kind of offers are made and what negotiations occur.

I suspect the government will put something in place to reignite the economy and housing market. There are strong indications that they might introduce a stamp duty holiday. If this happens I think it will help give an incentive to people who want to sell and buy a new home etc. It may not be as big an incentive to FTBs though because they already get a relief.

Stamp Duty Holiday: calls for break during coronavirus rise amid loss of 520,000 UK property sales in 2020.

It will be interesting to see what happens, but I think it might be worth managing expectations with regards to house prices dropping too much. Prices might drop a little, but it is possible that it will just stagnate until things stabilise.

Agree @chocotrio

That’s very interesting about stamp duty!

I agree that people need to manage their expectations. If prices drop it will be a small amount. If people are expecting a 5 bed detached house for the current price of a one bed flat I think they’ll be sorely disappointed

Agents advertise at pre-lockdown prices partly because they don't know where to pitch them currenetly, but the main thing is, they'll be much more open to offers than before (if a seller needs to sell),

That doesnt mean riduculous offers will be accepted, though.

They won’t, house prices only ever go up. Hence the saying, safe as houses.

I think this situation is slightly different to the last recession. Last time people had been allowed to over leverage themselves with mortgages and also the people hit were high earners in financial services. This time people have a little more equity in the house (bank included more checks on affordability) and it’s the lower jobs being hit who are less likely to own the house etc

So I don’t think we will see the same drop in houses etc

@Bringonspring - I agree it's slightly different from the last recession. However, I think it's because it's somewhat unprecedented that we can't actually say one way or the other how this is going to play out in the longer term.

Is it really only "lower jobs being hit" in this scenario? I thought it was a bit more complicated. I keep reading that this situation was showing how a lot of what might be classed as 'low skilled' work is also 'essential' key work... However, I agree that jobs where people earn less are less likely to be homeowners etc.

It's not clear cut which group (or groups) have been impacted yet. For example, high earners may have stock market investments which they would have seen plunge dramatically. Markets generally don't like uncertainty. So, that will take time to recover and cause concern for more cautiousness with budgeting/spending etc.

Ultimately, I think house prices will be quite resilient (supply and demand - people still need somewhere to live etc.). However, I think home sales may be down a little (hence why the government is likely to bring in incentives to reignite the market there). There's a difference between the two: prices and sales.

We shall just have to wait and see...

Some houses that were removed in March have just gone back on this week at higher prices.

I think it is so they can then negotiate lower and still get a better price.

Im watching semi detached and detached houses under £320k (in a town in the south east where I moved from). I didn't think estate agents were even working at the moment.

I don't think prices will drop until the effect of furloughed people then being laid off and no more payment holidays etc, starts to be felt. I think a year before a deep recession really starts to bite.

I'm always browsing rightmove ,(despite hopefully not moving any time soon) but I notice some houses offering online viewing.
I'm not sure I would want to do that, or certainly not make an offer without having actually been in somewhere.

@flirtygirl estate agents are working, most with a reduced staff. There are still existing sales to manage (ones started pre lockdown) and new / empty houses to value and prepare for sale.

@Abreadsandwich. An agent we know is putting people on a list to view houses once lockdown is lifted. They say people aren't offering off the back of video viewings so much as narrowing down to a couple they want to see. So you than ring up and added to the list. When it's over, viewings will be booked in the list order. One of their houses has a list of 20people!

I think what house prices will do is very interesting. There is so much pent up demand to move as so many people put it off after Brexit. They've already been waiting 2 years and for some life has to go on. Apparently, the start of this year saw sales at the highest rate since 2006, they think that this was due to the release of some of that pent up demand. So perhaps houses won't drop as much as the economy suggests, at least not in the short term. Once people decide to move, they tend to do so sooner or later.

The 1992 crisis left people in negative equity. The market became illiquid in many parts of the country with only repossessions and estates of the deceased for sale. Those were at much lower prices. Other homeowners rented properties until they could afford to repay the mortgage on a sale.

@Hiddentree you clearly weren’t in England in the late 1980s. Property boom such that we were getting notes through the door with offers of £130k to sell our quite ordinary EOT house in east London. There was a change to tax relief on mortgages, plus a bit of a recession and crash - nothing selling. My brother who needed to sell due to divorce couldn’t because they had 20% negative equity. I had to relocate in 1991, two years after the £130k offers and we sold for £92k. Only about £3k less than we’d paid, but if we’d bought at the top of the market, would have been a huge loss.

Also - don't forget new builds either.

I'm in the process with a new build and been watching how the reservations/sales are doing during lockdown. Prior to lockdown the homes were selling really well because the development is well established, popular and great location - the builders had even stopped offering any incentives, because they didn't need to offer any due to the development being desirable in and of itself. I suspect that after lockdown they will bring incentives back in.

Despite lockdown, building work stopping and the showroom closing, I have noticed that there have been about 2 online reservation sales. Not as many as before (that is to be expected anyway), but the fact that they were being reserved/sold at pre-lockdown prices is interesting. Then again, there is a bit more competition with plots and house types etc.

