Future Market: What Impact will another Recession have on the Property Market?

publication date: Mar 2, 2012
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

Future Market: What Impact will another Recession have on the Property Market?

Predicting the property market is about as difficult as predicting the weather - and expert forecasts are rarely accurate. We know that over the next five years, in most areas, property prices are likely to recover, but within the next year or two, without a clear picture of how hard a recession could hit and to what level unemployment will rise, let alone unknown impacts of the Eurozone crisis on our banks and property market, it is tough to work out what will happen within the next six to twelve months.  However below we go through key indicators which can influence prices.

What will happen to March 2012?

In our last report we indicated that the confidence index from GFK NOP suggested that people are starting to learn to ‘live with the recession' and making the big decision to buy, sell or invest in a home was more based on personal finances and local market conditions than on national headlines. This certainly seems to have been the case for the second half of 2011 where the Eurozone crisis has had little impact on the property market.

Indeed, the latest GFK NOP consumer confidence consumer survey suggests confidence is still "seriously depressed" but having said that there has been a four point improvement in the Index with people in particular apparently more confident to make major purchases with a nine point growth above December 2011 and a seven point improvement on January 2011. Though any increase in confidence is good, it should be borne in mind that pre-credit crunch in 2006, confidence for making major purchases ranged from minus five to minus seven. So at -22 consumers are still far less likely to make a major purchase - especially a house, hence volumes still remain significantly depressed.

Changes in Stamp Duty for First Time Buyers

Typically any changes in stamp duty tend to drive a flurry of activity in the housing market. Unfortunately the government has concluded that offering First Time Buyers zero stamp duty up to £250,000 has had little impact on the market. As a result, after 24th March 2012, a first time buyer paying the average £135,000 for a property will have to find another £1,350 on top of a 10% plus deposit (£13,500) to buy a property.

In many areas across the UK this will have little impact, as the average first time buyer can purchase a property for less than £125,000 so pays no stamp duty. However in areas such as London and the South, this is likely to lead to a race to close deals by the end of March for those priced between £125,000 and £250,000.

Increased activity will initially be good for sellers trying to move up the ladder in the lead up to the end of March, but could mean the rest of the year is tough to secure a sale as first time buyers are attracted to new build deals and government initiatives which could entice buyers away from the ‘second hand' market. So from a seller's perspective if your property is worth less than £250,000 and local first time buyers could buy, it may be better to get it on the market sooner rather than later.

Unemployment Figures
Unemployment figures are likely to rise over the coming months. In our last report, news about redundancies at BAE systems and the problems this would cause for Brough in Lancashire has been followed recently by news of Astra Zenica shedding jobs internationally, although at this stage only around 300 of the 7,300 jobs have been identified to affect the areas around Macclesfield and Alderley Edge. More jobs are expected to be shed from small to large businesses.

According to the Office of National Statistics, from September to November 2011, "the unemployment rate was 8.4 per cent... up 0.3% on the quarter....The unemployment rate has not been higher since 1995 and the number of unemployed people has not been higher since 1994." Expectations are that unemployment will continue to rise potentially until 2013.

Unemployment can particularly affect markets at a micro level when major employers are involved. The general fear of it also has a national impact as people's willingness to buy property reduces and can force some to sell up due to job losses. From a future perspective, according to CML: "The central forecast is for 45,000 repossessions [in 2012], up from an estimated 37,000 this year but still fewer than the 2009 figure, and far lower than in the downturn of the 1990s."

On average for the first half of 2011, around 45,000 mortgages were being approved per month, in comparison the latter part of 2011 did much better, with mortgage approval levels rising to just under 53,000 in December. In comparison to pre 2007 levels, these approval levels are still down by approximately 60%.

Bank of England Mortgage Approvals

Predictions for the mortgage market for 2012 aren't great though. A worsening of the Eurozone crisis could cause a ‘Credit Crunch 2' which may mean banks don't have the money to lend and go back to lending to those households with large deposits of 25% or more, making it tough for people trying to trade up and those attempting to get onto the market for the first time.

The Council of Mortgage Lenders "expect the bulk of the negative effects in the housing market of wider economic uncertainty to manifest through a continuing low level of housing transactions. While an estimated 852,000 transactions are likely to have taken place in 2011, the CML anticipates fewer transactions [in 2012] with a central forecast of 825,000."

One shining light at the moment in housing are buy to let mortgage offerings. These are doing well in comparison to standard mortgages and easing of credit conditions for investors is definitely helping the market to keep going. However, potential new rules imposed on lenders from Europe could hit the buy to let market later this year. The changes could require buy to let mortgages to be regulated and this may reduce the number of lenders offering mortgages or restrict what/who they could offer too. As yet there isn't enough detail to understand the impact this could have for investors, but for those looking to invest, taking advantage of current deals may be worth considering.

When sellers and lenders struggle to sell on the open market they typically turn to auctions to secure a quick, guaranteed sale. As such, auctions can be a good indicator as to what is likely to happen in the future housing market. A good indicator that the general housing market is likely to fall is a rise in the number of lots (homes) being auctioned.

Over the last few months, EIGroup's figures suggest a healthy auction market with the number of lots offered up slightly (+3%) during 2011 versus 2010 and a 5% increase for December 2011 versus December 2010. The really interesting information though is the rise in the number of lots actually sold, up by 10% year on year and up by nearly 12% in December 2011 versus the previous year.

This rather suggests that investors feel we are at the ‘bottom' of the market, helping to ensure over 70% of lots offered were sold on the day. With plenty of stock coming through and properties being keenly priced, the auction market suggests that from an investor's perspective 2012 will continue to be a good time to buy.

From a buyer's, seller's and investor's perspective, especially in areas where it takes a ten weeks or more to sell, it may be worth consulting not just local estate agents, but also your local auctioneer. You may find a cracking bargain or they could sell your property more quickly for you.

Taking into account all of the above indicators, overall property prices are likely to continue to rise in wealthy and international buyer territory through the year, while other areas which are equity rich and have already had their economies ‘stabilised' will remain the same, or dip slightly. Other areas which are already falling by 5% or more are likely to be a great environment for a buyer or investor, but a tough environment for anyone wanting to sell.


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