As Britain enters the most serious phase yet in its fight to tackle the coronavirus crisis, the traditional “spring selling season” in the housing market has been all but forgotten.
The government’s crisis measures to limit the spread of Covid-19 mean estate agents, prospective buyers and surveyors are barred from making home visits — bringing the homebuying process very largely to a halt across the UK.
The property market, like the economy, has gone into lockdown for now, says Jonathan Samuels, chief executive of property lender Octane Capital. “To even be talking about bricks and mortar in the current climate feels absurd,” he says.
Yet the ministerial guidance on buying and selling has left questions for some about when and how the rules apply, whether a sale might be “parked” with legal agreements in place rather than entirely abandoned, and the legal and financial implications of pulling out of a deal.
Although there are limited circumstances in which a property deal may still go through, various practical and financial obstacles could block its path.
FT Money has questioned property agents, mortgage brokers and lawyers about how these unprecedented market measures are likely to impact buyers, sellers and property prices.
What has the government said?
Anyone wanting to move home, whether a buyer or a renter, should delay the transaction where possible while the coronavirus “stay-at-home” measures are in place, in order to reduce the chances of infecting others or being infected, the government announced at the end of March.
No one is allowed to visit a home during this period, which rules out physical viewings and surveys, though homeowners wishing to get a move under way can lay the groundwork of instructing agents, a solicitor, and applying for a mortgage, in anticipation of the restrictions lifting.
The curbs have also sparked a mini-boom in “virtual” or remote surveys that can show off a home to potential buyers on a smartphone or computer.
The government has said there is “no need to pull out of transactions”. Where a buyer and seller have exchanged contracts, they would ideally postpone completion until the “stay at home” rules come to an end.
“If moving is unavoidable for contractual reasons and the parties are unable to reach an agreement to delay, people must follow advice on staying away from others to minimise the spread of the virus,” it added.
Where a home is already vacant or no move is involved, a transaction may go ahead, as long as any removals that take place are carried out in accordance with the rules on social distancing.
Nick Morrey, product technical manager at mortgage broker John Charcol, says such homes are often bought by landlord investors. Others are often looking to sell a vacant home when they have inherited a property that needs to be sold to settle inheritance tax bills.
Buyers who have exchanged and have a mortgage offer in place for only a limited period can take advantage of a three-month delay being offered by mortgage lenders to prevent a deal from collapsing, Mr Morrey says.
“Lenders can extend the completion deadline to, say, the end of September, to allow people to get the remaining arrangements in place so as to complete when possible.”
So can I still buy a home?
To those with no immediate need to buy or sell or without a contractual imperative to conclude an ongoing transaction, the government advice is clear: you should delay.
Henry Pryor, an independent buying agent, says there are nonetheless some people who are thinking of embarking on a fresh hunt for a new home or putting a home on the market. “You should dilute your Gordons a bit more if you’re thinking of doing this,” he says.
“If you want to buy and sell you are allowed to, though the government would seriously want you to consider the wisdom of doing so, and there are financial, practical and legal hurdles you’ll have to get over. You can buy and sell, but you’d be taking huge risks in my opinion.”
The bar on a surveyor visiting an occupied home rules out both a buildings survey for the buyer and an in-person valuation survey for a mortgage lender, which many require where borrowers have smaller deposits.
© Chris Ratcliffe/Bloomberg
Many estate agents are also running a skeleton service, having shuttered offices or put staff on furlough, and the same applies to firms of conveyancing solicitors.
Beth Rudolf, director of delivery for the Conveyancing Association, the industry body, says that where they can, solicitors are still helping clients who confirm they can move within the guidance. But there are new sticking points in a process that, even before Covid-19, took an average of 20 weeks between a sale being agreed and completion.
Some local authorities are closing their property search departments, making it hard for personal search agents to check records. And while the industry has made good progress on enabling buyers to sign a mortgage deed online, the same does not apply to the transfer of property deeds, she says.
“We still have an issue with deeds. If people want to proceed and haven’t previously signed and had their document witnessed, it can be tricky finding someone to watch you sign the transfer, bearing in mind the witness has to be someone unrelated to the person or to the transaction.”
