COVID-19 UPDATE: RESIDENTIAL PROPERTY MARKET - RESIDENTIAL TO HOLD RESILIENT IN THE LONGER TERM - CBRE ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
COVID-19 UPDATE:
RESIDENTIAL PROPERTY MARKET
RESIDENTIAL TO HOLD RESILIENT IN THE LONGER TERM
MAY 2020 | JENNET SIEBRITS, HEAD OF RESIDENTIAL RESEARCH
CBRE 1 MAY 2020 | COVID-19
EXECUTIVE SUMMARY
• The market commenced 2020 with the highest level of mortgage approvals in February for six years.
A Boris Bounce started the year off positively • This reflected improved confidence after the decisive election win and reduced Brexit uncertainty.
• This momentum was expected to continue.
• The Government’s lockdown policy has caused the housing market to slow significantly.
• RICS sales expectations are much more negative than during the Global Financial Crisis.
But a Covid-19 Comedown followed
• During the lockdown only a few sales have progressed, with many deferred.
• The post lockdown recovery will depend on consumer confidence and the wider economic outlook.
• CBRE currently forecasts a 5.4% fall in GDP and a rise in unemployment to 5.6% in 2020.
Expecting a sharp shock to the economy • This suggests the GDP decline will be worse than the GFC, but the unemployment impact is lower.
• The market is unlikely to return to full strength until 2022, due to the wider economic downturn.
• Transactions to fall dramatically, ending the year 40% lower than 2019.
The downturn will negatively impact transactions • While the percentage decline is less than the GFC, sales are likely to be lower due to a lower base.
• Sales should pick up in 2021 and return to trend in 2022 as macro factors return towards trend.
• Initially, low sales volumes will make it difficult to determine the quantum of any price reductions.
• Prices are likely to fall in 2020, with a consensus expectation of between 5% and 10%.
Prices declines expected to be muted
• In the last two recessions (early-1990s and 2008-09) UK house prices fell by 18% from peak to trough.
• With low interest rates and bank/Government support measures, fewer distressed sales are expected.
CBRE 2 MAY 2020 | COVID-19
A POSITIVE START TO 2020…
There was a resurgence in the residential property market at the start of 2020. Buoyed by perceived clarity around Brexit and a conclusive
Conservative election win, confidence and activity returned with the Bank of England reporting the highest level of mortgage approvals in
February for six years. Initial estimates suggest there were c.300,000 sales in Q1. Looking specifically at the London new build market, Molior
data showed that sales in Q1 2020 were at their strongest for two years. CBRE’s performance mirrored this, with our residential unit sales 70%
higher than Q1 2019.
London Transactions 10-Year Average
7,000
New-Build Transactions
6,000
5,000
4,000
3,000
2,000
1,000
0
Q2 2011
Q2 2013
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Q1 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Q1 2020
Source: Molior, CBRE Research
CBRE 3 MAY 2020 | COVID-19
…BUT LOCKDOWN LED TO A SHARP SLOWDOWN
The outbreak of Covid-19 and subsequent lockdown policy caused the market to slow significantly. This was reflected in the CBRE Key Client
Survey, which showed a 70% fall in the number of new applicants and sales in the last two weeks of March, when compared with the start of
2020. The Royal Institute of Chartered Surveyors (RICS) Residential Survey was similarly negative. RICS Surveyors’ sales expectations are much
more negative than during the GFC and partly reflects the lockdown period.
60
40
Net balance (%)
20
0
-20
-40
-60
-80
-100
Feb-20
Feb-20
Feb-20
Feb-20
Feb-20
Feb-20
Mar-20
Mar-20
Mar-20
Mar-20
Mar-20
Mar-20
GFC
GFC
GFC
GFC
GFC
GFC
Jan-20
Jan-20
Jan-20
Jan-20
Jan-20
Jan-20
New Buyer Enquiries New Instructions Sales Expectations Price Expectations Tenant Demand Landlord Instructions
Source: RICS
CBRE 4 MAY 2020 | COVID-19
SALES ACTIVITY MAY BE LOWER BUT THERE IS LIGHT AT THE END OF THE TUNNEL
The housing market will go through a number of phases reflecting the Covid-19 restrictions and wider economic backdrop. During the lockdown
very few sales are concluding, but as restrictions are relaxed many more in-progress deals should reach completion. In the aftermath, the
economic backdrop becomes more influential and demand is likely to moderate. The market is unlikely to return to full strength until 2022.
