An update on valuations and the housing market

The impact of the coronavirus crisis is having a significant effect on the housing market, particularly on valuations and the construction industry. Richard Petty of JLL assesses the current situation and the outlook over the coming months.

We have just been through a three-month period in which valuers have not been able to inspect properties, and valuation reports have included a Material Uncertainty Clause (MUC). Restrictions are easing, so are we now coming out the other side?

As always, there is a lot of press comment about house prices, suggesting either a boom driven by pent-up demand, or big falls, depending which paper you read. 

Valuers always have to reflect the market. So the valuations we give in the social housing sector, whether for loan security or any other purpose, such as land acquisition or sales, are all driven by what we see happening at the moment in the housing and land markets, and how we see things panning out in the future.

The housing market reopened for business about a month ago, and we have seen a modest bounce in sales due to pent-up demand. Transactions that were on hold from earlier in the year are being completed – some people have to move now, rather than waiting for greater certainty. 

But, once the government's furlough scheme is phased out on 31 October, there is the potential for a rise in unemployment. There is, sadly, already plenty of that coming through in the news, and consumer confidence is bound to be affected. We think most buyers will therefore remain cautious for the rest of 2020 and into the early part of 2021. Over these next few months, we believe investors and opportunistic owner-occupier buyers will dominate the market.  

The total number of sales this year will roughly halve, from 1.2m in 2019 to around 650,000 this year – a far less liquid market than during the global financial crisis. We know there is a strong correlation between the number of housing transactions and house prices. So we expect house prices, on average across the UK, to fall by 8% this year before beginning to grow again in the second half of 2021. However, this does not mean Market Value subject to Tenancies (MV-T) values will necessarily fall by the same amount as house prices. There are lots of moving parts in an MV-T valuation, and local market conditions will have a vital bearing.

National averages of course hide a range of regional and local variations. We think London will come back sooner and more strongly than the rest of the country, because this is where investors and opportunistic buyers will focus their attention, including welcome capital from overseas. This will start in the prime areas and then ripple outwards. This is exactly what happened after the global financial crisis and we are expecting history to repeat itself. 

Coronavirus has also hit house building. Even though some construction sites resumed activity relatively quickly during lockdown, homes built by conventional methods on site are going to take longer due to social distancing, and therefore going to cost more. 

Modern methods of construction (MMC) homes built in factories are also affected to some degree. Developer confidence also plays its part, and we expect housing starts to drop to just 80,000 homes in 2020, below that of the global financial crisis in 2008 when starts bottomed out at 100,000. Starting enough homes to deliver 300,000 per year will remain challenging due to lack of capacity in the industry. That shortage of supply will, however, feed through to a resurgence of house price inflation next year. 

New home completions should fare slightly better, as housebuilders prioritise these in the short term. However, there are difficulties in the supply chain of building materials which, coupled with social distancing, could extend the time it takes to build a new home by up to 50%. This is likely to be a significant drag on supply for some time, until social distancing is no longer necessary. 

Within this market, what is happening to valuations of existing social housing stock?  First, inspections have resumed, mainly on an external basis, but with internal visits also possible under strict protocols to respect residents and valuers. Visits to development sites are much more straightforward. 

Secondly, housing associations are, for the most part, in a good financial position due to reduced management, repair and maintenance costs during lockdown, and rental income has held up well. The stock rationalisation market has continued to trade, and Existing Use Value for Social Housing (EUV-SH) values can therefore be assessed with full confidence. On the basis of guidance from RICS, valuers have been able to lift material uncertainty clauses from EUV-SH valuations since 26 May. 

However, for the time being, the MUC will continue to be used for valuations of land, sale prices for shared ownership or private homes, and for MV-T valuations for loan security. We need to keep a careful eye on what is happening with house prices, and market rents as letting activity resumes.

Along with colleagues at Savills, we are keeping this under regular review and RICS will look to lift the MUC as soon as possible. In the meantime, whilst the clause remains, it does not mean that valuations cannot be relied upon. Social housing is, traditionally, a very resilient asset and is certainly proving its worth again through the current crisis.