A Property market crash affects the entire population. Homeowners, renters and estate agents are all impacted. House values & the volume of transactions drop, impacting incomes & the livelihood of many.
The coronavirus has resulted in a stock market drop inline with the 2008 financial crisis. With the virus not yet mature in the west, many fear more financial repercussions are to come.
No matter how much marketing estate & letting agents do in these turbulent times, it’s difficult for many agents to do anything about the downturn.
Read below for some of the causes of property market crashes.
Pandemics impact on the property market
Starting with the most relevant, the coronavirus as stated, is having a profound effect on the world.
Government instructions across the globe are for people to self isolate in many cases.
As events, workplaces & gatherings shut down, people are unlikely to want to uproot and move in this current period.
Potential buyers and sellers are most likely going to be inclined to just stay put while the environment stabilizes.
With the drop in transactions, for some people desperation may result in opportunities for others.
If there is a seller keen to sell as quickly as possible, the market may drive them to lower prices in order to get a quick sale.
On the flip side, desperate buyers may need to up their bids to get hold of properties.
Volumes are likely to drop, which will impact revenues of estate & letting agents. For those agents that have built up reserves, they are in a stronger position to overcome this turmoil.
However start ups, particularly the new range of online letting agents, may not have the financial backup to cope with an immediate downturn.
This will be a true test on which agents are geared up to see out this wide impacting virus.
How the stock market can cause a property market crash
In one way or another we are all impacted by the stock market.
Your employer may be listed on the stock exchange
Your pension is likely to be invested in the stock market
Or perhaps you have some of your savings invested in stocks and shares ISA.
As the value of companies drops, so do peoples investments.
Suddenly your pension and/or ISA is worth less and you’re net worth reduces.
A stock market crash for many therefore results in less cash available. This therefore means less cash to invest in the stock market. Less investment lowers demand while supply stays the same.
This has a knock on effect of
- Prices drop, and/or
- People don’t sell in order to wait to see property value growth again
Making matters worse, at volatile times, companies seek to reduce their overheads. This often leads to staff cutbacks.
This adds to the issue of people having less income to invest in property and therefore impact demand.
The political environment has the potential to cause property market crashes substantially.
Firstly, BREXIT brought about a high level of uncertainty.
People weren’t quite certain what BREXIT would mean for the economy. Would jobs suffer, would there be more tax and what changes would be made to regulation?
These questions again can lead to a lack of transactions on the market as people look to hold onto their cash.
Foreign investment is also of course impacted by political unrest.
Similar to the above, risks to changes in tax, regulations and the working landscape means foriegn investors either withdraw from the UK or halt on further growth.
As BREXIT matures now that the UK has withdrawn from the EU, it is expected clarity will be provided as trade deals materialise.
How interest rates cause property market crashes
Interest rates are at their lowest in history. The 2008 financial crisis, EU instability & now the coronavirus have played their part in this.
Basic, risk averse savings accounts offer little to those looking to save in terms of gains based on interest.
On the other hand, lower levels of interest rates are available across mortgage products.
This therefore reduces interest payments for repayment mortgages, thus incentivising purchases.
However if interest rates were to rise, many will face higher repayments on existing tracker mortgages. In addition many may be deterred from purchasing a property due to the higher monthly payments that would need to be made.
With the risk of people being unable to make mortgage payments and many people being priced out, demand and prices would be impacted.
Demand would reduce as people struggle to make ends meet. As a result property prices take a hit.
What needs to be taken into account however, is the increase in people looking to rent as buying becomes more expensive.
Landlords may be able to take advantage of this situation and financially benefit.
As their own buy to let mortgages rise due to higher interest rates, rents may increase as the buyer market decreases – people still need places to live.
On this note, many who have funds to purchase a rental property, may opt to do so to take advantage of the higher rents. Of course financial analysis would need to be undertaken to ensure the higher interest rates to eat into a substantial chunk of the potential higher rents.
One of the biggest beneficiaries when property market crashes occur and the buyer market takes a hit, are those landlords without mortgages.
As there is no mortgage therefore no impact of interest rate increases, these landlords may be able to profit from the increase in the rental market.
Supply & Demand can cause a property market crash
There is a UK property shortage, which means there is not enough supply to meet demand.
With more demand that meets supply, the prices of properties increase.
There is another line of thought when it comes to the UK housing market.
Matthew Parris, columnist for the spectator, suggests that there is no housing shortage. Instead the issue is the prices of property.
Only few can afford to buy, and many can’t even afford to rent. Therefore it’s not a supply issue.
Residential property has become a kind of currency, prized more for value than utility; and its role as a financial asset is messing with its ability to perform the function of actually housing people. Straining to increase the supply of housing will no more restrain price than straining to increase gold production would make much difference to the price of gold.
With the increased amount of issues landlords now face, including regulation & tax requirements, there is a risk of demand for property decreasing.
With the reduction in prices, housing may become more affordable for many who are currently out priced.
This wouldn’t however be good for everyone.
A reduction in house value poses an issue for those renewing mortgages for their properties.
The mortgage may be a higher proportion of the properties value. With a decreased loan to value range, home owners may not be able to secure a new mortgage at a similar rate than previous.
Even worse, their mortgage may revert to the variable rate after the fixed term. Commonly these rates are extremely high and repayments will double.
Homeowners may default on mortgage repayments as a result and lose their homes.
Repossessed properties will then add supply to the market, which lowers values of properties even further, creating a looping impact.
In conclusion, a property market crash can occur for many reasons. Usually, its not because of one independent issue. More so a property market crash is caused by a combination of intertwined events. During a crash there are always winners & losers.