The word ‘unprecedented’ has been frequently used to summarise the impact that Covid-19 has had on societies worldwide.
We’ve had to adapt to new norms personally and we can all speculate on what life will be like once the new normal truly settles. But one thing that can be observed is that the mortgage market has been weathering the unprecedented Covid-19 storm remarkably well, all things considered.
In 2020, gross mortgage lending decreased by just 9.6 per cent to £243bn. Looking at the figure objectively might worry some but, when you consider that this is on a par with 2016 and actually higher than in the years immediately preceding 2016, this is not a bad performance at all given that the global pandemic triggered the deepest recession in more than 300 years.
2020: change in buyer behaviour?
2020 was clearly a year of two halves. Mortgage lending dropped by a third (versus the same period in 2019) during the first lockdown last spring. However, once lockdown eased, pent-up demand meant that home-purchase lending rebounded very strongly in the second half of the year. 2020 ended with home-purchase lending being 25 per cent higher than in the fourth quarter of 2019.
Another reason for the rebound could be that there was a heightened amount of buyers who were looking to incorporate working from home into their property search. Rightmove noted that in 2020 there was an annual jump of 326 per cent in listings that mentioned terms such as ‘office’, ‘workspace’ and ‘working from home’ in the property description. In May last year it also reported that 51 per cent of Londoners were looking to move outside the capital, alongside a similar trend for buyers in Edinburgh, where 60 per cent were seeking to move further afield. The article noted that other large cities were reporting the same trend, so it’s clear that changes to working habits have impacted buyer behaviour.
There are signs that this movement may be waning slightly in 2021, at least for Zones 1 and 2 in London. Rightmove recently reported that renters were looking to take advantage of falling prices to move back to central London again, and that all of its top 10 latest rental hotspots were in Zones 1 and 2.
Mortgage market and the wider economy
2021 has got off to a fairly strong start. This January brought the highest number (99,000) of home-purchase mortgage approvals in 14 years. It is evident that the pace of house-price growth remains robust too, with growth in the mid-/high single digits on most metrics.
The mortgage market is certainly performing well compared to the slow start to the year for the economy. However, the economy is widely forecast to rebound quickly as lockdown restrictions start to fall away. The government’s fiscal watchdog has reported that the economy could regain its pre-Covid size by as soon as 2022.
This data, coupled with the sweeping extension of government support measures for businesses and households (the furlough scheme chief among them), creates a much more favourable backdrop for sustained growth in housing market activity.
That said, unemployment is forecast to keep rising for some time and, when coupled with an estimated modest earnings growth, it may present headwinds to growth in homebuyer demand in the medium term.
House price estimates for 2021
The Office for Budget Responsibility expects annual house-price growth to moderate through 2021 before turning mildly negative next year, but other economic forecasters are increasingly upbeat on the outlook. Savills, for example, estimates that, through government support, the easing of social distancing restrictions and low interest rates, there could be house-price growth of 4 per cent this year.
Recently announced initiatives could back up Savills’ prediction and continue to spur buyer behaviour: namely, the stamp duty holiday extension and the new Mortgage Guarantee Scheme.
The Stamp Duty holiday extension: who could benefit?
The extension of the stamp duty holiday unveiled at the Budget will primarily benefit homemovers. It will enable all those buying homes priced at between £125,000 and £500,000 to avoid the tax entirely if they complete by the new deadline of 30 June, while those buying more expensive properties will be able to cut their bill by around £15,000.
In light of this we could see strong spring sales activity, especially in higher-value markets where buyers are able to take full advantage of the holiday. While the stamp duty land tax relief will drop to £250,000 in Q3, the measure could continue to support purchase activity into the early autumn, particularly in areas of the country with lower average sale prices, such as parts of the Midlands and northern England.
The higher-LTV market: Mortgage Guarantee Scheme
Whereas homemovers are the prime beneficiaries of the stamp duty holiday, first-time buyers who are struggling to raise a deposit stand to gain most from the reintroduction of a Mortgage Guarantee Scheme.
NatWest is among the first lenders to sign up to the scheme, which is designed to reopen the market for 95 per cent LTV loans, which largely disappeared in 2020. Evidence from the previous incarnation of the Mortgage Guarantee Scheme, when the number of high-LTV products rose five-fold, suggests there will soon be a substantial increase in availability of high-LTV loans for would-be homebuyers.
The introduction of the new scheme is timely as data from Zoopla shows that FTBs are returning to the housing market. The level of interest from people looking to step onto the housing ladder was up 5 per cent in the first six weeks of this year compared to Q4 2020. There has also been an 18 per cent increase in the number of sales agreed on homes worth between £100,000 and £250,000, a price band typically associated with FTBs.
To conclude
There is always a degree of difficulty in predicting what will happen in either the housing market or the economy in general. This has been amplified by the Covid-19 outbreak.
Although uncertainty remains (and the end of the furlough scheme later this year may give a clearer picture on the UK employment rate and therefore buyer behaviour), the extension of the stamp duty holiday gives buyers more time to benefit, and the reintroduction of the Mortgage Guarantee Scheme will provide timely support to a new generation in realising the dream of homeownership.
