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?

I think it will be 6 months to 1 year. House prices won't drop straight away as only when people put houses in the market and can't sell will prices drop. Some then decide to stay out due to things like lack of equity to move etc. Will be slow coming but painful for some when it arrives

@newbie111 - I've got the same question as @CatAndHisKit. Thanks for your insights - it is clear and useful. Economics is not something I understand that well, tbh.

How would high inflation and high interest rate impact those with non-mortgaged homes - would they be assets in that kind of situation? Also, those who have negotiated fixed rate interest rates for the next 5 years?

Also, with regards to your point about gold - am I right in assuming that the UK doesn't have much because of Gordon Brown's controversial decision to sell the gold reserves?

Re. houses owned outright: The value of the house would still be affected irrespective of whether the owner has a mortgage or not. The only difference is, in this instance, unless the owner wanted to sell during the recession period, they could afford to sit tight till the prices come back up as increased interest rates etc wouldn’t affect them. How long would that “sit tight” period be for this recession? No one knows as this recession’s only just begun.

If these are people who want to downsize during the recession and refuse to reduce the price on their house, their house will most likely go unsold (plus be registered on Rightmove, Zoopla etc. as a home that was on the market for x months further decreasing the home’s desirability). As emotionally attached as we are to our houses, we just need to remember that the same forces (credit availability, interest rates, demand etc) that increase our house prices also have the power to decrease it and therefore, ultimately, the price of the house is driven by the market, not the individual.

Re. 5 year fixed mortgages: No one knows for sure. As I mentioned, by most estimates, house prices will start falling in about 12 months time when the effects of this recession really bites and it might take house prices much longer to recover. During the last crisis, the government introduced “Help to Buy” in 2013 and that was responsible for driving house prices to where it is today. Since then, they’ve run out of a lot of the tools available to prop house prices up so there are concerns that we may never see the current prices again in a very long time.

Re. Gold: Though Gordon Brown did sell our gold reserves just before prices spiked (and therefore we missed out on some significant cash), the sterling isn’t backed by gold (and hasn’t been since the 1930s) and therefore no amount of gold in the Bank of England’s vaults can prevent inflation rising when the BoE’s printing money indiscriminately.

@newbie111 - Thank you that is really clear and useful gain an understanding.

I keep reading that it will be investors (mostly cash buyers) who will profit from this situation. However, if inflation goes up, then doesn't that devalues their cash? Or would they benefit from the increased interest rates on their cash savings?

newbie yes, I understand most of your analysis, always interesting to read. The only thing I'd say to the contrary is that outright owners will have to sell in many cases regardless of what interest rates are doing as afetr all this their income may drop and they would want to free up cash, or the large house eats up too much of their reduced income, hence downsizing. I@m not saying no one would budge on price, but if the sale is between people who don't depend on morgages or a sale of inherited house where again they may need the cash quickly due to their redced income) - then prices can still be close to what they were, in the next few months/this year. After that - as you say - there may be more of a drop.

We’re remortgaging our current home to release equity - it’s just been down-valued by 15 per cent because of the current covid uncertainty

@newbie111 thank you for the explanation. I learned something new today :)

@FiveGensOfLove oh that is surprising... as most of the talks of decline has been speculation. Do you mind if I ask where your house is and which lender down-valued it?

@ChocoTrio Investor buyers will profit as they'll aim to sell high in the next few months and then "buy the dip" once the market has reached it's valley.

If they hold investments in cash it will certainly be eroded by inflation unless the interest rates pick up and when the interest rates do, house prices will fall and they can then move their cash investments to property. The interest rate and inflation swings are all going to be much smaller (between 2 - 4%) compared to the house price swing (15 - 20%) so any inflation losses caused due to temporarily holding cash will be remediated.

I wouldnt worry about interest rate rises just yet to be honest. They will want a stable economy before raising interest rates and even then it will be a slow and steady rise. Certainly nothing like we saw in the 80s

@newbie111 the furlough scheme is a grant so businesses don't need to repay this. We all will indirectly through taxes over the long term but its not like the economy will resume and the business will get a wage bill from the government.

I don't think they will reflect in house prices for a while. As noone can say how deep the economic down turn will be or whether it is temporary or not. Whereas with the 2008 recession it was clear from the start it was going to be a long term recovery.

@Adjeoebfwh we’re in South London and converting current mortgage to a BTL with The Mortgage Works (but don’t know who does their valuation surveys). The reason I know it’s a 15% dip is that we had it valued by our current lender before starting this process which was only two months or so ago....

@CatAndHisKit

Those who own outright may be in the strongest position. They possibly have more options too - if their income does drop, then they have the option to enter a rent-a-room scheme or other options because they have an asset. There are other ways to free up cash than just selling up.

Think it was pointed out earlier that plenty of homes are owned outright, without a mortgage, by the older population. If they are on state pensions for example, they might actually be ok for income because there is a triple lock that guarantees the basic state pension will rise in line with the lowest of earnings, inflation or 2.5% (whichever is highest).

However, Covid-19 might be a game changer. Read this article with a think tank, The Social Market Foundation (SMF), calling for a ‘Scrap triple lock so all ages pay for economic impact of Covid-19’ (the source is Retirement Planner).

@Rhica You've misunderstood my post. I am fully aware that the furlough scheme isn't a loan but a grant. The wage bill I mentioned isn't from the government - it's the company's cost of paying wages (and benefits) for it's employees aka "loaded cost".

"noone can say how deep the economic down turn will be or whether it is temporary or not. Whereas with the 2008 recession it was clear from the start it was going to be a long term recovery"
No one can say for certain but people already know what the impact is thus far and can model various scenarios to get a range of estimates of long term impact. By every economic measure GDP contraction, job losses etc. all indicators say this is going to be worse than the 2008 global financial crisis.

