UK Property Continues to Defy Gravity – August 2020 Roundup
To say that it’s been a busy year is possibly the understatement of the century. For various industries and businesses, the last five or so months have been filled with challenges, both new and old.
As more and more countries around the world begin to re-open following lockdown measures, we’re taking a moment to process the impact that COVID-19 has had, and will have, on UK property – from the beginning of the year until the end.
Now… Where Were We?
We don’t know about you but Q1 2020 feels like a long time ago. After a whirlwind election result at the end of the 2019, as a collective we entered the new year with a lot more certainty than recent years had delivered and for a while, the property market reflected this certainty.
In January, as Britain geared up to officially leave the EU at the end of the month, buyers continued to purchase property, especially in ever-growing regional areas, resulting in double-digit price growth for the UK’s big hitters such as Birmingham and Liverpool.
February continued the good news and house price growth remained at around 3.9%, a three-year high that reinforced Hometrack’s predictions of a rise in demand. Mortgage approvals followed suit, up by 5% when compared to a year earlier.
Finally, by the time we hit March, all English cities hit their 2007 pre-recession prices, nearly 12 years after the financial crisis caused a split in the market. With even London showing positive growth, most experts agreed that things were looking up for UK property, unaware of what was to come.
The Lockdown Landscape
The initial threat of Coronavirus had a delayed effect on the property market when compared to other investment vehicles. On the same day the World Health Organisation (WHO) declared a pandemic, the stock markets entered freefall. The Dow Jones Industrial Average (Dow Jones) fell so quickly that it ended an 11-year rally and major businesses announced downward pressure on profits.
Property, on the other hand, showed that it’s typically more resolute – especially when it comes to the effect of economic shocks. Prices held strong but for many industry experts, the bigger threat was how social distancing measures would affect transaction levels and the knock-on effect this could have.
Forecasts predicted a similar situation to that of the SARS outbreak in 2003 – an initial downturn as investor sentiment reflected uncertainty, followed by a bounce-back in the second half of the year.
Indeed, Q2 saw buyer demand dip by 40% as face-to-face property viewings were halted following strict lockdown measures. Transaction levels became the ‘first casualty’ but again, many people used Hong Kong (HK) as a precedent for what would happen.
In 2003, during the SARS outbreak, HK house prices fell by 1.6% but transactions fell between 30 and 70%. After the outbreak was contained, both the market and the economy snapped back to old levels.
Fortunately, technology advancements in 2020 have played a huge role in keeping transactions afloat. Virtual viewings and digital purchasing processes have become more commonplace for many estate agents, ensuring a safe and efficient buying environment while also accelerating PropTech as a whole.
As you’d imagine, a crisis of this scale has never been seen before and for many of us in the property industry, it’s added new levels of uncertainty to a market that has faced its fair share of challenges over recent years.
Calm Before the Storm?
At the time of writing, restrictions across the UK have begun to ease as the country tries to kickstart an economy struggling to stay afloat.
While many sectors of the economy have been hit hard, property has experienced something of a ‘mini-boom’ across the country.
Driven by a wave of pent-up demand and timely government interventions such as the Stamp Duty holiday, activity levels within the industry have escalated significantly since May, breaking records across the board.
What follows is a closer look at each aspect of the market – from house prices to transaction levels – and what the future may hold for UK property on a wider scale.
House Prices ‘Defy Gravity’
Despite downward pressure from a shrinking economy, UK house prices are around 1.7% higher than they were in 2019.
Encouraged by interventions such as the Stamp Duty holiday and continued low interest rates, we’re seeing the results of a government that is unwilling to let the market fail.
House price falls are usually the consequence of a recession – in 2009 we saw prices drop by 30%. That said, while the Office for Budget Responsibility, the UK’s major financial watchdog, believes that prices will fall by 5% during this downturn, the current market trends would suggest otherwise.
While a bust could always follow the boom, it’s worth remembering that house prices are closely linked with consumer confidence and demand – as long as there is confidence in the market, property has the opportunity to continue ‘defying gravity’ in a market where everything else is falling.
Regional Rental Performance Continues to Grow
July was an excellent month in the rental market for regional cores across the UK. As average rents continued to climb – hitting highs of £845 – the market started Q3 up 3.4% on the same period last year.
Unfortunately, London experienced a different story as average rents fell by 0.6% over the year while stock levels went up. Likely driven by Airbnb owners switching from a short-term focus to the long-term rental market, competition in the capital continues to be fierce.
Data from the Office for National Statistics (ONS) suggests that private rental prices have risen by 1.5% in the 12 months leading up to June 2020, unchanged from April 2020. This suggests that lockdown has had less of an effect than initially thought on the rental market, which could be attributed to the government initiatives designed to help landlords.
Transactions Boosted by Incredible Demand
Since markets ‘re-opened’ in May, transaction levels in the UK have surged as growing demand is once again released.
According to Rightmove, July was the busiest month for property sales in 10 years with a mammoth £37 billion worth of property sales agreed.
Sales figures are up by 60% when compared to the same period in 2019, as buyers continue with plans made prior to lockdown.
Knight Frank research suggests that the ‘prime market’ is a huge contributor to this rise – sales for properties valued over £1 million have risen by 100% year on year.
Other asset types have seen similar success; sales on property priced between £750,000 and £1 million was up 118% while properties valued up to £500,000 rose by 53%.
Regardless of price paid, this rebound is a clear example of how the Hong Kong market reacted in 2003 and reinforces the predictions made at the start of the crisis.
Bigger is Better for Tenants
As more people are spending more time than ever at home we’re witnessing an accelerated shift in tenant priorities.
A recent Rightmove survey suggests that nearly 49% of renters say lockdown has increased their desire for a larger home.
Whether it’s people working remotely, families looking for extra space for ‘me time’ or renters in the ‘micro-living’ demographic most prominent in the capital, bigger accommodation is quickly rising to the top of tenant wish lists.
As you’d expect, with the majority of people typically seeing the same four walls each day, private outdoor spaces such as balconies and communal gardens are also gaining in popularity.
The Royal Institute of Chartered Surveyors has found that 81% of property professionals believe that developments with either gardens or balconies will command more interest in the wider market – a critical signpost for investors to consider.
Fortunately, despite many more people working remotely, experts don’t foresee developments with close transport links becoming any less desirable – tenants always demand mobility and these amenities should remain an investor priority.
What Does the Future Hold?
For many industry experts, the future of the UK property market will be heavily influenced by the wider economy.
Savills believe that short-term struggles – represented by a 7.5% fall in house prices over the rest of 2020 – will be off-set by strong long-term recovery. Interestingly, they also stand by their 2019 prediction that prices will generally rise by 15.1% by 2024.
This long-term growth is broken down into several increases: a 5% bounceback over 2021 followed by an 8% boost in 2022 before returning to a steady 4-5%.
The same Savills report also believes that housing markets will recover fastest in regions with more resilient employment sectors. With this in mind, they predict the South East will drive market growth, supported by the relatively mild impact that lockdown has had on employment for the professional, scientific and technology sectors – all of which are prominent in the region.
Conversely, areas reliant on tourism and hospitality – such as the South-West – will be slowest to recover.
Finally, it seems property technology (PropTech) will indirectly benefit from social distancing measures, which have accelerated the need for virtual tours, blockchain transaction technology and other tenant-focused platforms.
While the future is still uncertain, especially as the housing market seems to be defying expectations, it remains clear that for investors – especially those in international markets – there is opportunity to be found in UK property, especially for those sticking to a long-term strategy.