Given the long delays to many transactions, Ms Rudolf adds that buyers and sellers may need to be prepared to make a partial payment for conveyancing services in advance of completion, counter to the traditional model.
“Where we would previously not charge until completion, there may need to be interim payments coming in so conveyancers can continue to pay their staff as completions are not happening.”
For those who have exchanged but not completed, the government advice is to agree a delay to completion. But if both parties cannot agree, legal risks remain.
The Law Society has said that if completion does not take place after contracts have been exchanged due to coronavirus, “the parties not completing will be in default”. And even if a buyer and seller can agree on a delay, that may be contested by others if they form part of a longer chain of transactions.
“Notices to complete, penalty interest and deposit loss may all come into play,” the Law Society added.
A further risk it identifies is where a buyer has exchanged on a home using a mortgage agreed on the basis of a valuation that is subsequently rendered unreliable if house prices fall.
“You should also consider that property values will fluctuate during the period of deferral and this might impact your lender’s ability to lend. This will be particularly important if your mortgage makes up a large proportion of the house price, perhaps 60 per cent or over,” it said.
How will the restriction hit sales and property prices?
Transactions are not registered until completion, so next month’s statistical releases for April will see some activity from property sales that were already under way before the lockdown and could not be delayed.
Richard Donnell, research director at property website Zoopla, says the big slowdown is likely to come in May and June, when he predicts an 80 per cent drop in transactions — a far steeper decline than was seen after the financial crisis. “Transactions will drop below the worst of 2008, because we’ve physically stopped the market,” he says.
Overall, he forecasts a 50 per cent year-on-year drop in housing transactions over the whole of 2020, assuming a mid-year lifting of the restrictions.
Any return to normality will be slow, he cautions, given the length of the homebuying process. “Demand could come back into the market again, subject to the economic impact and when restrictions are lifted. But there’s a five-month lead-in to when sales generate revenue.”
As transaction levels plummet and people delay the decision to put their home on the market, it will be harder to see the overall impact on house prices. In spite of this uncertainty, housing market analysts have made initial attempts to gauge the drop. Savills, the estate agent, is predicting a fall of between 5 and 10 per cent in the short term.
© Simon Dawson/Bloomberg
Low interest rates and lenders’ forbearance on arrears will reduce any forced selling and the danger that this will lead to a bigger drop in prices, says Lucian Cook, Savills residential research director. Three years of price stagnation after the Brexit referendum in 2016 should also have the effect of cushioning any fall.
However, the dramatic shift in housing market sentiment was laid bare on Thursday in the latest monthly survey by the Royal Institution of Chartered Surveyors.
Back in February, the balance survey found 21 per cent more surveyors expected to see prices increase over the next three months than those that did not. However, by March, 82 per cent more respondents expected prices to fall between now and June.
Rics said more respondents also expected prices to fall not just in the short term, but over the next 12 months. It has called on the government to consider post-pandemic measures, such as a stamp duty holiday, that could assist a market recovery.
The impact of coronavirus is likely to be harder on first-time buyers than other segments of the market because of their reliance on the low-deposit, higher-risk mortgages that most lenders have withdrawn over the past fortnight.
Some will have been using the government’s Help to Buy equity loan scheme, which helps buyers of new-build properties. While builders have a pipeline of deals going through on vacant new homes, the construction of many developments has had to be slowed or mothballed under the social distancing restrictions.
Younger buyers who are getting help from “The Bank of Mum and Dad” may also find their buying power checked, as the plunging stock market has hit the wealth of parents and grandparents.
Mr Cook urges first-time buyers to take the longer view. After the restrictions lift, developers will have to be pragmatic in their pricing to recapture their lost sales rates. “They are going to be offering some incentives,” he says. “First-time buyers shouldn’t despair, but should look to the medium term and what opportunities come out of it.”
My home was already up for sale before all this happened. Should I take it off the market?
Under normal circumstances, leaving a property on the market unsold for a long period can taint it in the eyes of potential buyers, who are left to wonder why previous viewers have not snapped it up. But since the entire market has been affected by the coronavirus measures, the conventional stigma is unlikely to apply.
