This article explores the extent to which a property crash later this year is likely, and if there is one, whether it might result in job losses in conveyancing in the same way we have seen recently following the Financial Crisis of 2008.
Factors that cause a housing market crash
Firstly, the factors that cause a housing market crash are one or more of the following:
- An economic downturn, recession and or high unemployment; or
- A fall in the availability of mortgages to fund house purchases; or
- High interest rates impacting mortgage affordability; or
- Lower demand for house purchases
Before we look at each of these, let’s have a brief look at the causes of the last house price crash, which happened as a result of The Financial Crisis of 2008, and what the impact of the house price crash was on the legal sector then.
The Global Financial Crisis of 2008 caused a house price crash because:
- Banks lent a lot of money in mortgages to people with bad credit – these were called ‘sub-prime’ mortgages.
- These sub-prime mortgages (many of which were lent in the US) had high interest rates on a fixed-term basis (e.g. perhaps a two-year fixed term interest-rate, which is common in mortgages) and many were offered at multiples of someone’s salary of 4 or 5 times (instead of the more common 3.5x salary which we now see). They were also lent in a very risky way – often on 100% loan-to-value (meaning people who took out these mortgages did not need to have any available cash to put down as a deposit on a house purchase).
- These sub-prime mortgages were packaged up in to bundles, and then sold on. For instance, many US banks sold bundles of these sub-prime mortgages they had provided in the US, to UK banks. This created two big problems (1) it allowed banks who were offering them to have money to keep lending to people requiring a sub-prime mortgage; and (2) many banks across the world bought these bundles, repackaged them themselves, and sold them on to other banks. Eventually lots of banks were exposed to the high risk of these mortgage loans not being repaid in full or in part.
- At the end of these fixed-term interest-rate periods on the sub-prime mortgages, the people who had these mortgages had to find a lender willing to loan them the amount they had against their house, and taking into account the payments they were making preferably at a less expensive rate (due to their own affordability and the fact that their loan size was high in comparison to their income)
- However at renewal time, many people found themselves having to pay out more money on a higher-interest rate deal, or worse, not finding a deal at all so that they had to pay a very high interest rate when their initial deal expired; this meant that they were struggling to make their mortgage payments due to their own financial circumstances.
- As a result these people with higher payment obligations in many cases tried to sell their home (which they could not do for an amount that exceeded what they owed) and, when they weren’t able to do that, they started defaulting on their mortgages. These defaults happened on a huge scale and during the same time period.
- In a situation where consumers default on their mortgages, this often results in the bank who issued the mortgages (or the bank who purchased these mortgages as a package from another bank who had issued the mortgage) repossessing their houses.
- In fact, bank repossessions happened on a huge scale on these sub-prime mortgages. But because banks had lent, in many cases, mortgages which were on a 100% loan-to-value basis, banks found many consumers defaulting on their loans and had to repossess the mortgaged houses.
- Coupled with that, property prices also began to fall, so banks were left with huge numbers of repossessed houses that were now valued at a price much lower than the value of the mortgage issued. As a result banks began losing a lot of money.
- The result was a number of banks collapsing or getting a government bail-out to survive. This happened across the globe, and there were high-profile bank failures in both the US and UK for example.
- To prevent this situation from ever reoccurring, banks tightened up their lending criteria and made it harder for anyone to get a mortgage – in particular a large deposit was required in most cases and this did not just impact those requiring a sub-prime mortgage – but anyone requiring a mortgage. This meant less risk for banks, because if they had to repossess a property, that property’s market value would be at least, but probably more than what the bank had lent against it.
- This tightening up of lending criteria led to far fewer people (and businesses) qualifying for credit to do anything – not just buying a house – but for buying anything with borrowed money.
- This tightening up of credit criteria by banks meant that there was a lot less spending everywhere because individuals and businesses had less borrowing capacity; as a result a recession and a large number of job losses occurred.
- It also meant fewer people being able to afford to buy a house, lowered demand for buying a house and this led to fewer house sales and house price values falling.
