Lloyds Bank grabbed headlines with its worst case scenario of a 30% drop in prices, and whilst this was markedly more pessimistic than other commentators it demonstrates the level of uncertainty about the future. There is consensus emerging that there will be significant immediate falls in the order of ten percent, and a range of five year outcomes from plus 15% to minus 30%.
Deposits and funding constraints
Following the post 2008 severe constrictions on mortgage lending to those with smaller deposits there has in recent times been a considerable relaxation amongst lenders with deposits as low as 5% being sufficient to access a property. Lenders have become defensive and the size of deposits lenders are requiring have jumped. An increase from 10% to 15% for first time buyers represents a 50% increase in the immediate contribution to the purchase price of your home. This is set against recent losses, many are carrying on their investments which were supporting the deposit contribution.
An additional drag on the market is the lack of a current valuation benchmark for mortgage valuers. The Office of National statistics ONS has temporarily suspended its house price index due to low volumes and that means there is no view into market value levels until things settle down. In the early 90’s when markets were falling heavily Mortgage Valuers were often forced to down-value mortgage applications defensively to take account of rapidly deteriorating conditions when reviewing comparable transactions and in many cases this perpetuated the downward pressure on values. Many valuers will have one eye on their Professional Indemnity Insurance as they consider the value of the home you agreed to buy in the pre-Covid calm. None will be tempted to be bullish.
Chain Collapses and Fall Throughs
Chain collapses are a big threat to clearing the pipeline of suspended transactions. A single failure in the chain puts all prices on hold. Evidence is already emerging that transactions are falling apart. The consultancy Twentyci reported that whilst on the upside in the first four days after lockdown there were 7,897 new instructions and 4,640 sales agreed, there were also 4,244 price reductions and critically, 4,677 transactions fell through.
One Prime Property transaction in the West Country has been thrown into doubt after the purchaser has walked away from the deal after exchange of contracts. The consequences of failing to complete for the purchaser can be quite severe and go beyond the loss of the exchange deposit so this is not a step to be taken lightly if any other option exists. As with the 2008/9 market the spectre of Banks refusing to renew mortgage offers post-exchange to enable completion has raised its head. If you have been furloughed, or made redundant post lockdown then you are at risk. Once you have exchanged, your room for manoeuvre is very restricted. Many chains are in turmoil as demands for discounts are passed up from the bottom, with everyone in-between piling on their own pessimism onto the dicing being passed up. It takes just one vendor to stick to their guns on the original agreed price and the chain breaks. Pragmatism is required, but how much?
Should you consider proceeding with a purchase at pre-Covid prices?
This is the real question for buyers. It depends. If the house you are buying is a one of a kind, single opportunity to purchase and you are going to hold it for life then the value movements are academic. You may want to renegotiate, however you may equally have made the decision to pay what it takes. Financial pride will be the only thing holding you back.
Similarly if you are trading up, absolutely need to move and have limited equity, this may be your last opportunity to do so for some time before negative equity locks you to the property until prices recover. You won’t escape negative equity, but you will be tied to a home that at least services your needs, always assuming you can afford the mortgage.