12 months ago,
the unemployment rate in Neath stood at 3.5% of the working population, yet
with Coronavirus hitting the UK, what impact will this rise in unemployment have
on the Neath property market?
As I have discussed a number of times
in my articles on the Neath property market, this summer saw the Neath property
market do exactly the opposite of what was expected when Covid hit.
The Stamp Duty holiday added fuel
to pent up demand for people to move to property with extra rooms (to work from
home) and gardens. This prompted a brief hiatus in the number of people selling
and buying their home in Neath over the last summer and autumn.
Yet, insecurity around rising
unemployment, led to many mortgage companies becoming more cautious in the
later months of summer, predominantly when lending to the self-employed or
first-time buyers borrowing more than 85% of the value of the home (as they
wouldn’t want to lend money to someone that could not afford a mortgage due to an
insecure income or not having a job).
Back in the late spring, economists were predicting that UK unemployment
would rise to a peak of 6.5% in Q3 2020, returning back to the 2019 levels
(3.4%) by 2022.
As we speak (Christmas 2020), nationally
the unemployment rate stands at 6.3%. The toll Covid has had on people’s
livelihoods has been massive, with an additional 1,434,515 people out of work,
although it is important to note this unemployment rate is still lower than the
five years following the Credit Crunch years – 2008 to 2013.
So, with such a growth in
unemployment and the spectre of a ‘No Deal Brexit’, this may hold back the
enthusiasm of many companies to take on more staff, reducing any rebound in
employment. If unemployment remains high, this will influence perceptions of
employment and personal/household financial security, which are the ultimate
drivers for both house prices and whether people buy and sell.
3,015 Neath Port Talbot people were unemployed a year ago and
today that stands at 4,995.
Looking
at all the study papers on the topic, there is a link between unemployment and
house prices, yet it’s not as strong as you would think. The larger factors are
the demand and supply of property on the market and interest rates.
Interestingly, in the past two recessions, the comparatively richer
regions of London and South East house prices have been more sensitive to
unemployment and house price changes than the rest of the UK, yet London and the
South East also bounced back quicker and higher after the two recessions.
The
concept behind this is that more expensive house prices in the South drop more
than lower priced houses in the rest of the UK. Why? Because those more
expensive regions have, by definition, more expensive house prices meaning the
homeowners have higher mortgages, so if they become unemployed, their homes are
more likely to be repossessed (because of the high mortgages), and consequently
that reduces house prices in that area quicker because repossessed houses tend
to sell much more cheaply compared to normal house sales.
The health of the Neath property market in 2021 and beyond really
depends on what happens to the economy as a whole and more specifically what is
happening in the Neath economy.
When we drill down though, unemployment has hit different
sectors of the economy to a lesser or greater extent. For example, for office
workers, people who work in tech & sciences and the professional services,
the impact on jobs has been comparatively mild, with many personnel able to
work from home. Yet for others, such as those who work in the hospitality,
leisure, retail, entertainment and catering industry, remote working
is simply not an option, and these have been hit the hardest.
Unfortunately, the industries mentioned above are
the ones that tend to employ the younger generation, who invariably live in
private rented accommodation, rather than own their own home. Being made
redundant puts their dream of buying their first home back even further as they
try and get themselves back on their feet by initially finding a job (let alone
save for a deposit).
Housing markets will recover quickest in towns and cities, where jobs
are in more resilient employment sectors.
For example, in London, unemployment
jumped really quickly (and high) in 2009 with the Credit Crunch, yet came down
just as quick in 2011, just as the property market in London started to take
off, whilst in Neath, it took a lot longer for unemployment to drop and the Neath
property market didn’t really start to get going until 2013/2014.
If we have a determined economic
contraction, with a lengthier and leisurely economic recovery, impeded by
financial stress, that will lead to much higher unemployment in the 10% to 12%
range in the summer of 2021. However, before I get to the initial question, I
need to highlight another interesting fact, because…
What is particularly interesting is the increase in
unemployment in Neath amongst men has been higher than women, with a growth of 2.9
percentage points for men compared to 1.6 percentage points with women.
So, what is the prediction for
the Neath property market under the cloud of this growth in unemployment?
One massive redeeming factor that
could just save the Neath property market is low interest rates. This will keep
mortgage payments low, meaning repossessions should be kept to a minimum (therefore,
there shouldn’t be a flood of cheaply priced Neath properties coming onto the
market all at the same time and dragging Neath house prices down with it, as it
did in the previous two recessions of 2009 and 1989).
Yet, irrespective of the ultra-low interest rates, I still consider
property prices in Neath at Christmas 2021 won’t be much different from today,
and in fact could be slightly lower.
This is because people have been
paying top dollar in the last six months to secure their dream Neath home,
quite often spending the money they saved on Stamp Duty on the purchase price.
When Stamp Duty Tax returns in April 2021, there will be less money to pay for
the property … thus Neath property values will be, by implication, lower in a
year’s time.
What about Neath landlords
and the rents?
Nationally, rents fell just over
2.3% between 2008 and 2010, following the Credit Crunch, while national house
prices fell 15.9%. I anticipate Neath rents will also remain comparatively robust
in the coming months and years.
Rents are very much tied to the rise
and fall of wage growth and I can’t see why this relationship shouldn’t
continue. Rents will rise in Neath by between 13% and 15% in the next five
years, yet if property prices do rise in 2023/24, that means future rental
yields will be marginally lower in 2023/4 comparative to today, especially as ultra-low
interest rate expectations (according to the money markets) seem to be here to
stay for a long time.