- In the UK, The Bank of England lowered interest rates substantially to enable those who could still get a mortgage to do so on favourable terms; the government also introduced a number of schemes to help first-time buyers. Eventually due to demand for houses and a lack of supply, the housing market recovered – but it took many years.
Since the Financial Crisis of 2008, lending criteria in the UK has remained tightened, and banks do not offer 100% loan-to-value mortgages. The minimum criteria in most cases, for the purchase of a property, is at least 90% loan-to-value (meaning that anyone who wants to buy a property to live in has as to find a minimum of a 10% deposit). For people who have a history of bad-credit, the minimum loan-to-value is likely to be less favourable (e.g. a bank may require a much bigger deposit, of say 25%); this is in stark contrast to the lending criteria seen in the run up to the Financial Crisis 2008.
So will a property crash occur in 2021?
The answer is: nobody knows because it is not possible to predict the future with precise accuracy.
But for a crash to occur, at least one or more of the four factors which cause a house price crash mentioned above would have to occur.
Most conveyancers we are speaking to think there will be a property slump when the stamp duty holiday ends (currently due to happen at the end of March 2021).
It would seem that this prediction is reasonably likely, looking at the four things which cause a crash, i.e:
(1) An economic downturn, recession and or high unemployment
If this were to happen (and to some extent, it already has happened since March 2020-now), the change would have to impact people who would ordinarily be buying a home, or who have a home at the moment but would fall behind on their mortgage payments.
However, the pandemic seems to have impacted the ‘Under 25s’ far more than any other age group (BBC News, 6 May 2020). (That’s different to the Financial Crisis in 2008 which impacted anyone who wanted to borrow money for any reason, and particularly first-time buyers who did not have cash available to put down as a deposit.)
This is significant to point out because, in the UK, the average first-time buyer is 34 years old (Finder, August 2020). So unless the older age groups in the UK become unemployed, and that unemployment impacts their ability to either get on the housing ladder or stay on it, the demand for house purchases may not, on its own, fall, due to a change in the unemployment level in the wider economy; it would have to impact the right category (i.e. those aged 34 and above) to be of much significance.
(2) A fall in the availability of mortgage credit
If mortgage lenders make it harder to get on to the housing ladder by, for example, demanding a higher deposit of say 20% instead of 10% from first-time buyers (in the same way criteria to borrow was changed in the aftermath of the Financial Crisis, from a 0% deposit to a minimum of a 10% deposit), then there could be a subsequent reduction in the number of people who are able to afford to buy a house and hence lower demand. This did happen at the start of the pandemic; many mortgage providers increased the amount of deposit buyers required. However, it was temporary, and now there are many lenders willing to offer 90% loan-to-value products again.
Nationwide for instance, which is the UK’s largest building society, had restricted its mortgages in June 2020 in response to the coronavirus, but in July 2020, it lowered the minimum deposit it required from first-time buyers to 10% (source: BBC News, July 2020).
(3) A rise in interest rates
So far this has not happened and furthermore it would seem unlikely. What has occurred is the opposite – interest rates have fallen and so far stayed down. This means it is cheaper to buy a house for anyone requiring and qualifying for a mortgage.
On 11 March 2020, interest rates were reduced from 0.75 to 0.25; and on 19 March 2020, interest rates were further reduced to 0.10. The next decision on bank rates is due on 4 February 2021 (source: Bank of England, 2021)
(4) Lower demand for house purchases
This seems to be a likely scenario but it would be the opposite to what has occurred since March 2020 to the present. In fact there has been higher demand for house purchases. That’s because many people have wanted to move house (probably because they want more space because they are working from home). Increase in demand has been possible because the government has also made buying a house cheaper by introducing the stamp-duty holiday (due to end 31 March). When the stamp duty holiday ends, many people will find it will not be as affordable to move house. If this happens though, it is likely to be only short-term.
So in conclusion a slump rather than a crash is possible/likely, but whether any reduction in demand is just temporary for a few months, or is more long-term remains to be seen. It also remains to be seen whether other factors that could cause a crash (such as significant unemployment in the age groups who would either be buying their first home or have just started on the housing ladder) will happen.
