The property forecast lottery
Paul Stockwell, Chief Commercial Officer
Commentators' house-price predictions have been throw into doubt amid Covid-19.
When commentators make predictions about house prices, the experts normally land within a couple of percentage points of each other.
Not this time. The pandemic has rendered efforts to call the future performance of the property market more of a lottery than a science. In fact, predictions from many of the industry’s most well-known names range all the way from a decline of 3% to 23% in the residential market.
It’s an incredibly wide field, symptomatic of an incredibly unusual and unprecedented global event. It’s very difficult to judge what will happen to the UK’s house prices when lockdown ends.
The unknown quantity driving all the speculation is unemployment. The furlough scheme marks the first time in history that the UK government has stepped in to pay the salaries of workers who may have unfortunately otherwise been made redundant.
Depending on the underlying economy, the employment prospects of those people, once the Chancellor ends the scheme, are largely unknown. It is unprecedented.
So that’s how we went from a narrow band of forecasted price rises at the start of the year to this — a pool of forecasts as wide as they are deep.
Only three months ago, the ‘Boris Bounce’ was getting lots of media attention and house price predictions were relatively consistent. Leading commentators, such as, Rightmove, Knight Frank and the Royal Institution for Chartered Surveyors were all forecasting a rise of 2%, Zoopla a rise of 3%, Savills predicted growth of 1% and Halifax was hedging its bets with a predicted increase of somewhere between 1% and 3%1. All these predictions were well within the margin of error.
Then Covid-19 arrived on our shores, and just look at the variation in predictions now.
Knight Frank estimates a 3% fall over the remainder of the year. The Centre for Economics and Business Research has calculated a 13% fall, and Deutsche Bank believes the decline could be as much as 23%, with 9% its lowest estimate2. Lloyds Bank expects a drop of 5% this year and Savills’ best case scenario is also a 5% fall, though its prediction actually ranges from 5% to 10% — a sign of just how difficult it is to judge2.
This sort of divergence in opinions would have been unimaginable at the start of the year and, though unemployment will be inextricably linked to pressure on housing affordability when the country returns to normal, it is significant that predictions for the labour market don’t vary as wildly.
The Office of Budget Responsibility predicts unemployment will rise to 10% in Q2 this year. It also says that GDP could fall 35% if a three-month lockdown is followed by another three months during which measures are gradually lifted. The Bank of England predicts that the economy to contract by 14% this year and expects the unemployment rate to rise to 9% in Q2. KPMG predicts unemployment of 7% in 2020 overall.
It’s not like the country hasn’t seen these levels of unemployment before, so why the trouble in making predictions? The rate of people out of work reached 8.5% following the 2008-09 financial crisis, 10.7% after the recession in the early 90s, and 11.9% in the 80s3.
So it must be the trajectory of the UK’s recovery that is the big unknown. Indeed, the redundancy prospects of the 27%4 of UK workers now furloughed are a mystery.
A quirk of the housing market distorts the picture even further. The aftermath of the financial crisis showed us that, for many, moving home is not a necessity. Transaction levels remained stubbornly low for years and, in the run up to Brexit, a decline in house prices in London and the South East was probably more muted than it might have been because a lot of people just chose to stay put in instead. This reduced supply and put a floor under prices. In a falling market, every postponed house purchase is effectively a vote against selling up short of what a vendor thinks their property is worth.
That would be a secondary effect if the market began to soften but all eyes will be on the employment prospects of UK workers. Economists have been discussing the prospects of a V-shaped economic recovery after Covid-19. If the labour market enjoys one, it would not be a surprise to see prices hold up much better than expected.
But no one has unfurloughed 7.5million workers in the history of this country — and everything is likely to flow from how successfully that can be done.
Notes to editors
1Housing predictions for 2020 before the pandemic - Rightmove, Zoopla, RICS, Savills, Halifax.
2Housing predictions for 2020 since lockdown - Knight Frank, Savills, CEBR, Deutsche Bank.
3Labour market statistics time series
4ONS: Furloughing of workers across UK businesses
This blog was featured on Mortgage Strategy.