By Richard Pike, sales and marketing director, Phoebus Software Ltd
I attended a number of conferences and meetings towards the end of last year where there was a pretty bullish attitude amongst some attendees on how 2021 was going to show significant improvement for our sector over 2020 performance.
Valuations wise, there has clearly some been some unexpected increases through the stamp-duty holiday due to finish at the end of March. Whatever way you look at this scheme, it has been contributing to the fuelling of a housing market in a time of economic crisis. At the same time there has been a growing number of people wanting to move, to a house more conducive to working from home and with outside space available. Unless Rishi Sunak makes a dramatic U-turn on a drop-dead end date of the scheme on or before the 3rd March, we are going to find ourselves on the edge of a potential housing precipice. This will lead to uncompleted transactions, with many partners to the house purchase supply chain having to try and pick up the pieces on (ironically) April 1st.
The more “mature” readership will remember a similar situation stoking the house valuation furnaces which was the end of the dual MIRAS scheme back in the late 80s. Although the scheme was fully wound up in April 2020 by Gordon Brown, Nigel Lawson announced the end of the scheme in his 1988 budget and gave couples a deadline by which to purchase houses and gain £60,000 tax relief on their mortgages. Sometime later, Lawson publically stated he regretted not ending the scheme on the day of the budget, and that giving people a future deadline to gain the benefit, caused an unsustainable and artificial increase in house prices. This lead to a house price crash once the benefit was withdrawn and was a trigger for the economic crash of the early 90s.
It is highly probable that prices will drop from the 1st April whether the SDLT holiday is withdrawn with immediate effect or if it gets phased out. The only difference in these scenarios will be the severity and speed of the drop, and therefore the market’s recovery may have to be criteria and product driven.
From a risk perspective, add to this two other factors. The first is the amount of lenders that are bringing out higher LTV products when we do not know the extent of any movement in house prices. The second is general economic indicators. Today unemployment stands at 5% or 2.6m, with the lowly paid and the 25-34 year old segment of the population being hardest hit. This figure does not include the 4.5m people still on furlough, and that scheme cannot continue forever.
Looking further afield, in Europe, mortgage book performance is suffering, and for the portfolio purchasers, NPL trades are becoming available at much lower rates that last year. Following the global finance crisis, in the UK there were clear examples of trades that indicated it was cheaper to buy books than originate new loans. This scenario could potentially re-occur.
Many indicators show we are heading for much higher unemployment than we have today. The Bank of England wants stress scenarios worked with unemployment rising by 12%. This would be coupled with some level of house valuation correction following the end of the SDLT exemption. This can only lead to higher arrears levels and without the Regulator’s intervention on forbearance policies, you’d expect much higher repossession rates. These may well still happen in time anyway, and if it does, will affect property valuations again for obvious reasons.
The rollout of the COVID-19 vaccine will undoubtedly get things moving in the right way, but realistically we’ll be well into Q2 before any resemblance of normality can return, and therefore well into the second half of the year before we can see what life will look like for us all moving forward.