The most obvious impact of Covid-19 on the residential construction market will be the fall in output as a result of the time lost on site. Lost production time should not last more than two months assuming that the phased lifting of Covid-19 restrictions allows construction to resume in May. However, even once the restrictions are lifted, the productivity of the construction sector will be impacted by the social distancing rules. These rules will limit the number of people on site and their interactions with each other which will slow project completion. April 27, 2020
Social distancing will also impact the connection of services to new housing developments. For example, instead of two utility engineers accompanying each other to a site, only one may be allowed thus halving productivity in this area. The same is likely to apply to builder merchant yards which will limit the entry of customers at a time. Finally, there is likely to be disruption to global supply chains which will lead to challenges in sourcing materials and delays.
While developers will finish units where construction has already started, the uncertain economic environment may cause small to mid-size developers to pause commencements on new units. Developers still repairing their balance sheets from the last economic downturn will especially be cautious in this regard. The larger developers of scale are much more likely to stick to their planned phasing timelines and proceed with projects as originally planned.
Outlook for New Homes output
Given that it takes between six to twelve-months to build a new home, heightened Brexit related uncertainty in 2019 already means that new completions were already due to be negatively affected this year. Then, just as Britain eventually left the EU on January 29th, the market was hit by two large, unexpected shocks. On February 8th, there was a hugely uncertain general election result while on February 29th the first case of Covid-19 was announced in Ireland. These dual hits to developer confidence, coupled with the restrictions on construction and the Brexit effect carryover from last year, will negatively impact on housing output this year. Overall, we expect that new completions in 2020 will be substantially down on the 21,241 units delivered last year, and the market could see a reduction of between 25% to 40% in output.
What will the effect of Covid-19 be on demand
The main worry for developers will be the ability of buyers to obtain mortgages given the hits to employment and wages arising out of Covid-19. Those with existing mortgage approval will be reassessed to take consideration of their new financial circumstances which will negatively impact on lending. Another consideration is mortgage rates, with evidence from Canada showing that mortgage rates started to rise at the beginning of the crisis before falling as a result of the monetary stimulus unleashed by the Central Bank. However, North American banks are in much better financial health than European banks and it is not certain that rates in Ireland will not rise as a result of Covid-19.
In terms of buyer enquires to agents, Knight Frank New Homes saw a drop of 25% in new enquiries in March. This decline was unsurprising given that viewings had to be cancelled although the impact has been mitigated by the adoption of virtual viewings. Despite the difficulties in transacting during the lockdown, some sales are nevertheless taking place. There is also a sense of increasing buyer frustration arising from the lockdown with prospective buyers’ eager to move forward and transact in the second half of the year. Unusually, buyers will be able to purchase completed and ready to go houses when viewings resume as construction will have continued long before viewings restart. This could prove to be an attractive incentive to many.
While demand will be adversely affected by mortgage challenges and the uncertainty in the economy, there will also be a corresponding reduction in the supply of new homes to the market which will mitigate the effect of this. As a result, competition from those seeking to acquire and move into a new home in 2020 will ensure demand for the reduced level of stock delivered in 2020. While the residential market as a whole will likely see some price adjustments in the short-term, the scope for these in the new homes market is more limited because of this. From a developer’s point of view, the output drop in supply could be a silver lining in relation to protection of value. Even before Covid-19, we were producing well short of the estimated 35,000 new units needed annually so the fall in output this year will increase this deficit, even accounting for the negative demand effects arising from Covid-19.
Finally, it is worth looking at the country projections contained within the International Monetary Fund’s recent ‘World Economic Outlook’ report. The report showed that not only is Ireland’s economy expected to contract by less than the Euro Area this year (-6.8% versus -7.5%), it is also projected to rebound by more than the Euro Area next year (6.3% versus 4.7%). Over the next two years, Ireland’s economic prospects are much stronger compared to Germany, the UK and the United States to select just a few.