The Double-Edged Sword of Supply and Demand?

The initial market freeze of 2020 was a clear catalyst for many major changes throughout the property market. Coinciding with the UK’s first national lockdown, people found themselves re-evaluating their priorities and their homes, leading to a mass of pent-up demand to relocate and restart. 

Magnifying this on a national level, combined with the introduction of the Stamp Duty holiday, the demand for property in the UK soared coming out of the first lockdown. While we witnessed a surge in buying and selling, the significant lag in supply already present in the market meant the effects of Covid on the property market and construction industry were further exacerbated, creating a ‘double-edged sword’ – unprecedented demand but even more restricted supply.

Whether this ‘double-edged sword’ is seen as good or bad depends on your position. For those already in the market, it’s a clear signpost of rising potential – supply and demand drive higher prices after all. For those yet to jump in? An omen that now might be the time. 

Shallow Supply…

The first national lockdown the UK endured saw the temporary shutdown of the construction industry, and while this was relatively short, social distancing concerns led to some building sites remaining closed for the entirety of the lockdown. 

The demand for property was growing even before the onset of Coronavirus, which the construction industry was already struggling to meet. Leading up to March 2020, 255,000 homes were delivered in the UK – more than double the housing supply we had in 2012-2013 – but this still fell short of the government’s previous intentions of delivering 300,000 properties annually. 

This 13% fall in new properties only worsened as the year went on, especially with the unexpected surge in demand. As 42% of residential construction sites shut down in the first week of April and national lockdowns continued, only 5,000 new properties were delivered across the UK in 2020 – just 5% of what was completed in 2019. 

As the UK delves deeper into its third national lockdown, the flow of new homes on the market continues to stagnate. The recovery of the construction industry is dependent on the rebound of the economy, which we could potentially see in 2021 with the circulation of two (soon-to-be three) Covid vaccines. But with construction capacity continuing to inhibit delivery, and an estimated 20% reduction in supply for 2021-2022 when compared to previous levels, it could take years for the industry to stabilise. 

For homeowners, 2021 has brought with it a certain level of caution; despite wanting to upsticks and sell their property, a ‘wait-and-see’ approach has become more common. Reports from Zoopla indicate that this month, the number of new homes coming to the market is 12% lower than the previous 12 months.

Richard Donnell, Research & Insight Director, Zoopla, comments, “Sellers are more cautious however and appear to be waiting for case numbers to drop much further before listing their home, or until we see a return to tier-based restrictions.

“The strength of the market in 2020 has eroded the available number of homes for sale and this will mean continued upward pressure on house prices in the short term.”

…Meets Rising Demand

Not only did the Stamp Duty holiday sustain the property market over the second half of 2020, it caused property sales for the year to surpass 600,000. As changing tenant priorities result in a greater ‘spread’ around more affordable cities and towns, we’re seeing an opportune time for buyers to enter the market and current homeowners to realign their priorities with their living demands.

2021 has already presented the property market with many uncertainties and possibilities, but reports from January suggest the unprecedented demand from 2020 will continue. Rightmove has seen it’s busiest start to the year to date and the platform has been inundated with enquiries – interest in purchasing property has risen by 11%, as well as rental property enquiries increasing by 22%. 

Figures from the first two weeks of January alone indicate a rise of 8% in new sales compared to the same period in 2020. As you’d imagine, while this rise in activity is to be expected given how 2020 ended – especially with the certainty of a Brexit deal – we’re also seeing a surprising change in how this demand is manifesting in the market. 

Research by Nationwide has indicated that more buyers and tenants are choosing less densely populated areas as opposed to city centres. While city centres will always be popular, they’re not known for offering the most spacious properties (at least for those who also value affordability). It’s likely that while people won’t leave city centres entirely, they may redistribute to nearby districts that can provide more space or lower rental costs.

When we consider the short-term impact of the last few months, the Stamp Duty holiday has undoubtedly instilled a sense of urgency in prospective buyers. That said, it’s just one part of a larger puzzle. The fact the holiday coincided with a positive Brexit outcome and low interest rates means we’re now seeing a perfect storm. As we mention in our 2021 UK Investment Guide, we’re anticipating this high demand to remain strong while UK interest rates are low, which will continue to increase the borrowing power of buyers. 

What does this mean for investors?

This lag of supply and rising demand in the UK presents an opportune time to invest in property. Tenant demand continues to rise as we delve deeper into 2021, placing upward pressure on rental values in the UK market. Rental price growth is forecasted for the next five years, coinciding with the healthy capital growth that is predicted over the same period as supply dwindles.

As the outlook for the market grows more optimistic, it’s easy to see why now is the time to invest. Growing demand and property prices can only make things more competitive (and expensive!) for investors, especially when the Stamp Duty holiday deadline is fast approaching. That said, after a challenging 2020, investors can be assured of one thing – of all investment assets, a property investment is one of the most secure available.