What will be the impact of lockdown on the property prices in Frinton-on-sea?

Over the last few weeks since the beginning of confinement, I have seen many reports and analysis either showing far too much unjustified optimism or attempts to emulate some kind of project “fear”.

Beyond the speculation and meaningless predictions throwing wild numbers around (in my opinion), I would like to share with you analysis based on data and likely probabilities while keeping my focus on properties in and around Frinton-on-Sea.

How was the property market prior to the lockdown?

Following a difficult year in 2019 clouded by the news surrounding Brexit, the property market showed a real activity increase post Boxing Day 2019 with prices and transactions widely reported to have picked up. However, I would like to mention that this “bullish” enthusiasm might not have quite reached Frinton-on-sea like it did in more commutable locations around Essex or closer to London. The property activity in CO13/CO14 is far more seasonal. Assuming a decent early Spring, I was expecting a delayed surge for the April/May/June period but of course this was not to be thanks to the lockdown on March 23rd.

How is the situation during lockdown?

As you know, many people are losing theirs jobs, finding themselves in furlough or trying to adapt their professional activities online. The property market is witnessing a number of “falling through” with buyers or sellers breaking the chain, exchange of contracts may happen but completions can be tricky if the property is not empty.  Potential buyers may not physically view properties and this is reported as having a significant impact on the number of properties on the market, the number of sales and the total of transactions. 

The data shows that there were 428 listings on Rightmove for the CO13/CO14 postcodes early March and there are still the same amount mid April!  From mid January to mid March there were around 120 sales agreed ( 60 per month) with now only 12 agreed sales between mid March and mid April, 6 from the shutdown date. This is basically an 80% drop in potential transactions, a trend mostly witnessed across the country.

On Rightmove on average each listing in the CO13/CO14 postcodes were getting 35.2 detailed views per day prior to the lock down, as off mid April the average is now 22.9! This means a decrease in potential browsing activity by 35%. In fact it dropped the first week of confinement to 20.1 ( a drop of 43%) and it is now slowly increasing again.

As browsing decreases by 35%, it is fair to believe that it would also point towards a drop in demand probably between 20 and 30% as all browsers are not always buyers but all buyers would be browsers.

The law of supply and demand does affect prices: If the supply remains the same, the demand has probably dropped anything between 20 and 30%, can the demand pick up later?

Impact after the lockdown?

What we are currently experiencing is totally unprecedented over the last 100 years but we can certainly use past events to understand the probability of certain likely future scenarios.

It is widely reported that we will be entering into a deep recession as the economy would have been 90% shut down which sadly has resulted in a great deal of job losses. A recession is when the economy/ GDP shrinks for 3 consecutive quarters. It is realistic to expect a drop in GDP for the second quarter and up to anything in double figures, something not experienced in 100 years. The second quarter should bear the brunt of the lockdown and the economy might well contract by 20% or more. It is likely that the unemployment rate will be shooting up towards 10% meaning that one person in 10 will be without a regular income.  In reality it is best to approach it from the other angle of employment rate as not everyone wants to work. Let me explain that we had an unemployment rate of 3.8% and an employment rate of 76.3%. If the unemployment rate shoots up to 10%, the employment rate will drop to 70.1%. It means a real term change of 8% in people working. From a different angle, we may state that 80.1% of the total potential working population would like a job but only 70% will get one, a loss of one in 8 rather than one in 10!  This is likely to impact on the capacity of the economy to recover as less people working will contribute less to the overall economy already waking up from many weeks of lockdown. This is likely to bring a negative spiral whereby the recession increases unemployment and the unemployment impacts further on the economy by lack of spending. We are about to enter a totally unknown phase in the world economy and we will be lucky if this coming recession is not worse than the last one in 2008/2009 by entering a Deflationary Spiral.

I am not here to discuss or forecast the exact state of the economy post lockdown but I want to show you that what happened to the property market in 2008/2009 has a very high probability to occur again, at the very least!

Let’s see what happened to the property market during the last recession which officially started in Q2 2008 with a 0.2% contraction followed by Q3 (-1.7%), Q4 (-2.2%), Q1 2009 ( -1.8%), Q2 2009 (-0.3%). In March 2008 the UK average house price was £182,845, in March 2009 it was £154,452 which is a drop of 15.53%.

Arguably the 2008/2009 recession was caused by the subprime mortgage housing bubble and we could say that the financial side of the property market caused a chain reaction which brought a contraction of the economy and unemployment. The UK property prices had started to drop since August 2007 reflecting the American financial crisis which then snowballed around the world. 

