Press release

22 Apr 2020 London, GB

UK housing market’s largely decent start to 2020 ended by coronavirus – EY ITEM Club comments

The UK housing market ended 2019 and started 2020 on the front foot as it benefitted from reduced uncertainties following December’s decisive General Election result.

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  • The UK housing market ended 2019 and started 2020 on the front foot as it benefitted from reduced uncertainties following December’s decisive General Election result. This was evident in mortgage approvals for house purchases rising to a six-year high in February and prices firming markedly on most measures.
  • However, the Land Registry/ONS today reported annual house price inflation fell back to 1.1% in February after climbing to an eight-month high of 1.5% in January from 1.2% in December, and a 2019-low of 0.7% in August and July. Prices fell an unadjusted 0.6% month-on-month in February.
  • In contrast to the softer national performance in February, London prices rose 2.3% year-on-year, which was the strongest rise since October 2017 and up from 1.3% in January.
  • The early-2020 upturn in the housing market has been brought to an abrupt halt by the impact of coronavirus on the economy, households and people’s movements.
  • Indeed, the housing market looks set to be essentially at a standstill for the next few weeks at least.
  • The expectation is that house prices will come under downward pressure from a sharp rise in unemployment and people’s incomes being hit (despite the Government’s supportive measures) as well as lower consumer confidence and increased caution.
  • Once lockdown restrictions start to be lifted, housing market activity should progressively pick up. Even so, given the impact on the economy, the anticipated rise in unemployment and the impact on many people’s incomes, the housing market looks unlikely to return to the levels seen at the start of 2020 for some time.
  • EY ITEM Club believes that house prices could fall back 5% over the coming months. However, the speed of recovery will be dependent on how well the economy rebounds from the impact of coronavirus and how quickly the labour market recovers. We expect a decent recovery to start in the second half of 2020 and to continue in 2021. Very low borrowing costs with the Bank of England taking interest rates down to 0.1% should provide some support.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

The Land Registry/ONS reported that the year-on-year increase in house prices dipped to 1.1% in February from an 8-month high of 1.5% in January. It had previously climbed to January’s high from 1.2% in December and 0.7% in August and July 2019, which had been the lowest rate since October 2012.

House prices fell an unadjusted 0.6% month-on-month in February. This followed a drop of 0.3% in January. Prices had dipped 0.3% month-on-month in February 2018.

London prices rose 2.3% year-on-year in February, which was the strongest rise since October 2017 and up from 1.3% in January. The annual increase in UK house prices was limited in much of 2019 and 2018 by falling year-on-year prices in London. Indeed, London house prices fell continuously year-on-year between February 2018 and August 2019, with a peak annual decline of 3.0% in May. London house prices rose 0.2% month-on-month in January.

It needs to be noted that the ONS’ measure of house price inflation lags many of the other measures as it is based on mortgage completions.

Data for house prices in March has also been mixed. The Halifax reported that house prices were flat month-on-month in March, which followed four months of increases. The three-month/three-month gain in house prices moderated to 2.1% in the three months to March from 2.8% in the three months to February. However, the annual rise in house prices rose back up to 3.0% in March after falling back to 2.8% in February from 4.1% in January (the highest level since February 2018). Meanwhile, the Nationwide put annual house price inflation at a 30-month high of 3.0% in March (after a rise of 0.8% month-on-month). However, the Nationwide commented that the cut-off point for its survey is just before the end of the month so the survey would not have fully captured developments after the Government imposed the lockdown.

Housing market picked up at start of 2020 but now coming to a standstill

Latest data from the Bank of England shows mortgage approvals for house purchases rose to 73,546 in February, taking them to the highest level since January 2014. This was up from 71,344 in January, 68,122 in December, 66,074 in November and a 5-month low of 65,327 in October.

The data provides further evidence that the housing market was benefitting early on in 2020 from increased confidence and reduced uncertainties following December's election. This was also evident in survey evidence. The February RICS survey said that new buyer enquiries, agreed sales and fresh listings all reportedly increased over the survey period, extending a run of positive readings going back to December.

However, housing market activity took a substantial hit from coronavirus during March, reflecting the increasing restrictions on people’s movements as well as the impact on confidence and economic activity.

The Government has advised homebuyers and renters to delay moving as much as they can while the emergency measures are in place. The Government has further stated that no visitors are allowed to visit properties while “stay-at-home” measures are in force, including estate agents and surveys as well as potential buyers. Meanwhile, some mortgage lenders have started to temporarily restrict new mortgages.

The Halifax observed that the housing market started March similarly to early-2020 with sustained buyer and seller activity, but it ended the month in very different territory due to coronavirus and the country’s response. The March RICS survey observed that “having started the year showing a marked pick-up in momentum, sentiment across the UK housing market predictably deteriorated sharply in March as highlighted by the latest RICS UK Residential Survey results. Government measures introduced to combat the spread of the coronavirus have required estate agents to close their offices, meaning much activity has effectively been frozen over the coming months. The situation is evolving rapidly, and it remains unclear how long such restrictions will remain in place. However, as is the case across many sectors of the UK economy, these closures are expected to have a significant impact on the outlook for the market this year.

Both the Halifax and the Nationwide have observed that the shortage of transactions over the coming months will make gauging house price trends difficult.