UK Property Market Forecast 2020
With the results of the General Election confirming a clear majority government for the New Year, the UK property market forecast for 2020 has started with a flurry of fresh predictions for the direction the industry may take.
The consensus seems to be that the Conservative win has started removing some of the uncertainty that has clouded the market since the Brexit vote in 2016 – a major blocker for many investors that were taking a ‘wait-and-see’ approach. According to Liam Bailey, Head of Residential Research at Knight Frank, while January is typically a good month for sales in the industry, 2020 may see a ‘release of pent-up demand that will elevate it even further’.
Regional cities continue to dominate growth, using the momentum of redevelopment and housing undersupply to push prices further upwards. Borrowing costs remain at a record low and a relatively stable labour market is also helping to combat the impact of uncertainty.
With many forecasts also pointing at marginal rises within the London market, the so-called ‘Boris Bounce’ could mean light at the end of the tunnel for the capital, which finally seems to be recovering from its biggest decline since 2009.
Another major question is, does this increase represent a short-term positive bounce or the beginning of a new property cycle? And what does this mean in terms of the overall UK property market forecast for 2020?
Property Price Forecasts for 2020 – 2024
House Price Predictions across the UK
The graph below shows the predicted house price growth of each UK region over the next five years. While this is a good indicator of the regions that are set to perform overall, it’s important to note that this doesn’t into account individual success and many city cores in these regions are expected to over-perform against the national average.
As you can see, while London’s recovery has started, it will still fail to match the rises seen in key regional areas that are racing ahead of the national average.
Gradual house price growth predicted across London
After the market reached limits of affordability halfway through the last decade, London saw huge declines that tempered sales. Experts predict that the Greater London region will see gradual house price growth in 2020 of around 1% before it rapidly increases in 2022 and beyond.
While the General Election results produced a more positive outlook for the UK market – international buyers were quick to jump on the bandwagon according to high-end estate agents – the situation could be better described as ‘cautious optimism’ as we still don’t know what state the market will be in post-Brexit.
It’s anticipated that while Greater London will continue to underperform against markets in the Midlands and the North, prime central London property will go the other way as the city’s most expensive properties start to look more valuable on a global level, especially alongside predicted rises.
Midlands continues exceptional performance
Anchored by Birmingham – a top performer in the second half of the last decade – the West Midlands is forecasting excellent growth in 2020. Birmingham is expected to continue its meteoric rise with predicted property price increases of 15% by 2024 while rental prices are expected to increase by 12.5% over the next three years. The Midlands Metro Expansion will play a huge part in driving both demand and property performance, as key destinations around the region establish direct links with the second city.
South-East prices expected to rise
In the Living with 2020 Vision report, JLL predicts that the South-East, including key regeneration spots like Slough and Bracknell, will experience price growth of around 14.8% by 2024, while rental prices will rise by 11.5%. Buoyed by huge infrastructure projects such as Crossrail and regeneration across key destinations in the region, the South-East will benefit from some of the positive growth that London is experiencing.
North sees new property challengers
It’s also predicted that UK house prices are expected to rise by 15.3% on average over the next five years but only 1% of this will be in 2020. Savills expect Yorkshire and the Humber to see the biggest growth with 21.6%, mainly down to the strength of the regional economy.
What affects property prices?
The main things that affect property prices are:
- Supply and demand
- Economics – Including inflation and employment
- Political certainty and uncertainty
- Bank base rate
Supply and demand in the UK Property
While many of the aspects that affect property prices are down to the individual buyer, several fundamental factors have an impact on the rise and fall of a property’s value. These can easily be categorised by the ‘supply-side’ and ‘demand-side’, all of which contribute to the overall value of a property.
For example, on the demand side, economic growth plays a huge part. Demand for housing is heavily dependent upon income. With higher economic growth and rising incomes, people will be able to spend more on houses; thus increasing demand and pushing up prices. Similarly, low-interest rates mean more people can afford a mortgage, once again increasing demand and in turn, property prices.
At the same time, if available supply drops, the same outcome will occur – not enough properties on sale to meet demand, whether through a lack of sellers or not enough being built, means supply goes down and prices naturally rise.
While politics is still playing a huge part in the overall performance of the UK market – particularly in terms of the uncertainty that continues to plague buying decisions – initial responses to the election and expert forecasts paint a much more optimistic outlook for investors.
Inflation and Interest Rates vs Property Prices
Inflation is one of the main reasons why interest rates fluctuate and is largely determined by the state of the economy overall. This is why the aftermath of the global financial crisis in 2008 resulted in low inflation and even lower interest rates – to encourage growth and job creation. The last time interest rates rose was in August 2018, where they increased from 0.5% to 0.75%, still incredibly low when compared to historical rates.
The inflation target for the Bank of England is 2.0% and it’s expected that this target will be maintained over the next five years even as the general economy begins to grow again: ‘We think a gradual and limited increase in interest rates over the next few years is likely to be needed to keep inflation at our 2% target.’
