The first half of 2020 saw a sudden and severe contraction in GDP alongside a jump in unemployment, as a result of restrictive lockdown measures employed to curtail the spread of the Covid-19 pandemic. Between February and June, the UK saw more than 20% GDP decline (1), while unemployment increased, from 4% in the first quarter to 4.5% by the Summer (6). As a result, residential transaction activity fell off considerably, as lenders tightened mortgage approvals (3) and income uncertainty deterred many from making large financial commitments.
Throughout the Summer, lockdown measures eased and economic activity picked up, although GDP remains 9.2% lower than its pre-pandemic level in February (2). Nevertheless, the residential landscape has changed appreciably, owing to various economic support measures and easing of lockdown restrictions, which released months’ worth of repressed demand (5). Whether existing conditions are likely to prevail through the end of the year and into the long term is not a given, as considerable economic uncertainty prevails. The Royal Institute of Chartered Surveyors (RICS) estimates unemployment to rise to 8% by the end of 2020 (18), which stands to alter market characteristics further.
Residential Sales Market
According to a residential market survey by RICS released in September, the market has seen four straight months of rising demand since June (7). In line with this, we observe national prices having increased each month since May, as shown in the following chart:
National Prices – Past three months (June-August)
Source: RICS September 2020 UK Residential Market Survey pp 2
What’s more, newly agreed sales have risen throughout the whole of the UK, with East Anglia and the South West experiencing notably high growth, as shown below:
Regional Newly Agreed Sales– Past month (August)
Source: RICS September 2020 UK Residential Market Survey pp 3
This suggests that policies implemented to incentivise and facilitate transactions successfully reached all corners of the UK market and have been a driving force in the market’s recovery. Mortgage approvals have increased significantly from July and are at their greatest level since 2007, at 85,000 in August (10). Meanwhile, it is worth noting that the Office for National Statistics (ONS) has not resumed publication of its UK House Price Index, which it suspended at the onset of the pandemic when transactions fell sharply (8). The organisation cites “insufficient records in the system” (8) to produce an index that meaningfully represents the market, which means activity is still recovering. And yet, UK home prices are at record-high levels, according to Nationwide Building Society (9).
Nationwide’s house price index shows that the UK experienced its highest annual growth rate in the years since Brexit uncertainty started affecting the market in 2016 (10). The official government figure for average residential property price was £239,196 in August, (11), up from £231,855 in March (12). More recently, the property information provider, Zoopla, estimated an average home price paid of £282,621, and average property value of £315,150 for October (13).
The rise in demand can partially be attributed to normal levels of activity returning to the market and to a backlog of demand which built up during the lockdown period (10), but other factors are also at play. The Stamp Duty Holiday enacted on July 8th (14) and historically low interest rates (15) will have incentivised buyers to move their home purchases forward, which is one key reason surveyors, property owners and investors worry that the price increase will not endure (7, 16).
Residential Lettings Market
Despite a robust increase in property prices, rents have not upheld this trend as strongly. Throughout the UK, rent decreases during the lockdown ranged from 1%, in Birmingham, to 10%, in Edinburgh (17). On the whole, rents are now up 2% with the exception of London and Scotland, where rents continue to fall (17). RICS anticipates rental growth across all UK regions except for London, which is expected to see a 1% decline over the next 12 months (18).
RICS obtained responses in a September survey of businesses that 93% of responders expect to reduce their office footprint by some amount through 2022 (18), owing in part to layoffs but also to a “lasting shift to remote working” (5), which calls for less office space. This foundational change would particularly impact London, whose necessity to daily work life would diminish. Eventually, growth in population and employment will fill the space left behind by those migrating to more spacious, rural dwellings (17) but for now, we see downward pressure on rent in this key region.
As of October 15th, Savills forecasts -3% growth for prime London rent through the end of 2020, and only 1% rental growth in 2021 (21). In contrast, suburbs, the Wider South, the Midlands, North, and Scotland, are expected to see between 2% and 4% rental growth through the end of 2020, and between 2% and 3.5% rental growth through 2021 (21). Given that rent growth is pro cyclical, these modest estimates for the year ahead are likely attributed to the continued uncertainty regarding the economic landscape, notably significant concern about rising unemployment (22) and the outcome of Brexit.
Although mortgage approvals are on the rise (10), the threat of rising unemployment could reverse this trend and prevent some buyers from acquiring property. This group will consequently be renting for longer and can uphold vacancy rates. The outlook for the Built to Rent sector remains positive, as evidenced by investor transactions in the space (24), which further attests to the rental market’s longer-term viability.
Though the Service industry received much attention for its 19.9% contraction over the second quarter (1), the Construction sector suffered a more pronounced 35% reduction in output (ONS).
The decline in GDP in the second quarter reflects widespread falls in output across the services, production and construction sectors.
Source: Office for National Statistics – GDP first quarterly estimate
Private new housing construction fell 51.2% across the UK in the second quarter (1), with social distancing measures and difficulty in obtaining construction materials impeding operations (23) from taking course. The slowdown in activity will reduce the delivery of new homes by 35% in 2020, by Knight Frank’s latest estimate and will even have a lasting impact beyond this year (25).
As undersupply of homes continues to affect markets across the UK* (20), government measures targeted to enable construction have been implemented to speed up home deliveries. These include an expansion of Permitted Development rights, which went into effect on August 31st (4), and amendments to the planning system (26). The effects of these measures remain to be seen, but they stand to keep house prices and rents from ballooning, and to stimulate the economy with increased activity.
Unlike most UK regions, which continue to experience housing shortages (19), London has seen a recent supply increase and is likely to see supply grow as lower demand causes units to remain on the market for longer (20). This can sustain downward pressure on rent.
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