UK housing market risks add to consumer woes

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●  A petri dish for economic sentiment: The resumption of housing market activity in England some seven weeks after the coronavirus lockdown was imposed will be an interesting experiment. It may provide the best gauge yet about the scale of the negative confidence shock from the pandemic. Marginal activity in the housing market, in terms of housebuilders’ willingness to increase supply, buyers’ willingness to take on long-lived liabilities and banks’ willingness to supply mortgages, reflects economic agents’ confidence about the future.

●  Near-term outlook: Partly owing to the lagged impact of the negative economic developments during the lockdown when activity was on hold, house building and transactions will likely soften in the coming months. A near-term slump in demand linked to rising unemployment and the collapse in consumer confidence point to a correction in national house prices over the next few months. The fall in prices will likely be much less than the huge drop in consumer confidence – see chart. Confidence, as well as forward looking data for the housing market, will likely partly snap back in June to a less subdued level as the lockdown is eased. The c5% yoy correction as signalled by the April RICS house price survey seems more realistic, in our view, with risks tilted to the downside.

●  Knock-on effects on consumption: UK household spending is highly sensitive to changes in net wealth. The bulk of households’ debt is mortgages (roughly three-quarters) while around half of their accessible wealth (total wealth excluding pensions) is tied up in the housing market. Negative wealth effects from falling house prices will weigh on the rebound in household consumption in the near term. It will reinforce the urge by households to raise their precautionary savings – see here.

●  Regional gaps: London and some of its neighbouring markets are typically much more cyclical than regional UK markets. The average price of a house in London was c£480,000 in February – double the national average. Whether the correction in London exceeds the national average will depend on two factors: 1) the extent to which job losses are distributed between London and the regions; and 2) the extent to which foreign investors continue to view London as a potential safe haven as the UK leaves the single market – probably at the end of the year. Looking further out, a likely shift towards remote working could reduce demand for inner-city housing while raising marginal demand for cheaper and more spacious housing in commuter belts.

●  A confidence game: While the rise in unemployment from the coronavirus recession will weigh on near-term housing demand, the subsequent recovery in employment will drive the housing market recovery over the medium term. Unlike in 2008, housebuilders and banks have healthy balance sheets. They will not accentuate any correction. The timing of the upturn therefore depends largely on how quickly household confidence improves into H2 2020. If confidence does not pick up on a sustained basis, housing activity could slump by more than we anticipate. In such an outcome, the government would likely intervene to boost demand by either making the Help to Buy mortgage subsidy more generous or, perhaps, as some commentators have suggested, offering a holiday on stamp duty.

Kallum Pickering

Senior Economist

+44 20 3465 2672

kallum.pickering@berenberg.com

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This material is intended as commentary on political, economic or market conditions for institutional investors or market professionals only and does not constitute a financial analysis or a research report as defined by applicable regulation. See the "Disclaimers" section of this report.

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