If there is a property crash, what will the likely impact be on the legal sector?
In a nutshell, again, no one knows. But what we can do is look at what happened in the aftermath of the last property crash (of 2008), which was as follows:
- There was far less conveyancing activity because of high unemployment and the change in availability of credit to fund a house purchase.
- This reduction in work led many firms to make conveyancing staff redundant – in some cases there were a huge number of redundancies.
- Newly qualified solicitors did not qualify into conveyancing positions, due to lower work demand, and many left the sector altogether after qualification if they didn’t have a job offer in another practice area.
- There were very few conveyancing jobs around in the market, and any that there were, attracted a large number of redundant candidates.
- Many firms had to have a re-structure particularly in their conveyancing team – but in other teams as well.
However, as is the case with any downturn in work, not all firms were impacted equally. Whilst some law firms made mass redundancies, other law firms made none. Some law firms even grew their conveyancing teams (either from scratch or increased their current one, despite the economic conditions).
Firms which were predominately conveyancing firms, in many cases (but not all cases), suffered more than firms who had other, more profitable practices in other areas.
In firms which were negatively impacted, their response in many cases was to make support staff and those requiring supervision redundant first. Then conveyancers who could run a caseload were, in many instances, required to run their caseload with less secretarial support and become ‘self-producing’ fee-earners. This trend towards self-producing fee earners has remained even though the market recovered.
By the time the property market started to recover, in 2013/2014, many law firms experienced difficulty in hiring staff. That was because:
- Newly qualified lawyers did not want to qualify into conveyancing roles because many had seen colleagues lose their jobs.
- There were not a huge number of lawyers on the market who were 0-5 years’ qualified but there was a lot of demand for such people.
- Previously experienced staff had left the sector altogether and had no desire to return to it.
- Staff who had been looked after by their firms and kept their jobs were less likely to want to move and start again building up their employment rights from scratch.
Nevertheless, in more recent times (2020) it has become very difficult to recruit experienced staff because there has been a huge increase in conveyancing instructions but not enough staff to service this work. So many firms have been trying to hire experienced staff, but have not succeeded.
These factors combined probably mean that, if there was another property crash which happens later this year (2021), law firms will probably look to retain their experienced fee-earners despite it (depending on affordability). The more financially stable a law firm is, the more likely they are to take this course of action because, experience shows us, the market will recover again, and when it does law firms will want to be in a position to capitalise on that recovery by having staff already in place who can service the increase in work, so that they are positioned to make money.
So this is what might happen if there is a property crash in 2021 (or later):
- In the short term, there will be fewer jobs available.
- For existing conveyancing staff, their job prospects, promotion potential and pay rise likelihood will all reduce assuming that their individual billing and performance also reduces (which may not happen in some instances).
- Law firms will probably deal more harshly with poor or underperformance – for example insurance claims, low billing performance, compliance issues or client complaints, against a backdrop where workload has reduced.
- We would think that law firms will only make redundancies as a last resort, especially amongst experienced (and qualified) fee-earning staff, and would instead explore alternatives to redundancy (such as taking a voluntary cut in the number of hours worked). We think this is the case because many will be wondering if the situation of lowered conveyancing activity is just temporary and will recover relatively quickly.
We hope you have enjoyed reading this and if you want to talk to us more about what you think the impact of any property slump would be, do not hesitate to call us.
BBC News, 6 May 2020. Coronavirus: One million under-25s face unemployment, study says. Viewed 12 January 2021 www.bbc.co.uk/news/uk-52555978
Finder, 28 August 2020. First-time buyer statistics: Average age to buy a house in the UK. Viewed 12 January 2021 www.finder.com/uk/first-time-buyer-statistics
BBC News, 13 July 2020. Nationwide offers 90% mortgages to first-time buyers. Viewed 12 January 2021 www.bbc.co.uk/news/business-53383375
Bank of England, 2021. Interest rates and Bank rate. Viewed 12 January 2012 www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate