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Home truths: Covid’s duration will determine its impact on values

Speculation about where house prices and the property market will end up in the aftermath of Covid-19 has already started, with the publication during the week of a report by Davy Stockbrokers estimating that new house prices could fall by as much as 20pc if the coronavirus upheaval continues.

The important words here are “if” and “continues”. It is reasonable to assume that the new homes market would be hit hardest given that developers are like retailers, with a certain amount of stock and a moving pipeline. And pipeline disruption can bring empty shelves, even after demand recovers, which could in turn adversely affect the housing crisis (remember that?).

It is estimated that 30pc of building materials now come from China, which is in recovery, with its factories moving again, although shipping is still being paralysed.

The second-hand market is different. Typically it takes time for a crisis to filter down into pricing. Take the example of Ireland’s property crash, which can be traced back to a series of failed sales of luxury homes just before Easter in 2006. The first evidence of impact on prices didn’t manifest in Dublin until March 2007 and didn’t go countrywide until the following year. Second-hand owners can take almost a year to cut their price. They’ll just withdraw and sit on their hands to wait it out.

The second-hand residential sector is much like other businesses which no longer rely on in-store activity. Impact will depend on how long the pandemic takes to push through. The SARS outbreak kiboshed sales activity temporarily in affected countries and hurt new home values in the short term, but actually didn’t have much impact at all on second-hand residential property prices. Hong Kong’s notoriously expensive housing market saw activity plummet by over 70pc, but a rapid play-out meant second-hand prices were largely unaffected.

The big problem arises if Covid-19, like the Spanish Flu of 1918, makes a second sweep. In that case we’re certain to see falling values linked to longer-term job losses and overall economic impact. Poor long-term prospects for the second-hand market are usually linked to enduring recession.

But if Covid-19 plays out in months, evidence suggests that the market is likely to snap back to normal very quickly, albeit influenced by recessionary tinges that the overall economic impact will cause.

The word from estate agencies before the virus hit was that the upper-middle and luxury market in Dublin, which has been sluggish for a number of years thanks to Brexit, was looking like showing value gains for the first quarter. This week most agencies report making sales and dealing with large numbers of contacts from perspective buyers whose attention has been concentrated on property hunting by virtue of being confined together around the clock in their own homes.

Last week agents moved to enable more virtual walk-throughs, online viewings, increased video postings and even online accompanied Q&A sessions with agents. Smaller independents, however, have greater reliance on on-site visits, and these are being curtailed completely. The one-third hike in online property activity online activity reported by some agencies will certainly help properties that are now on the market.

The Sherry FitzGerald network issued a Q&A to its staff this week to answer questions their agents were raising re Covid-19. In this document, seen by the Irish Independent, the firm points out to staff that banks and solicitors are still operating as normal regarding mortgages and conveyancing and that sales are proceeding at all price levels. The agency said it was too early to say how new business is being affected.

The big problem for estate agents is that, as with other outbreaks which have occurred in the last 20 years, there will certainly be a fall-off in new instructions as the crisis becomes full-blown. Data from recent outbreaks like SARS shows that activity could plunge by as much as 70pc in the short term.

Thus far anecdotal evidence suggests that new instructions have fallen drastically, but that the levels of those instructions still coming in have been better than expected. This may change.

The key factors for the prospects of the property market are the duration of the crisis and then the longer-term impacts on jobs, security of income and the economy overall.

Irish estate agencies can at least take solace from the fact that things aren’t as bad as in the UK, where Michael Gove recently issued a statement urging people not to move house at all, and the UK banks are ceasing the issue of new mortgage loans.

The longer-term impact on property values will also depend on local impacts. If tourists continue to stay away after Covid-19 has gone, then tourist-reliant areas with high numbers of holiday homes could see their values impacted.

A long-term impact on farming, which works on annual cycles for its income, could also impact further values of homes in areas reliant on it.

Unlike economically engineered recessions such as that of 2008, the overall bounce back for the residential market from Covid-19 is likely to be far quicker, again based on the evidence from the 1918 and SARS outbreaks.

But in poor case scenarios, if damage is done, expect the vulture – the crisis investor who is always out waiting and watching from the fence, sitting on a war chest. They swooped in when the Dublin market hit rock bottom in 2011 and hoovered up vast amounts of property in D4’s leafy and value-depleted lanes. Those homes doubled in value in a decade. Unsavoury perhaps, but without the vultures there are no recoveries.

News by independent.ie, edited by Dowling Financial.

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