What does the Covid recession mean for the future of house prices?

Confidence has been restored to the property market but buyers fear values will drop again, writes Adam Williams

The property market and economic performance are usually entwined: buying activity and house prices rise during periods of economic growth and slow down when the nation’s finances worsen.

Jobs are lost and finances are squeezed during a recession, meaning house price rises are tempered and cautious buyers hold off from purchasing. But the start of the current recession has not played out in the usual way. This is partly because we have entered one after a public health crisis, meaning that the financial system has not frozen in the same way it did in 2008. The Government has also taken steps to protect jobs in the short term and prop up the housing market.

Property transactions dwindled when lockdown began and house sales were effectively banned between March and May. There were fears that confidence in the market would disappear and house prices would crash.

To stimulate activity, Rishi Sunak, the Chancellor, announced in July that stamp duty would be waived for the vast majority of house purchases. Those who buy properties worth £500,000 or less will pay no tax, while those who purchase more expensive homes will benefit from reduced costs.

The stamp duty holiday will run until March 31 2021 and will save the average buyer £2,460 in tax. Stamp duty is levied on house purchases in England and Northern Ireland, and similar cuts to devolved property taxes were later announced in Scotland and Wales.

This move has quickly restored confidence to the property market and transaction figures have rebounded. However, buying a home today is not without its risks.

The main concern for buyers now is that the worsening economic conditions could cause house prices to fall soon after purchase, potentially leaving them in negative equity. This means they end up owing more than the value of their home and tends to affect people with small deposits.

There are also fears that the Government’s furlough scheme has delayed the inevitable and that hundreds of thousands of people will lose their jobs when it ends in October.

Neal Hudson of BuiltPlace, an analyst, said: “The almost inevitable negative impact on the market will be felt when furlough, mortgage payment holidays and the stamp duty holiday end towards the end of this year and in early 2021.”

Even those who are eager to buy may be denied a mortgage by banks. Self-employed workers and first-time buyers have seen the number of loans available fall. Some buyers may prefer to delay their purchase and wait to see how the recession plays out. In a “V-shaped” recovery, Britain’s economy would bounce back quickly but a slower return could mean the current mortgage woes continue.

Ross Counsell of Good Move, a property website, said there was a risk that supply could shrink if sellers feared they could not achieve their desired sale price. “Sellers may also be less inclined to accept lower offers on their homes to protect their finances,” he said. “Some may even take their homes off the market until the economy picks back up.”

However, those thinking of delaying their purchase because of the uncertainty do not have long, given that purchases must complete before March 31 to benefit from the stamp tax giveaway.

‘Some sellers may take their homes off the market until the economy picks back up’