As the year draws to a close, we are back with our latest update for the UK property market. Looking back, it has been an extraordinary year for residential real estate prices, with the average home seeing an increase in value of around £15,000 since June. There are a number of core reasons for this run which we’ve covered in the past, however, this week we dive into them a bit deeper to get to the bottom of the main drivers.
The Stamp Duty Cut
The cut to the base rate of stamp duty means that purchasers could save up to £15,000 in sales taxes on UK residential property until the end of March next year. This meant a better deal for buyers, and the prospect of a faster sale for vendors, which has ultimately dominated the market and drove prices to a historically-high levels. While it has kept the market extremely buoyant through some of the most uncertain economic signs ever seen, there has been criticism that it has ultimately created a false economy, given that the average house price has outstripped the maximum saving offered by the stamp duty cut in the first place.
Industry figures and politicians alike have called for an extension to the cut, or even to instate the current stamp duty measures indefinitely. Others, however, see it as an ultimately distortionary policy, which has caused overheating in the market and will ultimately come back to hurt those who have recently purchased in the long run. Either way, there is little reason to believe that we will see a significant reversal in the fortunes of the market before March.
Record Mortgage Approval Rates
The Financial Times now reports that UK mortgage approvals are now at their highest levels since 2007, with the number granted a mortgage increasing from just 9,300 in May to 91,500 in September. This rise is almost certainly driven by the March expiry of the stamp duty cut. The rise in lending, while good for keeping the market buoyant, has some analysts expressing unease at the feeding of a bubble in the housing market. The rise in prices is ultimately divorced from the economic backdrop whereby redundancies and foreclosures are set to rise. The extent to which lending will be providing this level of liquidity in six months’ time remains to be seen.
Pent Up Demand
The economic impact of lockdown measures was distinct from previous market shocks to economic growth in that economic activity was effectively paused overnight.
As illustrated by the above chart, the drop in the first half of 2020 is nothing short of precipitous, clearly indicating the extensive and abrupt halt in economic activity in order to try to control the spread of the virus. Nonetheless, the rebound is equally intense, clearly showing the return to spending once any lockdown measures were lifted. While the hit to the economy for the year is forecast to be a contraction of 7.5% according to the OECD, this pent-up demand has certainly shown up in the average UK house price in the latter half of the year.
The Unstoppable Rise of Remote
Our previous commentary has focussed on the changing nature of demand for real estate, not only due to lockdown measures, but also deep structural changes to the way that corporations engage with workers. The landscape appears to be trending towards the maintenance of a more geographically dispersed and remote workforce, what some experts call the ‘hub-and-spoke’ model. This will allow companies to both reduce operational costs, while offering more flexibility for their employees; ultimately allowing them more choice in where they decide to live. We foresee that the prospect of lower living costs and more space will be popular for many, and will therefore drive an enduring shift in demand patterns going forward.
Conclusion and Predictions
In short, the fundamentals driving house prices to lofty heights have forged a bright spot in otherwise gloomy economic prospects for the UK. With this in mind, the strength and speed of the rise in prices could lead to the following outcomes in the market for 2020 and beyond:
- House Price Correction: the significant inflationary forces acting on the housing sector will dampen once the stamp duty cut ends and mortgage approvals fall back to a more sustainable level. As economic scarring continues, retail lending becomes increasingly risky, especially in a market where valuation inflation is likely.
- A New-build Glut: housing providers are responding to significant demand signals by increasing housing supply. It is likely that the inertia inherent in the building timelines will see many developments completed as historic demand falls away. This may mean a significant discount offered for properties of this type by this time next year.
- Lower Yields in Metropolitan Areas: major cities such as London, Birmingham and Manchester are likely to seea slight depression in their average rent figures as it becomes increasingly popular to work from further away from the office. The extent of this depends on how employers decide to use their office space and where they decide to hire going forward.
Here at Yielders, we are watching these trends carefully, and look forward to bringing further opportunities operating within strong market niches.
*capital at risk. This article is for informative purposes only and should not be construed as investment advice.