Will be interesting to see what happens...

@rabbitcarrot: "When the house price will reflect the impact of economy tanking"

In about 12 months.

The last few months, indeed, the next 3 - 4 months, will be characterised by frenetic government activity globally to prevent a collapse in employment, housing etc. but there's nothing that can compensate for a complete collapse in revenue for most businesses in what would traditionally have been the best few months of their financial year.

By giving these companies loans, furloughing employees etc., the government has only bought some time and slightly lessened the impact of the impending recession.

1. When things come back to "normal", these businesses will be hit with the full wage bill for these employees and will have had barely any cashflow.
2. Businesses and individuals will face increased taxes and will have far fewer savings left.
3. Any loans, deferred payments etc. taken will increase outgoings and reduce disposable income.
4. The economic impact of all this money being printed will raise inflation and will, in turn, result in raised interest rates.

These factors will take a good few months to ripple through into house prices. By most informed forecasts (i.e., not by real estate agents), expect a 15% correction in house prices.

And to those who compare this to 2008, there is no comparison. By every economic indicator, this is a far worse recession that will have much deeper consequences than the global financial crisis. We're simply at the beginning of this process and therefore don't see how bad this is yet.

@newbie111

That's an interesting analysis. Maybe need to take Brexit into account too?

You're right - there is no comparison, but for a wide range of reasons. This feels like a paradigm shift.

TBH I don't understand the wider economic dynamic between inflation and interest rates that much. Eek!

@ChocoTrio All this is excluding the impact of Brexit on the economy. The loss of our largest market in a time like this will, quite frankly, be the straw that broke the camel's back for a lot of SMEs.

An oversimplified explanation: Inflation destroys the value of cash. If annual inflation is at 4%, then that means your cash is worth 4% less this year compared to last year. In order to counter balance this, the Bank of England will raise the interest rates to 4% so over a year, the value of cash rises by the 4% as well to keep prices stable. This example, is of course, a very rough and simplified version as there are many other forces that come into play but I hope it helped to explain the relationship.

@newbie111
Do you think the BOE will use financial repression?

@newbie111

Thank you for your reply & interesting analysis.

Technically the higher inflation rate, the more interest rate would be. However from Jan 2014 to Jan 2017 even UK inflation rate is quite low based on UK inflation graph, but in reality people can still feel the value of their money dropped quickly which means inflation should be in a rising trend. I felt very confused is interest rate is still very low at the same time back to the period 2014 to 2017, almost no change at all.

People pay the same amount money in 2017 can buy a much more decent house back to 2014, does it mean inflation rate is always going up. But why interest rate is almost the same 2014 0.5, 2015 0.5, 2016 0.25, 2017 0.5?

@newbie111 thank you for your analysis - very clear and helpful!

One question - if we see significant inflation in coming year or two, do you think that will be reflected on house price too? In my understanding inflation happens in the form of rising nominal prices for goods. House can be one of those goods then? But then I don’t understand how people can possibly afford the higher price.

It sounds like a mixed bag though.

Inflation would suggest house prices are not going to "tank" - wouldn't the prices/numbers start increasing if inflation goes up?

Interest rates may increase the repayment amount on mortgages for some people. But there might be those who do quite well out of this too, such as those who have enough equity in their house or no mortgage or had recently got themselves fixed mortgage rates for the next 5 years etc.

Low interest rates has also meant less incentive for people to save. If interest rates start to increase, then people have more incentive to save as well. That may balance things out too - if people can save more etc.

Then again... yeah, Brexit...

@Didyousaysomethingdarling Potentially. It's one way of reducing government debt burdens.

House prices tend to track differently to CPI (prices of goods and services) as there have been significant interventions (high LTV loans, "Help to Buy" etc.) that have been solely aimed at increasing house prices. Increased house prices tend to make people "feel rich" or successful even though their disposable income or overall quality of life hasn't changed and is an important tool used by the government to make people feel like the economy is "doing well".

Inflation rates are expected to rise due to quantitative easing and monetary financing policies in effect today that reduces the value of the sterling in circulation (i.e., by printing money, you tend to devalue the currency in circulation). Bank of America recently upgraded it's forecast for the price of gold to double in the next 18 months because of the amount of USD being printed by the Fed. As the BofA report is titled, "The Fed can't print gold"

W.r.t. inflation increasing house prices, it's actually the opposite. As CPI inflation increases, for the same amount of monthly income, you have less disposable income to spend on mortgage payment. Affordability falls and therefore house prices will fall.

Also, when inflation starts rising out of control, interest rates will be increased. The Bank of England estimated that if the interest rates were to be increase by 1%, house prices would fall by 20%. A 2% increase in interest rates will drop house prices by 33%.

newbie but what about the non-mortgaged houses? Plenty of those owned by the older population, who tend to move to downsize. And of course inherited houses. Would that not balance the prices out a bit as it's not all about mortgage affordability. Also those who got a 5yr fixed mortgage within the last 2yr wouldn't be affected.