Much has been made of recent property growth in the United Kingdom. Does working from home mean that London property prices will decline as people move to the county simply commuting to the city on an infrequent basis. Are we in a bubble, is the rapid price growth merely a reflection of stamp duty holiday, and will prices decline as stamp holiday ends? I don’t think this will happen; I think the opposite will occur. I suspect we will witness significant increases in property values again, specifically in London and the southeast. Here’s why.
Lack of New Supply
New housing supply in Inner London, where new construction starts, have declined by 45% from 10,113 (2015) to just 5,559 (2020). As new construction has rapidly declined so has the amount of surplus stock. In Q2 2021, there were 1,661 completed and unsold apartments which is high by historical standards. Much of this stock is at the upper end of the market, with almost 40% located in Westminster and Wandsworth. Other parts of Inner London have very low levels of unsold completed stock apartments – for example, the City of London has just 40.
Already signs of things returning to ‘Normal’
Despite the impact of covid-19 on life in the capital, there are now signs of things returning to ‘normal.’ London’s transport network, bars, and restaurants are once again busy. In April 2021, London Underground use increased by 40%, and the transport network is rapidly filling again as restrictions are easing. In addition, with almost 80% of the UK population having had their second dose of the coronavirus vaccine, there appears to be little chance of any additional lockdowns.
Working from home doesn’t mean moving to the countryside
There is no doubt that the way people will work in the future will change; Coronavirus has accelerated this rather than created the change. However, it seems slightly naïve to believe that this new form of working will result in a mass exodus of people moving to the countryside and infrequently traveling to their place of work. The reality is that most people will want greater flexibility to be able to work part of their time from home, rather than a more drastic change of moving location completely. In fact, working from home more likely will change the physical attributes people demand in property rather than its location.
Interest rates are at all-time lows, but that is unlikely to last forever. The Bank of England (BoE) made two emergency rate cuts in March 2020, to reduce the impact of coronavirus on the economy. With interest rates cut to just 0.1%, the general expectation was that interest rates were unlikely to increase in the medium term. However, as inflation increases there are now increasing signs that the BoE will be forced to start increasing rates sooner that initially anticipated. As interest rates begin to increase investors will more rapidly pile into the property market in order to lock-in lower rates.
The National Institute of Economic and Social Research (NIESR) are forecasting inflation in the UK to increase to 3.9% next year. Sharp rises in oil prices and bottlenecks in supply chains have pushed up inflation in the UK, with inflation set to hit its highest level since late 2011. There are few signs to suggest pressure on either will abate either time soon, as the impact of coronavirus continues to impact other economies. Real estates role as an inflation hedge makes it an attractive option to investors and as inflation starts to bite, investors will choose to buy property. The London property market will be a major benefactor because of its international blue-chip status.
Retrofitting Secondary Stock
Already benefiting significantly from the stamp duty holiday, the secondary property market has already experienced significant price growth over the past 12 months. Price growth is set to continue as other pressure is laid to bear on the secondary housing market. Perhaps one of the most significant will be the costs to ‘green’ the UK’s ageing housing stock. Owners are set to be hit by significant costs to retrofit existing polluting homes as the UK’s tries to live up to its net zero carbon target by 2050. When and if they sell, vendors will seek to recover these costs when they sell their homes.
Cost consultant Arcadis have recently warned there are already signs of the construction industry overheating, with significant issues, of supply chain for materials, access to staff and increasing demand placed on the construction industry. For London in particular construction inflation is anticipated to increase by 5% year on year by 2024 and this to become the ‘new normal’. The reality is these costs will be passed on to consumers placing greater pressure on property prices.
Between the financial years of 2011 and 2020, median household income increased by just 7%, an average of 0.8% per year, after accounting for inflation. Predominantly caused by the impact of the Global Financial Crisis and lackluster economic growth caused by the fallout of the Brexit referendum. However, there are now signs that household incomes are set to grow as many of the economic headwinds are behind the UK and low levels of unemployment of inflation put greater pressure on incomes. Increases in income and prosperity will create greater demand for new housing again putting greater pressure on prices.
The combination of the factors above will once again put significant upward pressure on UK housing in particularly those in London. The market fundamentals of supply and demand, supported by the factors we have discussed here will mean that prices are only set to increase. I suspect that investors, particularly those based offshore and off plan, realize the opportunity currently presenting itself in the UK housing market and are poised to take advantage of this.
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