Housing Hindsight – Flying high or about to nosedive?

Published 2nd of August, 2020

A fascinating week with plenty of UK housing market newsflow, however, some of the news was positive and some of it negative. Depending on which news stories you read you might think that the UK housing market was either flying high or about to nosedive. In this edition of Housing Hindsight, we dig into the detail to see what is really going on.

It generally starts with a mortgage

The overwhelming majority of UK housing transactions are financed with a mortgage. Lloyds Bank and NatWest two of the UK’s largest mortgage lenders published their first-half results this week.

Lloyds reported that 472,000 mortgage customers had taken a payment holiday and that of which 193,000 have matured, of which 72% have resumed repayments and c.23% extended payment holidays and 5% are in arrears.

Looking at Lloyds UK mortgage book as a whole, the number of mortgages greater than three months in arrears increased by 7% (to 26,074) and the number of Buy To Let mortgages more than three months in arrears increased by 22% (to 4,699). Repossession stock fell, but the regulator has suspended all repossession activity until October 2020

If we look at Lloyds motor finance book 126,000 payment holidays have been granted, of which 70,000 have matured, of which 59% have restarted repayments

NatWest said that 240,000 customers requested a 3-month mortgage payment holiday, representing 20% of the book by volume, approximately 1/3 have requested a further extension.

Mortgage defaults - A hidden problem?

Lloyds comments that:

“Default has occurred when there is evidence that the customer is experiencing significant financial difficulty which is likely to affect the ability to repay amounts due. The Group uses a 90 day past due backstop for all of its products except for UK mortgages wherein a backstop of 180 days past due is in place.”

I find it quite worrying that in terms of their definition of default Lloyds believes that it is not until a mortgage is 180 days (c. six months) passed its due date that there is evidence that the customer is experiencing significant financial difficulty. Are 90 days or three months not sufficient?

Lender’s Modelling Assumptions

This week Lloyds cut its house price forecasts and increased its forecasts for unemployment. For 2020 Lloyds Base case for UK house prices is a fall of 6% (its previous forecast published on 30 April was a fall of 5%). Upside case a fall of 3.7% (previously -2.2%) and downside case a fall of 8% (previously -7.6%). Unemployment is all cases is expected to increase to more than 7% (previous range 5.9-6.3%)

NatWest rather confusingly models two central cases with house price falls of 8.9% and 9.3% respectively with an upside case falling just 0.1% and a downside case falling 11.5%. Their probability-weighted average is an expected fall of 7.5%.

Twindig take – it’s tough out there and getting worse:

Lloyds and NatWest are closer to the housing market than most, they have skin in the game, they are the bacon in a full English breakfast. It would be short-sighted of them to talk up the UK Housing market if It led to losses in the future. The commentary from these lenders is clear: A significant number of UK households are experiencing financial stress and both lenders expect significant house price falls this year.

Let’s go buy a house

Homebuyers have two basic options new build (via a housebuilder) and second hand (via an estate agent) fortunately for us we had first-half results this week from Taylor Wimpey a housebuilder and Foxtons an estate agent.

What Taylor Wimpey Said

Revenue down 56%
Net cash £497m
Tangible Net Asset Value per share 102.8p
Orderbook up 15% in volume and up 23% in value
No evidence of stimulus from the Stamp Duty holiday
Sales held back by production capacity
All employees returned from furlough
All furlough subsidies returned to Government
Averages selling prices increased by 1% in July 2020
Around 50% of sales used the Help to Buy scheme

Twindig take – Look through the cycle

The housing market is cyclical and housebuilders main job is to manage the cycle. Taylor Wimpey is doing this very well. It has sufficient cash to weather the storm and plenty of cash to invest ahead of the recovery. Investing in land during the credit crunch set the scene for strong profits as the credit crunch eased.

Help to Buy is certainly aiding the new build sector and provided deposits to 50% of customers in the first half of 2020. As lenders proceed with ever more caution I would not be surprised if the share of help to buy sales increased during the second half of the year.

Taylor Wimpey has all staff back at work and has returned all furlough funds received from the UK Government, I would like to see the list of all the companies who have followed suit, I suspect it is a very shortlist.

Taylor Wimpey and other housebuilders can use these quieter times to assess how the use of homes is changing in a lockdown/working from home world and adjust the style and designs of their homes to better suit to our changing lifestyles.

In theory, a share price reflects al the future cash flows the underlying business is expected to generate and in my view, the future looks brighter than the current share price.

Foxtons

Foxtons is the bell weather of the London Housing market

What Foxtons said

Group revenue down 22%
Lettings revenue down 21%
Sales revenue down 28%
Mortgage broking down 9%
Around 15% of employees remain on furlough back
No financial guidance for the full year
The sales commission pipeline has strengthened since re-opening and is now broadly in line with last year.
Short term future sales activity is further supported by the Government’s Stamp Duty relief effective from 8 July 2020.
Covid-19 continues to impact the UK economy and consumer confidence, which is expected to have an adverse impact on residential property transaction levels in the short to medium term. The speed and extent of recovery is difficult to predict and therefore there is a high degree of uncertainty in the market outlook

Twindig take – putting on a brave face

The housing market may have reopened but in London Foxtons sales commissions were down by 44% in June and 32% in July. Trading is improving, but Foxtons offers no financial guidance suggesting that the recovery is difficult to predict and the outcome for 2020 remains highly uncertain.

Of particular interest is that around 15% of staff remain on furlough and there was no suggestion that Foxtons would be returning the furlough money it had received suggesting that business is not yet back to normal or in their own words “The speed and extent of recovery is difficult to predict and therefore there is a high degree of uncertainty in the market outlook”.

London is the major beneficiary of the Stamp Duty Holiday, but commentary around stamp duty was muted, Foxtons certainly weren’t banging the stamp duty drum.

Foxtons were keen to point out the strength of their lettings book which now accounts for 64% of revenues as sales volumes wane. We would point out that younger workers are more likely to be on furlough and may, therefore, see higher levels of unemployment. Foxtons reported negotiating more than 1,300 temporary rent agreements for those facing financial difficulties a figure we expect to rise as the furlough scheme ends. We also note the commentary at Lloyds that Buy To Let arrears increased by 22%

Following a fundraising, earlier this year at 30 June Foxtons had net cash of £40.5m which in my view will help them weather the storm rather than fund expansion and growth

OnTheMarket

Challenger UK property portal

What OnTheMarket said

Total advertisers had grown to almost 14,000 (up from 13,364 as at 31 January 2020)
Number of leads average of 134 per advertiser in June up 6.3% from January
Net cash £9.4m
"Following the release of pent-up consumer demand as the market reopened, buoyed further by the Chancellor's stamp duty holiday, agents are seeing strong levels of activity”

Twindig take – mistaking micro for macro?

Since issuing their AGM statement on Thursday 30th July the price of OnTheMarket’s shares has increased by around 10%. Whilst we congratulate them for signing up new advertisers and facilitating increased enquiry levels to their advertisers do these firm-specific successes outweigh the macroeconomic headwinds? There was no commentary about the number of staff returning from furlough whether OnTheMarket will be repaying the UK Government for furlough monies received and the successes did not lead the company to reinstate financial guidance. I wonder whether the share price gains will be short-lived as the good ship OnTheMarket sails against a strong tide.

Nationwide House Price Index

Long-running UK house price index

What Nationwide said

Annual house price growth recovers to 1.5% in July
House prices up 1.7% month on month
The bounce back in prices reflects the unexpectedly rapid recovery in housing market activity since the easing of lockdown restrictions
However, there is a risk this proves to be something of a false dawn

Twindig take - look forward not back

House price indices are backwards rather than forward-looking, they tell you what did happen rather than what will happen. We do not doubt that stock shortages and pent up demand from homebuyers whose purchase is non-discretionary will underpin prices. Such market dynamics allowed Taylor Wimpey to increase its average selling prices by 1% in July. However, we would caution against taking this data point as an indicator that all is well. A better guide would be to look at the volumes, LTV’s and mortgage rates of the mortgages Nationwide is offering to the market.

UK Mortgage approvals

Mortgage approvals in June 2020 bounced to 40,000 from their all-time May 2020 lows of 9,273

Twindig take – good but still subdued

Good news an increase of more than 300%, but mortgage approvals are still more than 50% below longer-term averages. We do not see a miniboom yet, although any stamp duty holiday impact is unlikely to be seen before the September approval figures

UK Mortgage rates

Bank of England statistics released this week show that mortgage rates for new business are ticking up

Twindig take – Risk and uncertainty

Commentary from Lloyds and NatWest suggests that the economic outlook is worsening so it is no surprise that the price of mortgages is going up to reflect the increased risk attached to them. High Loan to Value mortgages will be hit the hardest with the double blow of lower availability and higher pricing. The average rate of a 2 year 90% LTV fixed-rate mortgage jumped by 17% in June to 2.27%. This is very low by historic standards, but the direction of travel and impact on availability is clear.

Conclusion Walking and talking

The lenders appear to be walking like they are talking, the UK housing market is tough and likely to get tougher and they believe and are preparing for significant house price falls this year.

Taylor Wimpey is looking through the cycle and believes it is well-positioned (the talk). All staff are back from furlough and all furlough monies received from the UK Government have been paid back (the walk).

Foxtons and OnTheMarket talk of a recovering market but their walk is not as convincing, staff still on furlough and no repayment of furlough subsidies. This suggests it remains tougher out there than their words suggest.

The Data: Mortgage rates more risk being priced in. Mortgage approvals market less than half what it normally is. House Prices: looking back there is evidence of historic pent up demand, but this is no guide for what will be.