- The housing prices fell by 1.4 per cent month on month in June 2020 over the same period one year ago
- Given the catastrophe caused by the novel coronavirus, the annual house price growth has stalled, and remains a cause for concern
During the month of June 2020, the growth in annual house price came to a screeching halt as the novel coronavirus continues to dampen the state of the economy. According to a recent report on Housing Price Index (HPI) released by the Nationwide Building Society, the annual price growth turned negative for the first time in the last eight years. The housing prices lost their value by 1.4 per cent month on month in June 2020, following a 1.7 per cent fall in the earlier month of May 2020, over the corresponding periods last year. Given the catastrophe caused by the coronavirus pandemic, the house price growth has come to a standstill across the nation.
(Source: Nationwide HPI June 2020 release)
Economic data releases impact the market by varying extents, and one must pay attention to the date and time of the event. Usually, the likely impact of the data might could fall under three categories: low, medium, or high.
The Housing Price Index or HPI measures the price change in the value of residential houses. The data is typically released into the market on a month by month basis and also updated on an annual basis. This data is calculated as a percentage figure from a specific start date. In most cases, the statistical method used to calculate price swings is the hedonic regression model.
In the UK, the HPI is released by the Office of National Statistics (ONS). In UK, the novel coronavirus peaked infections during the month of April 2020. The average housing prices in UK were up by 2.1 per cent year on year in March 2020, (a month prior to that) according to the ONS. This implies that the real estate sector was doing relatively well in the pre-Covid period.
A basic rule of thumb is that falling house prices (in value terms) are reflective of a struggling economy where the overall economic output could be going down. Alongside, it may or may not reflect a rise unemployment numbers, depending on the basic characteristics of that particular economy. The UK economy is slowing down sharply and has entered a recessionary phase (depicted by shrinking economic output for 2 consecutive quarters). This could also have a negative impact on the currency of the country. All this could happen if the housing prices continue to fall for a long time, accompanied by a considerable drop in the economic output of a nation.
On the other hand, a higher than expected HPI number might be reflective of an improving economy in which case it is better for local currency and you might find it increasing in value on exchange rates. Also, you should compare the HPI release number to the consensus value or the previous releases and remember that the markets do not like shocks or deviations from the consensus.
UK’s Economy not in best shape
During the first quarter (period ended March 2020), the Gross Domestic Product (GDP) of UK fell by 2.2 per cent in terms of volume, according to Office of National Statistics (ONS). This can be attributed to the economic impact caused by the coronavirus crisis and the measures taken by the government to curb the spread of this deadly pandemic.
The services output fell by a record 2.3 per cent during the three-month period ending March as the services, production and construction sectors provided a negative contribution to growth in the output approach to GDP. For the three-month period ended April 2020, the unemployment rate in the UK was up by 0.1 percentage points to 3.9 per cent in comparison to the previous year.
Due to economic impact of the novel coronavirus and the apparent risk of a tidal wave of unemployment, Rishi Sunak, the Chancellor of the Exchequer, took to the despatch-box in a mini- budget to announce his plans for offering support to the struggling sectors on Wednesday, i.e. 8 July 2020.
The Chancellor reiterated the extent of the economic crisis in the summer statement. The production sector output plunged by 9.5 per cent in the three-month period ended in April 2020. The output from the construction and the services sectors was down by 18.2 per cent and 9.9 per cent respectively, during the three months to April 2020. In addition, millions of people have been furloughed.
According to the one of Britain’s top economic consulting firm, Centre for Economic and Business Research (CEBR), the average price of a house in the UK is likely to fall by around 13 per cent during 2020, in the present scenario.
The Housing Price Index released by the Nationwide Building Society dropped for two consecutive months of May and June 2020 by 1.7 per cent and 1.4 per cent respectively. This is a cause for concern as it is an indication of an overall slowdown in the economy. British government realises this and wants to boost consumer sentiment in terms of buying, selling, or renovating their houses. Therefore, on the first £500,000 of all property sales in England and Northern Ireland, the Chancellor had announced a temporary holiday on stamp duty beginning 8 July 2020 until 31 March 2021. This implies that buying a property of £500,000 or more could save you a lot of money, that you would have otherwise paid in the form of taxes. This move is likely to support jobs and drive growth across the property and the housebuilding sectors. This crucial move may impact the housing price index positively in the months to come.
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