Mr Pryor says: “The market will be sufficiently forgiving of what’s gone on to accommodate the fact that you’ve got your timing wrong. No one’s going to bash you.”
Though the number of properties coming on to the market has slowed dramatically, initial data suggest people are not rushing to pull their homes from estate agents’ windows and websites.
There has been only a 1 per cent drop-off in the number of properties being marketed per estate agency branch since March 7, says Mr Donnell of Zoopla. After paying for an energy performance certificate, having had a home photographed and getting floor plans drawn up, sellers face no additional costs in keeping their homes listed with agents, he adds.
Can I still get a mortgage?
Mortgage lenders are still very much in business but many have been temporarily overwhelmed by requests for mortgage payment holidays from borrowers whose finances have been hit by the economic impact of coronavirus.
Their lending activity has also been curtailed by the bar on physical surveys: this has halted valuations on most higher loan-to-value mortgages, for which lenders require more than a data-driven or “desktop” valuation.
Their retreat from parts of the market has been substantial. According to finance website Moneyfacts, there were 5,239 residential mortgage products available on March 11. By April 6, that had dropped by 47 per cent to 2,768.
For most lenders, cutting mortgages means removing their highest loan-to-value deals and putting restrictions on what they will accept as sources of income when deciding how much customers can afford to borrow.
© Hollie Adams/Bloomberg
HSBC told brokers on Tuesday that bonuses, commissions and overtime would no longer count in this calculation, except when dealing with NHS employees. The move follows a similar measure by Nationwide, and a decision by Metro Bank only to use 50 per cent of bonus income when judging affordability.
Many lenders also require furloughed employees to use their lower income level when applying for a mortgage. While the move affects those applying for a mortgage now, it also risks affecting those switching to a new mortgage when their fixed rate comes to an end.
Aaron Strutt, product director at mortgage broker Trinity Financial, said a 20 per cent income cut for furloughed borrowers would mean many existing mortgages were technically no longer affordable.
“Some of the lenders will ask existing customers if there has been a change to their income when they come to switch deals and, if they say yes, they may be stuck on an expensive standard variable rate.”
While thousands of borrowers have applied to lenders for a three-month mortgage payment holiday, their overall costs of borrowing will rise as a result, though brokers say the effect will be minimal.
However, Mr Morrey of John Charcol warns that most lenders’ systems are incapable of handling a payment holiday at the same time as a product transfer. Borrowers who are due to come to the end of a fixed term deal before the end of their payment holiday will either need to ask the bank if they can transfer ahead of time or do it as soon as the holiday ends, if they wish to avoid moving on to a higher standard variable rate.
Is hibernation the best policy?
Fresh activity in the market has been all but wiped out by the government’s moves to tackle the virus. But housing market experts say there is much that can be done by prospective sellers and buyers to prepare for the moment when the market returns.
Mr Morrey says lenders can carry on processing applications and making mortgage offers with extended deadlines that allow people to have the funding in place for when the distancing restrictions lift.
“If you think there’s an opportunity coming with a falling housing market between now and September, you can put in an application and get it all approved subject to valuation, so that when you find the right property you can update the lender and off it goes.”
Conveyancers are using clauses that help people when exchanging contracts to ensure they have enough time to move when the restrictions are finally removed. “There will be a lot of pent-up demand for removals firms and mortgage money to be released at that point. It will take time for people to get back on their feet,” Ms Rudolf says. The clause allows for an agreed period of, say, 30 days from the lifting of restrictions by which to complete the transaction.
Mr Pryor says sellers who have got to the “sale agreed” stage should move quickly to try to keep their deal alive. “If you are a seller, do whatever you need to do to get your buyer to commit to what you agreed in February.”
But he is more circumspect about the prospect of a rapid bounceback once the crisis is in retreat. “There will be some buyers who are prepared to commit but the majority take six months to get their confidence back after a seismic event. They’re not going to be back in the market in serious volumes until the new year. That’s assuming this is all over by July — which may not be the case.”
Source : Financial Times