Second wave may pull house prices back down - Capital Economics
UK Housing

Second wave may pull house prices back down

UK Housing Market Update
Written by Andrew Wishart

The second lockdown will have a smaller immediate impact than the first as the housing market is allowed to remain open this time. But it will also put the economic recovery into reverse and push the unemployment rate up to 9% next year. With policy support for the housing market fading at the same time, it looks increasingly likely that prices will fall in 2021.

  • The second lockdown will have a smaller immediate impact than the first as the housing market is allowed to remain open this time. But it will also put the economic recovery into reverse and push the unemployment rate up to 9% next year. With policy support for the housing market fading at the same time, it looks increasingly likely that prices will fall in 2021.
  • The first lockdown caused housing market activity to plummet as estate agents were forced to close their offices and in-person viewings were banned. Not surprisingly, buyer demand fell sharply, transactions were down by more than half, and house prices dropped by 3% between April and June. (See Chart 1.)
  • The impact will be smaller this time around because estate agents can remain open and viewings can go ahead. There are already a lot of sales in the pipeline so mortgage approvals and transactions will exceed pre-virus levels for the next couple of months at least. And with the furlough scheme and mortgage holidays extended, and the stamp duty cut still incentivising transactions, the immediate impact may be small. The main risk is that the lockdown weighs on sentiment like the first one did. (See Chart 1 again.)
  • However, the second lockdown will put the economic recovery into reverse. And severe restrictions will probably remain in place in some form in December and January too. As a result, we now expect employment to drop by 2 million (6%) from its pre-virus level compared to 1.3 million (4%) previously. (See here.) That points to a larger fall in house prices than in the financial crisis. (See Chart 2.) Meanwhile, the unemployment rate may rise to 9% by Q4 2021, exceeding the peak of 8.4% after the financial crisis.
  • Extraordinary support from policymakers has delayed the consequences of the pandemic for employment, household incomes, and the housing market. As a result, house prices have surged, completely reversing the fall in the first lockdown and taking annual growth up to 5.8% y/y in October – the fastest since 2015.
  • But we doubt that the housing market can continue to outrun the economic fundamentals when policy support is withdrawn next year. While the furlough scheme and mortgage holidays have been extended, to December and January respectively, unemployment will still be rising when they end bringing a risk of rising arrears and repossessions. And the stamp duty holiday is due to end in March, which will cause a sharp fall in buyer demand.
  • That said, a house price crash isn’t in the offing. We expect interest rates to stay at their current levels or lower for the next five years, ensuring mortgage affordability remains very high. And with banks much better capitalised than in 2008 we expect them to continue to exercise generous forbearance, reducing the number of repossessions as unemployment rises and so limiting forced sales. The upshot is that any fall in house prices should be limited.
  • A strong outturn is all but guaranteed in 2020 after the recent surge in house prices. But the new lockdown, higher unemployment, and fading policy support mean there is a growing likelihood that house prices reverse some or all of their 2020 gains in 2021.

Chart 1: RICS House Price Expectations & House Prices

Chart 2: Employment & House Prices (% y/y)

Sources: RICS, Nationwide

Sources: Refinitiv, Capital Economics


Andrew Wishart, Property Economist, +44 7427 682 411, andrew.wishart@capitaleconomics.com