The results of the UK’s 2019 general election removed some market uncertainty and prompted economic growth in early 2020 (1). However, this was soon followed by the global pandemic, COVID-19, that ushered in a whole new environment of profound uncertainty for investors, workers, and lenders to face.
The UK lockdown combined with an overwhelming toll on the nation’s health services (NHS) heavily impacted economic activity and put many jobs at risk, with as many as six million people on furlough at the beginning of April (2). Further, the government imposed a ban on tenant evictions through June, which has recently been extended to August 23rd (3).
Impact of COVID-19 on Residential real estate:
Residential rent collections were a mere 44% at the end of March in aggregate (4), though this figure varied greatly among property owners; some maintained collections of up to 98% (5). Meanwhile, a mortgage holiday has also been instated6 for those struggling to make payments, and the Bank of England cut interest rates to 0.1%, the “lowest ever in the Bank’s 325-year history,” (7). That said, lenders have still reacted with great caution as shown in the chart below.
Source: Housing Market: Key Economic Indicators. House of Commons Library.
April’s mortgage approvals for homes fell 72% from March, and were down to 15,848 approvals compared with 65,785 a year before (8).
Short & Long term impacts on house prices:
Overall, transaction activity has significantly reduced throughout the lockdown, with 52% fewer transactions in May than the same time last year (10). The Office for National Statistics (ONS) even halted the House Price Index due to the reduced number of transactions, attesting to the housing market’s slowdown during this period. Nationwide’s house price index shows a 1.7% drop in house prices between April and May, the most significant in more than 10 years (11). Liam Bailey, global head of research at Knight Frank estimates a 5% total decline in house prices since the start of the pandemic (12).
The effects of this shock will resonate differently between sectors, with residential real estate positioned to recover steadily, as it does not face the same structural challenges sectors like retail, logistics or offices do because of COVID-19. Despite the recent fall in house prices in response to the pandemic, underlying drivers of house price growth, namely a dramatic undersupply of homes 13 remain. The government has aimed to deliver 300,000 homes a year to the housing stock, though this figure neglects a backlog of necessary houses (14). The current pace has yet to catch up to a level that satisfies demand, with new supply reaching only 241,000 throughout 2018 (14), as shown in the graph below.
Source: Tackling the Undersupply of Housing in England. House of Commons Library.
Rental demand on the rise:
Covid-19 has not improved these circumstances, with construction of new houses being “severely restricted,” this year. As many will have to delay plans to purchase homes due to uncertainty facing their incomes, we can expect them to rent for longer. JLL forecasts positive rental growth to return by 2021, while it forecasts downward pressure on house prices until 2022 (15).
Some first-time buyers are opting to rent for longer as lending tightens, while others who are willing or able to see a purchase through are reducing their offers from what was agreed before COVID-19 (9).
Going forward, homeowners and renters will likely place greater emphasis on local amenities, outdoor access and spacious kitchens as 45% of survey respondents anticipate working from home to be their new normal (14).
Market Recovery as Lockdown Eases:
A report by PropTech firm Coadjute indicated that home viewings grew by 4% and properties registered for sales rose 5% in the first week of June i.e. immediately following the ease of lockdown in the UK. Dan Salmons, chief executive of Coadjute, said: “Over the last three months, data from our partners has revealed both the unprecedented drop in the property market after lockdown and the impressive recovery. With levels of activity now returning to normal, and further easing of lockdown measures on the way, we hope the UK property market can start to look forward again.”
The report also points toward additional data which indicates that although recovery has started, it could take up to nine months for property sales to make a full comeback and it’s likely that house prices will fall over the coming months before they rise again in the long term, which is good news for those looking to buy.
Stamp Duty Holiday:
On July 8th, the government enacted a stamp duty holiday with the specific aim of encouraging purchase activity among those financially affected by recent events (17). The holiday waives the stamp duty completely for buyers of properties up to £500,000 until March 31, 2021, and offers savings up to £15,000 for those buying properties over £500,000 (17). It is worth noting that in the past, a similar measure resulted in sellers raising prices by the amount of the savings, so that the holiday benefits were not experienced by those it was intended for (18). To this end, home prices may rise throughout the year, though price increases due to the holiday would not be sustainable beyond the end of the holiday. If the holiday is successful in increasing transaction activity among first-time home buyers--and some, who may not have been actively looking to buy, being motivated to enter the market as well - this can alleviate some of the downward pressure on prices through next March.
1 Westaway, Peter. “Helping You Reach Your Investing Goals.” Vanguard, 13 Dec. 2019, www.vanguardinvestor.co.uk/articles/latest-thoughts/markets-economy/uk-election-results.
2 Leaker, Debra. “Labour Market Overview, UK: June 2020.” Office for National Statistics, Office for National Statistics, 15 June 2020, www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/june2020.
3 Ministry of Housing. “Ban on Evictions Extended by 2 Months to Further Protect Renters.” GOV.UK, Ministry of Housing, 5 June 2020, www.gov.uk/government/news/ban-on-evictions-extended-by-2-months-to-further-protect-renters.
4 Hammond, George. UK Tenants Pay Less than Half Owed in Rent. 9 Apr. 2020, www.ft.com/content/0fe28f08-b340-4191-a9e0-dd723eb062e2.
6 Gompertz, Simon. Mortgage Payment Holiday Extended for Further Three Months. 22 May 2020, www.bbc.co.uk/news/business-52767058.
7 Islam, Faisal. Coronavirus: UK Interest Rates Cut to Lowest Level Ever. 19 Mar. 2020, www.bbc.co.uk/news/business-51962982.
8 Keep, Matthew. Housing Market: Key Economic Indicators. House of Commons Library. 25 June 2020, commonslibrary.parliament.uk/research-briefings/sn02820/.
9 Brooker, Nathan. The Covid-19 Shutdown Could Harm First-Time Buyers for Years to Come. 15 May 2020, www.ft.com/content/a577d790-8d7e-11ea-af59-5283fc4c0cb0.
10 Peachey, Kevin. Coronavirus: House Sales Plummeted by 50% in May. 23 June 2020, www.bbc.co.uk/news/business-53148678.
11 Bloom, Jonty. Coronavirus May Have Huge Impact on Property Markets. 11 June 2020, www.bbc.co.uk/news/business-52977890.
12 Ivey, Prudence. “House Price Forecast Downgraded despite Reopening of Property Market.” Homes and Property, 20 May 2020, www.homesandproperty.co.uk/property-news/house-prices-after-lockdown-downgraded-a138381.html.
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