The scenario in 2020 is obviously a lot different: the lockdown in reaction to covid19 is the cause, we are likely to witness high unemployment and a GDP contraction before we witness house prices going down as a consequence. The uncertainty will be about the scale of the price decline:  will it be less or more than experienced in 2008/2009?

The unemployment rate rose to 8.3% in August 2011, by which time the UK property market had started to slowly recover ( still -7% from March 2008).

The UK government and the bank of England have put in place financial measures in order to support jobs and the economy but by their own admission, they cannot save everyone!

Whether one thinks that this crisis may be worse or not than the previous one, it is certainly a reasonable assumption to project that house prices are at risks of declining by between 15 and 20%. Indeed  most UK lenders have already upgraded their affordability criteria and only seem to propose 75% mortgages now as opposed to the 95% deals offered previously.

It is all very well stating that interest rates will remain at an all time low but one needs a job to obtain a mortgage while the size of the required deposit has just increased by 20%!

As we enter totally unchartered territories, it is very fair to expect a high level of fear and a low level of confidence in the economy which is not conducive to consumer spending so important for the housing market.

On the positive side “interest only” mortgages are far less prevalent now than they were 12 years ago and lenders have had to increase their capacity to absorb a “stress scenario”. Would it be enough if prices were to decline beyond the 25% mark? Would many households find themselves in negative equity as experienced in the early 90s?

On the other side of the coin, the relationship between supply and price is positive meaning that a higher price will encourage further supply, a lower price will decrease the supply until it matches a lower demand. In other words, if the price drops too much some sellers will pull out of the market while demand will increase. This positive “price elasticity” is likely to offer a price resilience for as long as not too many people either fall into negative equity or forced to sell by their lenders.

If property prices are highly likely to be under pressure, it is fair to imagine that this scenario will not be felt in the same way for every type of properties everywhere.

I strongly believe that most people will go through this crisis with the desire to plan for a different lifestyle going forward, whether aspirations may be put into immediate practice is another matter but they will help to re-shape the housing market in the future.

Impact on the Frinton-on-Sea property market?

The general quantitive analysis above must be balanced by a more qualitative angle as I believe that the current enforced quarantine may well bring a desire for people to change the way their lives are organised.  Indeed a very recent survey shows that only 9% of people wish to go back to the normality of their recent past, most will seek a new more “qualitative” life balance!

From the industrial revolution we have had a number of disruptive changes that shaped the way our societies have functioned up to today. For example we have relied on an ever increasing need for transportation of goods and people everywhere. We have cars and trains to commute to work but we also have now an internet network which has allowed many people stuck at home to adapt their working routine very efficiently.  

I have the feeling that this lockdown is making people seriously question the so called “rat race”: Would you now like to commute a minimum two hours of your day in an expensive, hot and overcrowded London tube system even by just living in the capital, let alone commuting from afar by train or car? If you are currently living in a London flat, would you not prefer the same experience In Frinton-on-Sea or Walton-on-the-Naze in a 5 bedroom detached property for the same price?

We might well witness a horizontal property shift which is likely to be a down-pricing but up-sizing between different geographical locations.  If that is the case, the negative price impact will be greater in London and less so for fantastic places like Frinton-on-sea. 

The average property price in London is £471,504, the average is around £345,000 in Frinton, a 27% spread which is justified when jobs are available in the capital but will it be in the future?

If we are about to enter a new digital way of life where commuting becomes less prevalent, why would anyone pay a 27% premium to live a lesser quality life in a sardine box?

Is it not likely to assume a rising demand for properties in and around Frinton-on-Sea and a rising supply of sellers in and around London?

There is a “finite” number of high end properties in or around Frinton-on-sea and while we have seen the price gap between average prices and top end prices reduce during the last 4 years thanks to the “Brexit” period, I expect the top end prices to remain relatively supported while the average property price drops. There will always be a lower number of people who can afford the more expensive properties even if there is a greater number of people who cannot afford the current average prices.

If we indeed expect a lifestyle impact on the property market, it is even fair to expect an increase in demand for the right properties offering a much higher quality of life than existing homes in big cities for example.

Equally we might witness another “boom” in people retiring from big cities and downsizing to the right but cheaper flat or bungalow in and round Frinton-on-sea and indeed all around Colchester.

I am not very bullish for property prices in London but I can see a more favourable scenario for the rest of the country.

What do you think?

Florent Lambert

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