Yielders’ Economic Update: October 2020

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The Data

September saw a continuation of the white-hot run for the housing market since the introduction of stamp duty relief measures, historically low borrowing rates and the loosening of lockdown measures. We see the market as essentially tracking the rebound seen in the macroeconomy, and much of this has been driven by the ‘pent-up demand’ from what we will now call ‘Lockdown 1’. In short, this demand is translating into record-high house prices, edging towards the £250,000 average price across the UK.

The numbers above indeed reflect the abnormal economic conditions brought about by the pandemic. A projected economic growth of 15% for Q3 is staggering considering an economy such as the UK’s is doing well if it posts growth of 2-3% in a year. Nonetheless, it is understandable in the context of the economy contracting by about 20% in Q2 of this year, and a perceptible ‘snapback’ of demand was always on the cards.

The Bank of England’s base interest rate remains at a low 0.1%, however it appears there is talk in the city of utilising negative interest rates to try to further stimulate demand as we head into the winter period. We will touch upon this in a later blog, but essentially this practice would try to incentivise banks to lend money out, rather than hold it deposited with the central bank. A high experimental policy in practice, it has been trialled by a number of countries in the past, with mixed success.

Record Mortgage Applications

The Bank of England also reported that mortgage applications from UK consumers reached a 13-year high during the month of August,[3] a growth which is likely down to increased interest in suburban and country property. While it was initially mere speculation that interest in property outside of cities would be the focus of purchasing activity within the real estate sector, we are now seeing it reflected in the data. What we do know is that a rush for mortgages is speaking to a sustained change in demand for bricks and mortar, though the question is whether this is a mere trend, or a ground-breaking change in the patterns of residential demand in the UK market for many years to come. These mortgage applicants are likely to have the diminishing time frame of the stamp duty cut and looming lockdown measures on their minds when deciding when to make a purchase.

This does not necessarily mean that mortgages are being approved at a record rate, with the number of loan products available to homebuyers falling by as much as 50% over the past 12 months.[4] This is ultimately a de-risking measure by mortgage providers, who see the precarious nature of the jobs market and volatility of house prices as a threat to their loan portfolios.

Buoyed by Stimulus

We maintain that while the markets appear to be incredibly buoyant and largely divorced from the perilous economic conditions, it is important to note that many indicators are buoyed by temporary policy supports which will eventually have to be withdrawn. Back in early September, the National Audit Office estimated that the first six months of the pandemic cost £210bn in taxpayer money, for schemes such as the furlough scheme and healthcare spending.[5] The economy can’t rely on government support forever, and the mounting bill is testament to a need to strike a balance between virus protections and the encouragement of economic activity. The economy can’t rely on government support forever, and the mounting bill is testament to a need to strike a balance between virus protections and the encouragement of economic activity.

Rising Unemployment

The pandemic has also caused significant atrophy to employment figures, with the ONS estimating the unemployment rate growing to 4.5%, while redundancies are at their highest since 2009.[6] Unfortunately, the more lockdown measures that are imposed, the more jobs are put at risk, as businesses are isolated from beneficial economic activity. This is ultimately going to affect demand for housing in certain sectors, as rising unemployment will destabilise the financial health of a significant proportion of the population. Notably, however, the main brunt of the unemployment is forecast to be borne by young people aged 16-24, given the disproportionate impact on sectors such as hospitality and events. The impact that this will have on residential real estate demand is therefore unclear, seeing as this demographic tends to comprise more renters or those living with their parents.

New Lockdown Measures

As we head into the winter in the face of rising cases, it’s highly likely that the British public will be faced with an escalation of lockdown measures. This will undoubtedly dampen the recovery headwinds that have been building over the past couple of months. How this affects the economy remains to be seen, but consensus is building that it will fall short of the V or U-shaped recoveries that were forecast for the economy. In truth, there is likely no letter in the alphabet that can accurately reflect the growth prospects of the economy at this point, with ultimate stability only likely to be granted on the introduction of a viable vaccine.

A second national lockdown is unlikely, with the government instead pursuing a patchwork of local lockdowns through its tiered system, with autonomy given at the local level as to how stringent measures are beyond a base level. We expect this to affect real estate markets at a local level intermittently, with viewings and conveyancing matters taking longer as a result.

Conclusion

While the run for the housing market continues to be sustained in October, there will undoubtedly be a drop off. For now, however, transactions and interest remain very high in the market. It is interesting to note that August is typically the quietest month for transactions in the year since everyone is often on holiday, yet market forces have conspired to make a remarkable few months in an even more remarkable year.


[1] https://www.halifax.co.uk/assets/pdf/september-2020-house-price-index.pdf

[2] https://www.niesr.ac.uk/latest-gdp-tracker

[3] https://www.fca.org.uk/data/mortgage-lending-statistics

[4] https://www.telegraph.co.uk/personal-banking/mortgages/mortgage-availability-falls-10-year-low-half-loans-pulled-market/

[5] https://www.theguardian.com/politics/2020/sep/08/uks-public-spending-watchdog-estimates-210bn-coronavirus-bill

[6] https://www.bbc.co.uk/news/business-54520521

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