History suggests that large falls in employment can lead to big falls in house prices. The furlough scheme, mortgage holidays, and a moratorium on possessions have insulated the housing market from the effects of this crisis so far. But after that support is withdrawn next year, there is a risk that house prices fall.
- History suggests that large falls in employment can lead to big falls in house prices. The furlough scheme, mortgage holidays, and a moratorium on possessions have insulated the housing market from the effects of this crisis so far. But after that support is withdrawn next year, there is a risk that house prices fall.
- At face value, our forecast that employment will fall by 4% by early 2021 points to a big fall in house prices. (See Chart 1.) Of course, every recession is different. This one has been distinguished by extraordinary policy support, generous forbearance by lenders, and job losses being concentrated in the hospitality sector and among lower paid workers that were engaged in routine work. All three characteristics have insulated the housing market from the effects of COVID-19 so far.
- The moratorium on repossessions until January 2021 and mortgage payment holidays of up to six months have prevented the rise in the unemployment rate, from 3.8% to 4.8%, leading to a rise in the number of mortgages in arrears and homes being repossessed.
- Moreover, the drop in employment has also primarily fallen on the young and low paid, who tend to rent. (See Chart 2.) The blue bars on Chart 2 show that 16-24 year olds account for most of the 1.7% fall in employment since the pre COVID-19 peak in February. Only 1% of owner occupier mortgages are held by households in this age group.
- Recent revisions to the official data also confirm that renters have been hardest hit by the fall in employment. (See here.) By contrast, employment in highly skilled occupations rose between Q1 and Q3. So employment among those most likely to be homeowners with a mortgage has not yet fallen much at all.
- However, the worst impact of the recession on homeowners could be yet to come. While employment fell by 566,000 between February and September, another 3.3 million were still on the furlough scheme in August. The black bars on Chart 2 show that the majority of those still on the furlough scheme were in the 35-49 and 50-64 age groups. When the furlough scheme ends, job losses are likely to be largest among these individuals. And these age groups account for three quarters of owner occupier mortgages, so the impact of job losses on arrears and repossessions has probably been postponed rather than avoided.
- Admittedly, the extension of the furlough scheme to next March will delay job losses, and if a vaccine is rolled out quickly, a stronger economic recovery could limit the number of redundancies. But our central forecast remains that around a quarter of those still on furlough in August will eventually lose their jobs, indicated by the purple diamonds on Chart 2. With the furlough scheme set to end shortly after mortgage payment holidays and the moratorium on possessions are due to expire, we expect this to lead to a rise in forced sales.
- Overall, it looks like the furlough scheme is still shielding the housing market from the economic effects of COVID-19. The distribution of job losses may continue to be concentrated on renters. But homeowners will surely be affected too. As a result, we see a growing risk that house prices fall in 2021.
Chart 1: Employment & House Prices (% y/y)
Chart 2: Contributions to Change in Total Employment since Pre COVID-19 Peak (ppts)
Sources: Nationwide, Refinitiv, Capital Economics
Sources: ONS, HMRC, Capital Economics
Andrew Wishart, Property Economist, +44 (0)7427 682 411, firstname.lastname@example.org