@FiveGensOfLove

15% is a lot! Are they just being risk averse and extra cautious because of the current covid-19 situation being uncertain?

Also, South London, so maybe area is a big factor too. London is a tough one to call.

@newbie111

Very interesting post again!

I can maybe see what @Rhica might be saying when comparing to the 2008 recession, because that seems to have been more of a structural issue ('Structural causes of the global financial crisis: a critical assessment of the ‘new financial architecture’). This current issue doesn't seem like a structural problem though? So, maybe that suggests it will actually stabilise, because it's more of a blip than a crisis?

Again, I don't know much about economics, but I have been reading more about it lately!

Looking at Location! Location, Location people either wait until prices drop (and they don’t) or want a massive reduction on the house they are about to buy and top dollar for their own!

Honestly I think people will stay put. There will be some fire sales but you will be knocked down in the rush!

Looks like most companies will release their Q1 earnings this week. Interesting to see what UK banks say about their mortgage business outlook.

@ChocoTrio exactly my point. It is definitely far deeper than 2008 but also more volatile. These businesses weren't failing and the government has put infor the most, (I know there are gaps) support to allow them to continue. That's why it I wouldnt say it ls a complete right off yet @newbie111

The longer lockdown though, the bigger the risk of recovery. I understand how models work. I create and run stochastic models for a living

@ChocoTrio, @Rhica This IS a structural issue:

1. Vast amounts of QE/monetary financing affects the sterling, leading to inflation etc.
2. Nearly 10% of businesses have survived purely on low interest credit and propping them up isn't going to solve the problem (www.theguardian.com/business/2019/may/06/zombie-firms-a-major-drag-on-uk-economy-analysis-shows)
3. Cheap credit has driven up asset prices and fuelled household debt. Some example of this is the current car loan bubble: (www.telegraph.co.uk/business/0/carmakers-crisis-virus-threatens-burst-leasing-bubble/)
4. Banks already believe the a chunk of the loans they hold will become "impaired". JP Morgan has set aside $6.8 billion to cover losses, Wells Fargo $3.1billion etc. (www.washingtonpost.com/business/2020/04/14/bank-profits-coronavirus/) This will lead to a tightening of available credit akin to a "credit crunch".

The virus didn't cause these issues: It only accelerated what was guaranteed to happen, a popping of the "bubble", a downturn of this credit cycle. Here's an excellent video that explain credit cycles: economicprinciples.org/

ps. I'm a quant so I understand models too .

@newbie111

1. Agree
2. Agree alot of business are in survival mode at the best of times. But there is a lot of government support to get them through for a little while at least (not all will make it- alot won't)
3. Not sure this will be the same level of bubble as the 2008 house pricing and credit bubble

4.thats the big difference with 10 years. Banks have money ready to pay for impaired loans. In 2008 they didn't. That's why banks folded. And companies folded. Also - that's the US. I understand global interconnectedness and all that but there is a very good level of support for most ppl in the UK so I expect the UK to fair better than alot of other countries

we will have to agree to disagree. I'm not saying we won't get a full on recession.But I personally don't think it is as simple as a " normal" economic crash. There is a very good chance we will recover quickly. Also a very good chance we won't recover for a long time. There has never been anything like this. And I don't think anyone can say where we will be in 6 months time presently. The next few months will be very critical and very telling

Also sorry I reread my message and it came across a little passive aggressive 🤦‍♀️ I was rushing.

Choco plenty of outright owners aer in their late 40s - 50s, so not talking about pensioners, but them too depending on what happens to triple lock. Again, the equity release isnt possible for peoople under the pension age (under 60 at any rate). Personally I wouldn't rent a room out for various reasons, despte the number of bedrooms, so not an option for all - you need to be suited to sharing houses (unless it's so huge you have separate wings haha). I mean, all your points are absolutely valid but not a blanket rule. I still think people will be selling at reasonably good prices in the next 6 months or so (assuming they will allow viewings from end of May) - but agree that after that, hard to predict what the drop will be.
Generally glad about this thread as lots to learn, especially due to the two pros on here, even though they have differing views!

@newbie111

nice website link - very interesting

@newbie111 @Rhica
If credit is likely (has started) to dry up it's going to be more difficult to get a mortgage.
If inflation is likely to take off in the next few years and house prices drop. Would it be a good hedge to buy now with a 10 year fix portable mortgage and ride out any negative equity over that time? Making sure you're not too overextended and maybe pay 10% extra off your mortgage each year?

I think ft buyers hoping for a bargain will be dissapointed. I think there will be a slowdown for a few months then a really busy autumn to follow.

@Didyousaysomethingdarling If credit dries up and it's more difficult to get a mortgage, house prices will fall. This is because house buying affordability is directly linked to available credit.

If you can, I would keep a keen eye on the market for the next 12 months and then buy at a price you would be comfortable rather than rush to buy at an inflated value now. You cannot predict what interest rates will be like in 10 year's time and you want to keep the principal amount as low as possible.

@Zenithbear I know house prices are an emotional topic to most people than a logical one but unfortunately, there are already early signs of the market cooling:
"Before lockdown, agreed prices were on average 97% of asking price and that had since dropped to 93%" This was stated by KF, whose entire business model is built on people having confidence in the housing market and transaction volumes staying high. They have stated that houses were selling at a 7% discount to asking in the 3 week window since the lockdown. www.theguardian.com/business/2020/apr/28/sales-of-almost-400000-uk-homes-stalled-due-to-coronavirus-lockdown-says-zoopla

Again, since this is an emotional topic, please feel free to make your own decisions to buy, sell, hold etc. as you see fit. I, will be putting my money where my mouth is and deferring my house purchase for 12 months