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COVID-19: a Black Swan event

Anthony Codling reviews the longest week in the property world.

Anthony Codling

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Where we are now?

They say a week is a long time in politics and that may well be the case, but last week was probably the longest on record for the UK housing market.

The speed at which we have moved from a recovering and optimistic housing market to one in complete lockdown has been staggering. Not since the Second World War has the market come to such an abrupt halt and I would suggest that the war on the Corona Virus is in fact another world war.

Covid-19 is a Black Swan event
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Anthony Codling

I firmly believe that falling housing transactions will cause more harm to the residential sector than falling house prices. When the housing market is in lockdown (i.e. no transactions) house prices are somewhat irrelevant. House prices can only be established when properties are bought and sold and rents are only a matter of record when contracts are signed.

I would expect to see upward pressure on house prices as the Corona clouds lift for a number of reasons:

  • Covid-19 is a Black Swan event
  • The outbreak of Covid-19 is a textbook definition of a Black Swan event – an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.
  • Before the outbreak of Covid-19 the housing market’s health was improving, there was nothing fundamentally wrong with it, demand was growing, supply was increasing and house prices were rising modestly. If Covid-19 wasn’t here the UK housing market would be doing just fine.
A structural imbalance of demand and supply of housing

Every time I speak to an estate agent they tell me they would like more homes to sell and more houses and flats to let, a story I that am sure is true for every agent across our country. In my former role as a housing market analyst I regularly met with the UK Government to discuss what could be done to solve the housing crisis. There is, in my view, only one answer: build more houses and build them where people want to live. There is no short-term fix.  I believe that we would need record levels of housebuilding for at least the next 25 years to make just a dent in the problem.  The good news is that we can do this, we have done it before, however unfortunately it took a world war to make it happen. I view Covid-19 as the Third World War so maybe some good will come from this crisis.

Recessions hit transactions more than they do house prices

During the Global Financial Crisis Land Registry house prices peaked in September 2007 at £195,000 and troughed in March 2009 at £159,000 a fall of 18%. We may have had a decade of austerity, but house prices reached their lows within 19 months and then started on the path to recovery.  House prices eclipsed their prior peak in May 2014 and latest data suggests that average prices as we entered 2020 were £252,000 some 29% above the 2007 peak.

In my view house prices were shielded by housing transactions. According to the Land Registry housing transactions in England & Wales fell from 1.3m in 2007 to 0.6m in 2008, a fall of more than 50%. Unlike house prices housing transactions have yet to reach new highs. In 2019 housing transactions were still around 25% lower than their 2007 levels.

Transactions… transactions… transactions – is the new location location location

Whilst I remain relative sanguine about house prices, the herd of elephants in the room is the outlook for housing transactions. We are currently in a situation where all but a very small number of housing transactions have been turned off.

Transactions are key to the survival of estate agents (and housebuilders) and let’s not forget their respective supply chains. If homes are not being bought or sold, house prices, despite their column inches, become irrelevant.

If a home is not sold estate agents and housebuilders will not be able to generate the cash to pay their staff or their suppliers.

Whilst it is difficult to estimate the cost of the UK Government’s policies to keep workers on the payroll, the costs of not doing so are greater still. Housing is key to so many aspects of our lives and a functioning housing market is a key enabler of economic growth. The cost of mass unemployment in the housing sector may well turn what could be a Covid-19 recession into a Covid-19 great depression.  We must all hope that the UK Government will be true to its word and do ‘whatever it takes’.

Turning off housing transactions for any length of time will lead to many estate agents having to turn off the lights and shut up shop. Estate agents are the key enablers of housing transactions. Around 90% of home movers do so using the skills and guidance of estate agents.

Moving home is not a process you can amazon-ify. If any proof of this were needed we can just look at the hybrid agents, who despite their youth, have not aged well. They haven’t taken any significant market share in part because they haven’t sold many homes. If we take significant capacity out of the estate agency market we will take away the housing market’s ability to bounce back when the current Corona crisis passes. Covid-19 could change the face and shape of our economy and a functioning housing market will be key in order to enable geographic matching of employees to emerging job opportunities.

Rightmove’s wrong move?

Until now Rightmove has reigned supreme and was one of the few companies to grow its profit margins during the Global Financial Crisis, but has Icarus flown too close to the sun? Whilst shareholders cheer profit margins of 75% in these challenging times these cheers have been drowned out by the booing of housebuilders and estate agents. Rightmove was quick to act, but its first attempt at a price cut had all the hallmarks of a Ratner moment. It’s second attempt was a much more generous offer, but only time will if it made the right move.

How has the stock market reacted?

As a former stock market analyst old habits die hard. Stock markets, rightly or wrongly, are not a bad indicator of sentiment. I have noted many calling time on Rightmove, but investors have either not heard these claims or believe that Rightmove will retain its crown.

The FTSE 100 and the Dow Jones, the bell weather stock market indices of the western world have fallen by 28% and 25% respectively since the start of 2020. The price Rightmove’s shares have fallen by 27% since the start of the year, a fall in line with the overall stock market indices. Whereas share prices of traditional estate agents have fallen, on average, by 42% so far this year; housebuilders by 44% and Purplebricks by 71%. It seems to me that investors are concerned about the outlook for the UK housing market, but believe that Rightmove will be immune from the challenges faced by its customers.

Anthony Codling is CEO of twindig, a company which aims to put estate agents and housebuilders back in control of their data and to put it securely back into the hands of those who need it the most rather than those who profit from it the most.

Twindig will be launched soon…

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