Tentative Base Case Timeline
Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Phase 6 Phase 7
Jan - Feb Mar – mid Apr Mid Apr- May Jun – Sept Oct – Dec H1 2021 H2 2021
Covid-19
Pre-lockdown Restrictions Post Covid-19
Covid-19 period in the UK
Lockdown Lockdown
steadily relaxed
Lockdown lifted contained, social
period
distancing relaxed
Economic
growth improving, Economy
Employees
Collapse in GDP growth but continues to grow
Unemployment at furloughed Economy back to
Economic a record low
consumer
Sharp fall in GDP
returns following unemployment on
full strength
confidence sharp in Q2 the rise Unemployment
peaks
Brexit
Some sales put on
Lenders adapting,
Very few sales able hold during
desk-based
Strong market and to progress lockdown will now Needs driven Activity picks up
Housing valuations Sales return to
positive start to the progress demand arrives to with more sales
Market trend
year Zoopla estimate the market progressing
Applicant levels
370,000 on hold Viewings/listings
picking up
permitted
CBRE 5 MAY 2020 | COVID-19THE POST LOCKDOWN RECOVERY DEPENDS ON ECONOMIC RECOVERY
We can look back at previous recessions to illustrate how the housing market might react during this downturn. In both the nineties recession
and during the Global Financial Crisis (GFC), property sales halved. In the current downturn, CBRE expects a larger fall in GDP (5.4%) than in
previous recessions. With this in mind, one might expect a larger fall in sales of c.60%. However, this is unlikely for three reasons: 1) the rise in
unemployment is expected to be lower, 2) in both previous downturns the housing market had been booming, which isn't the case now, and 3)
declining sales during past recessions were exacerbated by external factors (i.e. MIRAS removal in 1990s) but dampened in the current crisis by
Government and bank support measures.
Transactions GDP (% Change) Unemployment Rate
14 2,500
12
GDP & Unemployment Rate (%)
10 2,000
Transactions (000s)
8
6
1,500
4
2
1,000
0
(2)
(4) 500
(6)
(8) 0
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: HMRC, ONS, CBRE Research
CBRE 6 MAY 2020 | COVID-19TIGHTER LENDING POST-GFC LED TO LOWER LOAN-TO-VALUE RATIOS
Before the GFC, average first-time buyer (FTB) loan-to-values (LTVs) were over 80%, and 95% mortgages were common. However, conservative
lending saw LTVs fall to c.70% in 2009. This reduced the ability for many to buy, resulting in a marked fall in sales. In the decade pre-GFC, sales
averaged 1.5m p.a., this has since reduced to c.1.1m. In the immediate lockdown period, lending standards tightened, but appear to have
relaxed slightly. Still, tighter lending criteria are likely to slow sales activity.
84
82
FTB Loan-to-Value ratio
80
78
76
74
72
70
68
66
Apr-05
Mar-08
Jun-09
Apr-10
Mar-13
Apr-15
Mar-18
Feb-06
Oct-07
Feb-11
Oct-12
Jun-14
Feb-16
Oct-17
Jun-19
Jul-06
Jul-11
Jul-16
Sep-05
Jan-14
Dec-06
May-07
Aug-08
Nov-09
Sep-10
Dec-11
May-12
Aug-13
Nov-14
Sep-15
Dec-16
May-17
Aug-18
Nov-19
Jan-09
Jan-19
Source: UK Finance
CBRE 7 MAY 2020 | COVID-19SHARP DOWNTURNS DON’T NECESSARILY EQUAL DEEP DISTRESS
During the GFC, the Government encouraged lenders to be more forbearing and increased support for at-risk households. As a result,
repossessions at 36,000 p.a. were modest compared with 54,000 p.a. during the 1990s downturn. We entered the current crisis with relatively
good affordability, due to lower interest rates and LTVs. The swift support measures announced for at-risk households through mortgage
payment holidays (used by 1.6m borrowers) is likely to once again limit the scale of repossessions. Lower supply of distressed properties, and
therefore price declines, appears likely despite a sharp economic downturn.
