Right now, prophesy is a mug’s game, particularly in the residential property sector. If you need convincing of that claim, go read the forecasts made by some of the UK’s ‘experts’ back last April after lockdown was imposed countrywide.
As far as UK transaction volumes were concerned, Knight Frank confidently predicted the 2020 numbers would fall by almost 40%, down to under 750K, and Savills were even more downbeat, predicting between 565K and 740K transactions for the year! As it turned out, total transactions topped the million mark.
Forecasts for selling prices were equally dire, with virtually everyone predicting severe falls. Property pundit and buying agent, Henry Pryor, posted a tweet suggesting that anyone genuinely interested in selling during the pandemic should consider reducing their asking price by 30%! The average selling price for the year ended up over 7% ahead according to the Nationwide.
You’d have thought some lessons would have been learned about the folly of forecasting such an unpredictable, febrile market, one that could be knocked off course completely by an unrelated event, but the latest lockdown and the imminent end of the SDLT holiday has prompted another round of doom-laden prophesies. Some of the more hysterical voices are suggesting we will see prices collapse by up to 15% in Q1 alone.
There are lots of people out there who make a living out of forecasting the market, myself included, but, this year, I suggest you ignore those forecasts. It’s time to plan for a range of possible outcomes.
There’s no algorithm or formula – or even a gut-feeling - that can take into account how people and markets are going to react as the pandemic plays out - we’re in uncharted waters. Who would have thought that, in December of last year, a positive balance of UK Consumers would believe their Household Finances will improve in 2021? Very few of us, I’ll be bound. But take a look at the chart below and you’ll see confidence at the end of 2020 was improving in all the key criteria that directly affect the housing market.
Crucially, you’ll notice the lilac line, (how people believe their own Household Finances will fare in the coming year) crossed into positive territory in the December survey. So, despite the disastrous economic effects of the lockdown, the horrors of what might happen as BREXIT plays out in real life, and the very real personal health risk, a majority (albeit a small one) of respondents to the excellent and reliable GfK/NOP survey, still feel they’ll be better off come next Christmas.
It is very difficult to assess how the Stamp Duty holiday and its abrupt termination at the end of March will affect the dynamics of the market – opinions vary wildly. However, despite the almost inevitable fall in transactions in the immediate weeks after it ends, I am convinced that the underlying state of the market will ensure numbers of transactions will still be close to a million by the time we get to the end of the year.
Another of my favourite measures of how the market is moving is the RICS monthly survey. It is not a perfect dataset by any measure. The sample size is relatively low, particularly when looking at regional data, but, as a finger on the pulse of market activity and sentiment, it is a reliable gauge of how those on the frontline are feeling. As part of a wider look across a range of metrics, I find it more often right than wrong when it comes to short term market movements.
The December survey suggests that while New Buyer Enquiries and New Vendor Instructions are down on their three-month averages, they are still broadly positive. The most worrying aspect is the short-term outlook. A significant majority of the surveyors in the survey believe both prices and volumes will fall in the next three months. Worrying, yes, but hardly surprising, and no indicator of how things will play out once the Stamp Duty hiatus works itself out and the majority of us have been vaccinated against Covid.
You can probably see where I’m heading with this.
Every year, for the past fifteen at least, I’ve set out my view, in broad terms, of where the market is headed in the months ahead. In private, around the table with Clients, I’ve advanced these theories as part of the process of developing strategy to drive best commercial advantage from the prevailing market dynamics.
Not this year though.
This year, the unprecedented conditions make a variety of outcomes equally possible as we emerge from the winter market, the latest lockdown and the hiatus caused by the huge volume of transactions started in Q4 of 2020. While I am confident my forecasts over recent years would stand up to scrutiny, even the one I set out last April, I believe it is quite impossible to predict the market with any confidence. Some might even say, reckless. It would be ‘finger in the air’ economics, prophesies Mystic Meg might disseminate, perhaps based on Uranus being in the ascendant.
I believe the more extreme warnings regarding the effect of the end of the Stamp Duty holiday on March 31st are over-blown and any impact it has on the market will be short-lived and will even itself out over the course of the year.
