One could be forgiven for thinking that OBR stands for the Office for Bearish Reports; it doesn’t, it stands for the Office for Budget Responsibility and it is an independent body with no axe to grind or market position to defend. It is not a housing report, but if we dig into the detail there are some important housing forecasts for us all to ponder.
Setting the scene – the largest decline in GDP in centuries…
This week’s 160-page Fiscal Sustainability Report makes Bleak House seem positively rosy. Before we have left the Executive Summary we are told that:
The UK is on track to record the largest decline in annual GDP for 300 years, with output falling by more than 10 per cent in 2020 in all three scenarios (and contracting by a quarter between February and April);
The unemployment rate peaks at 10 per cent in the third quarter of 2020 in our upside scenario; at 12 per cent in the fourth quarter in the central scenario; and at 13 per cent in the first quarter of 2021 in the downside scenario.
What does this mean for the UK housing market?
Those who know me well know that I am not a pessimist. My glass is more often half full than half empty. However, this OBR report does leave me looking for Reasons to be Cheerful Parts One, Two and not just Ian Dury’s Part Three.
A cut in Stamp Duty – is it the right tool for the job?
I have commented before that I think that a Stamp Duty cut is the wrong tool for the job and the OBR seems to share that view. It expects the Stamp Duty Cut to ‘truly’ add just around 25,000 housing transactions and pull forward c.75,000 from future, so it mainly robs Peter to pay Paul.
On the plus side, the OBR does believe that house prices will be about 0.5 per cent higher than they would be without the Stamp Duty cut.
The OBR’s central forecast is for 753,100 housing transactions in 2020, 40 per cent below its previous estimate (made in March 2020) of 1,245,800 a fall of almost 500,000. It does, however, expect housing transactions of almost 1.5m in 2021 some 15 per cent ahead of its previous estimate. On a 5-year view, the OBR’s central case expects 258,000 fewer housing transactions because of COVID. The takeaway here being plan for a ‘V’ shaped recovery in housing transactions.
The OBR’s central case is that house prices will fall 6.4 per cent in 2020 and trough in Q1 2021 after a fall of 8.2 per cent (their upside case assumes a peak to trough fall of just 2.5 per cent and their downside case a fall of 16.4 per cent). The central case sees house prices returning to their pre-COVID levels in Q2 2022 (upside case Q2 2021 and downside case Q1 2023).
These are national forecasts – the key to selling in this market will be showcasing the right property to the right buyer.
These are national forecasts and need to be considered in that context. The picture is actually made up of individual housing markets, individual streets and individual houses and they will all perform differently.
The key to selling in this market will be showcasing the right property to the right buyer, national statistics are not important to the buyer who has just seen the ‘one’ home they just have to buy. Fear Of Missing Out will trump depressing macroeconomic data.
Cuts rarely help, but pumping more money in, might
What the OBR analysis tells me is that applying a Stamp Duty cut to the housing market is like trying fix a broken leg with sticking plaster; it might work, but the chances are it won’t.
Help to Buy has worked and is working, at times creating a two-speed housing market. Surely ‘doing whatever it takes’ would mean opening up Help to Buy to the whole market. Yes, pumping more money into the housing market may increase house prices, but is it any different than the Bank of Mum and Dad?
And in these uncertain times wouldn’t rising house prices provide us with at least one reason to be cheerful?
Anthony Codling is a housing market analyst and the CEO of the property platform Twindig.