According to the Bank of England, the next steps for inflation and interest rates depend on the Brexit decision. A Brexit deal would translate to upward pressure on prices and potentially a need to raise interest rates, although they would remain substantially lower than before the financial crisis. A ‘no-deal Brexit’ on the other hand could require an interest rate decision that balances both upward pressures from the pound declining in value and the downward pressure that comes from a cut in spending.
So what does this mean for property? Interest rates have a complicated effect on property investment but long story short – rising interest rates will make purchasing more expensive and reduce the availability of mortgages. At the same time, developers will typically scale back production when rates are high, meaning lower supply and thus rising property prices for current investors. It should be noted that typically, the most severe effects occur when interest rates spike or drop suddenly – the gradual rise that the Bank of England is predicting is much less impactful for investors.
Will Prices Go Down Because of Brexit?
The ‘Brexit conundrum’ has been hanging over the UK property market for the better part of three years, typically affecting property sales and rising prices in key areas. While London has generally declined since the vote in 2016, other areas that aren’t ‘traditional’ investment hotspots have emerged at the forefront with positive growth.
Now, with a clear majority and Brexit plans in motion, it’s expected that some of the associated uncertainty will start to clear, although a lack of a leave date is still confusing buyers. While house prices stagnated in 2016 and only generally started to recover in 2019, fluctuations each year generally coincided with the natural property cycle. It’s common for prices to dip in August and recover in September for example, which is what we saw happen during 2019.
The long-term impact remains to be seen but UK sale prices jumped up by 1.7% in December 2019 compared with November – the largest monthly increase in the year. If this is a sign of post-Brexit market performance, it’s a positive one for property owners.
According to Andrew Montlake, Managing Director of mortgage broker Coreco, “Expect a sharp uplift in transaction levels starting early in 2020, as buyers and sellers who have played it safe put their plans into motion,“
Similarly, Jonathan Samuels, CEO of Octane Capital, believes: “Price growth in 2020 is likely to be a lot more robust than in recent years but what we don’t want is for values to suddenly get ahead of themselves.
“The property market will enter 2020 with a spring in its step but all eyes will be on how the economy holds up as we exit the EU.”
For investors, this could be a signal that now is the time to purchase, before prices start to recover and price them out of the market completely.
Predictions for Pound Sterling in 2020
Sterling started the first business week of 2020 on a good footing, advancing well against major currencies such as the Euro (up 5.35%) and the Dollar (up 3.09%). No doubt thanks to the Conservative’s election win and a more optimistic stance on finalising Brexit, the economic outlook for the UK is much more positive and this is reflected in the Sterling’s performance predictions.
Image shows Growth of GDP vs Euro Aug 2019 to Jan 2020
With plans in motion to get a Brexit deal through the door, it’s expected that the European Union will maintain a tough stance throughout negotiations which could have repercussions for the pound.
According to Shamik Dhar, Chief Economist at BNY Mellon Investment Management, a ‘No Deal Brexit’ is a major risk for Sterling in 2020 and this is rising in possibility because negotiations default to that position if a deal can’t be arranged in time.
It’s this potential for a ‘No Deal’ that is contributing to Dhar’s predictions that the Sterling will have a muted 2020 – perhaps good news for international investors – particularly until any uncertainty is cleared: “Sterling traded much of 2019 as a Brexit currency and so long as the ‘No-Deal’ risks remains I think it will remain weak.
The expectation is that a ‘cliff-edge’ situation of a No-Deal Brexit is less likely than a gradual move away from the EU. Dhar, for example, sees scope for a ‘staggered’ outcome: “To me, it looks like the initial position, at least, will be heading for what you might call a skinny deal with the EU based on goods, and maybe certain sectors in particular.”
If markets reacted relatively positively to this position, the talk of a No-Deal Brexit would fade away and Sterling would be in a position to extend the gains it made in 2019.
Conclusion: Is now a good time to invest in the UK property market?
For those that are considering an investment, the main question that comes out of the UK property forecast for 2020 remains: do you invest now and take advantage of current market conditions or wait for a concrete confirmation on Brexit? While patience may result in a more stable market you may miss out on maximising growth from rental income, which, depending on the area, could mean exceptional returns during 2020.
Overall, the market looks optimistic. A majority government, a clear stance on Brexit and renewed foreign investment means prices are set to rise almost universally. While growth is always going to be relatively restricted due to a degree of uncertainty, there’s no doubt that this is a prime window of opportunity to get into the UK market before it kickstarts once again. Interest rates are also set to remain low, reinforcing the standard of the opportunities available.
In terms of forecasts and predictions, the key points to consider are:
- Birmingham property prices and rental prices are both forecasting rises of 15% over the next five years – some of the highest in the country and a continuation of incredible growth over the last three years.
- The South-East continues to benefit from increased regeneration and infrastructure development that has resulted in JLL predicting price rises of 14.8%.
- London is starting to see gradual recovery this year and it’s expected that as demand starts to build once again, surrounding commuter towns will benefit from the ‘halo effect’.
- The Sterling is expected to have a relatively muted 2020, good news for international property investors that want to take advantage of the current currency climate.
- Undersupply continues to be a challenge for the UK and, if the supply and demand cycle holds true, will lead to rising property prices.