March 31st is also significant in that it marks the end of the extraordinarily successful Help to Buy scheme (HtB 2013-21) in its current format. From April 1st, only first-time buyers will be eligible for the scheme (HtB 2021-23) and their aspirations will be dampened by price limits that vary by region. However, although the current scheme doesn’t end until March 31st, the builders stopped taking HtB 2013-21 reservations back in December and anecdotal evidence to date suggests that the demand for HtB2021-23 is good. The regional limits are realistic and second-time buyers using Help to Buy were relatively few, consequently, the effect on the developers will not be as onerous as first feared. Certainly, it will not dramatically affect the overall market in terms of volumes or values.
The other big issue the developers need to consider is the shift in demand from apartments to houses. Partly driven by the cladding scandal and partly by the paradigm shift in lifestyle choices and the Work From Home revolution. This change has been gathering pace for a while and the mix on most new developments, other than city-centre schemes, is starting to reflect that. There’s little doubt the change in sentiment will have an adverse effect on apartment values, but I believe this will be balanced by an increase in the demand for houses.
So, here are three top-line scenarios, that, in my opinion, cover the potential outcomes we face in 2021. Let’s explore each and consider what the resulting effect would be on the market.
1. Fall in confidence due to issues concerning the pandemic. Failure of the vaccination programme, emergence of a new strain, continuation of the lockdown, potentially extended to include the closure of the construction industry. Any major set-back in the fight against the virus could have a significant effect on consumer confidence, but I struggle to see it affecting things any more than the super-shock of the first lockdown last March. Any dip in activity would be limited until buyers were allowed back and I believe the trading pattern would be similar to last year where the sales that would have taken place during lockdown, happened when the market was re-opened. In my opinion, these circumstances would have a negative effect on volumes, but not a catastrophic one. Even if we encountered another Covid setback, I’d still predict annual volumes in excess of 900K and prices to stay broadly where they are now.
2. Severe economic downturn as a result of the pandemic, the cost of Government support, mass unemployment and BREXIT issues. A credit squeeze resulting in a substantial reduction in mortgage availability. This is the one we should all fear. And one we should all have a plan for. I believe this is the least likely of three scenarios I have set out, but it would undoubtedly be the most damaging. If you take away the ability to borrow, you take away the ability to buy, regardless of all other factors. I’m no economist, but if we did experience this type of setback, I don’t believe it would be nearly as severe as 2008/9 for all sorts of reasons. Above all, there is an underlying demand that exceeds supply and that will underpin values even if volumes suffer until the recovery. Even allowing for a very substantial downturn, I simply can’t see prices moving back more than 10% to 15% at worst. However, volumes could fall back by as much as 30% from the average of the last five years.
3. Successful distribution of Covid vaccine leading to a dramatic improvement in R (rate of infection) and a relaxation of lockdown restrictions before the peak of the spring market at the end of March. There is every possibility that, just as the Stamp Duty Holiday ends, the lockdown eases and life starts to get back to something resembling normal. First jab vaccinations are already running at over 5 million and, with three different vaccines approved for use in the UK and a very determined Government, it really looks like we’ll have vaccinated all the most at-risk groups before the end of March. When we start to see restrictions being lifted, pubs and restaurants reopening and people going back to work, confidence will return and the likelihood is that there’ll be an upturn similar to the one we experienced last year after Lockdown 1. In this scenario, expect another surge in prices, possibly as much as 10% for the most sought after property in the right locations.
So, I sense you thinking, what use is a forecast that sets out three different outcomes with dramatically different consequences? Well, if you accept the premise that the unique set of circumstances surrounding the market right now, means that forecasting is little more than a lottery, it is time to take the advice of one of my great heroes, Dwight D Eisenhower. His point was that plans seldom go the way we think they will, but having one, one that allows for contingencies, gives you the flexibility to strategically pivot when the situation calls for it
Finally, why buy the canary? A smart, nimble and flexible plan is a no-brainer, but those contingency measures only work if a change in circumstances is spotted before it becomes unmanageable. Any nimble plan is pretty much useless without an effective, sensitive and reliable early-warning system – much like the canaries that accompanied miners down into the pits for almost a hundred years
Establish the Key Performance Indicators that are your reliable early-warning signals, measure them meticulously and be prepared to act quickly and decisively. They’re your canaries, make sure they’re well cared for.
Matt Fleming is a Residential Property Consultant advising marketing agencies and housebuilders direct. He has specialised in residential property for over 35 years and, during that time, has worked with most of the UK’s top 20 developers. The thoughts and sentiments in this article are entirely his own and do not necessarily reflect the views of the businesses he works with.