Repossesions Change in Average House Price
80,000 30
Change in Average House Price (%)
70,000 25
60,000 20
Repossessions
15
50,000
10
40,000
5
30,000
0
20,000 -5
10,000 -10
0 -15
1997
2014
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2015
2016
2017
2018
2019
Source: UK Finance, ONS, Land Registry, CBRE Research
CBRE 8 MAY 2020 | COVID-19AT C.700,000 TRANSACTIONS, FORECAST SALES WILL BE 40% LOWER
With a promising start, 2020 sales volumes were expected to be slightly higher than in 2019. In addition, there were around 370,000 transactions
in the pipeline. Covid-19 restrictions mean the only sales to complete in Q2 are those that had previously exchanged. As restrictions start to lift,
some stalled sales will resume and progress to completion in Q3, however, not all will progress. Past experience suggests around 40% will
remain on hold. Sales volumes in Q4 are likely to reflect wider economic concerns and estimated to be 40% lower. Compared with the GFC, this
is a lower percentage fall in sales, but the actual number of sales is likely to dip below the 2009 trough. Assuming no secondary infection and
double-dip economic downturn, sales should begin to pick up steadily in 2021 before returning to trend levels in 2022.
Covid-19 Transaction Timeline
Restrictions Social
Pre-Covid Lockdown ‘New Normal’
relaxed distancing
2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 2021 2022
900,000-
1,177,000 298,000 25,000 207,000 176,000 1,200,000
1,000,000
Source: ONS, Land Registry, Molior, Zoopla, CBRE Research
CBRE 9 MAY 2020 | COVID-19EXPECTING MODEST PRICE DECLINES IN 2020
The previous two downturns had been preceded by several years of double-digit house price growth. In both cases, peak to trough declines were
c.18%; the 1990s descent was spread over five years, while it took only 18 months in the GFC. The current economic decline will clearly put
downward pressure on prices. Post lockdown, it is likely vendors will resume marketing at ‘pre-Covid prices’, at this point the market will be
tested. The low sales environment and a lack of distressed sales may keep a floor under prices, but price declines of 10% cannot be ruled out.
Average Price Change in Average House Price
Change in Average House Price (%)
250,000 40
A CBRE survey suggest prices will fall 5-10% in Q2
Average House Price (£)
200,000 30
20
150,000
10
100,000
0
50,000 -10
0 -20
Q1 1986
Q1 1997
Q1 2008
Q1 2019
Q1 1981
Q1 1982
Q1 1983
Q1 1984
Q1 1985
Q1 1987
Q1 1988
Q1 1989
Q1 1990
Q1 1991
Q1 1992
Q1 1993
Q1 1994
Q1 1995
Q1 1996
Q1 1998
Q1 1999
Q1 2000
Q1 2001
Q1 2002
Q1 2003
Q1 2004
Q1 2005
Q1 2006
Q1 2007
Q1 2009
Q1 2010
Q1 2011
Q1 2012
Q1 2013
Q1 2014
Q1 2015
Q1 2016
Q1 2017
Q1 2018
Q1 2020
Source: Nationwide
CBRE 10 MAY 2020 | COVID-19CONTACTS Luke Mills Hemant Kotak Jennet Siebrits Max Povinelli Managing Director Executive Director Executive Director Senior Analyst Residential Head of UK Research Head of Residential Research Residential Research E luke.mills@cbre.com E hemant.kotak@cbre.com E jennet.siebrits@cbre.com E max.povinelli@cbre.com T +44 207 182 2949 T +44 207 182 3878 T +44 207 182 2066 T +44 207 182 2659 M +44 7810 455 950 M +44 7825 861 590 M +44 7985 876 831 M +44 7595 401 550 About CBRE Group, Inc. CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2019 revenue). The company has more than 100,000 employees (excluding affiliates) and serves real estate investors and occupiers through more than 530 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com. © CBRE Limited CBRE 11 MAY 2020 | COVID-19
You can also read
