UK Market Review – 2021
UK Market Review
Welcome to our first UK housing market review. As the UK returns to its ‘new normal’ and the economy begins to re-open, we ask two key questions.
- Is investing in UK residential property investment still worth it and why?
- If so, where are the best opportunities for UK property investors and why?
As the UK economy recovers and lockdown restrictions are eased, buy to let investors need to be specific in where they invest and only take advantage of particular opportunities. To make sound investment decisions, property investors will need to:
- Have specific investment objectives – capital appreciation will be a bigger driver for most investors
- Focus more on areas of under-supply – because growth is most likely to occur
- Consider the impact of working at home – this has caused changes to tenant requirements.
As the UK returns to its ‘new normal’ and the economy begins to re-open many people will be considering whether or not UK property investment is still worth it? And, if it is – where are the best opportunities likely to be?
UK Economic Performance
Over the past 12 years the UK economy has laboured under the impact of the 2008/9 Global Financial Crisis, the uncertainty created by Brexit and 3 economic lockdowns.
There are some detractors for the future UK Economy including:
- Long-term scaring to some parts of the economy most likely, travel and tourism, retail, F&B, and the leisure industries
- High levels of UK national debt that the government will inevitably need to begin to reduce
The UK economy will grow at a quicker rate than the past 10 years, because:
- The uncertainty of Brexit has been removed – the new UK/EU relationship will require some time to ‘normalise’, however, all markets like certainty and it makes it much easier for companies to invest in business growth
- New trade deals – mean the UK will enter into new trading agreements with countries outside of the EU. Additionally, because the UK is a service based rather than goods-based economy it will be easier to export services
- The speed of the coronavirus vaccine rollout – means that the UK economy will return to full activity and will be unlikely to have to return to lockdown
- Economic expansion – will be a key objective of the government and much of its economic policy will have economic expansion in mind.
Real Estate Market
The UK residential real estate market has performed well over the past few years and has shown high levels of resilience particularly throughout the coronavirus pandemic.
The drivers of this growth have been:
- Significant demand/supply imbalance of new housing
- Historic low interest rates
- Government market interventions most notably Help to Buy and the recent Stamp Duty Holiday (which has been extended to end in September 2021)
Importantly, this growth occurred despite:
- The absence of Income Growth – average real income growth across the UK has been negligible for past 10 years
- Low Economic Growth – GDP growth has been low in the UK over the past 10 years.
So, what are the implications for real estate growth if the UK experiences income growth and economic growth as well over the next 10 years…..?
Key Market Observations
- Capital Values – from a house price to income ratio, the UK is trading at the lower end of its peer nations, meaning there is room for growth in capital values
- Rents – particularly those in London are trading at the lower end of income to rent ratio compared to other global cities. There is significant room for growth
- UK Buy-to-Let investors – a proportion of UK domiciled buy-to-let investors have or will exit some or all their investments. Some will sell to other landlord’s but the majority will be sold to owner occupiers. This depletes the pool of properties available for tenants and puts upward pressure on rents
- Coronavirus will further accelerate housing inequalities – a new “coronavirus cohort” will join the ‘Lost Generation’ – a growing group of people for which home ownership will simply never be possible or will only be possible at a much later in life. The average age of a first-time buyer is currently 32.
Key UK Market Opportunities
The best UK investment opportunities will come from 4 specific market drivers.
Inner London – has a significant shortage of SUPPLY
The lack of new housing supply will continue to drive house prices irrespective of level of economic growth.
Even though housing construction has increased, England is still 100,000 new homes per annum short of what is required to simply meet current housing demand.
Inner London is where the most significant demand and supply imbalance exists.
The coronavirus lockdowns have irreversibly changed the acceptability of ‘working from home’. There will be some shift to working habits, however, the amount people who will now only work from home, forever, is low.
Many professional workers will choose a hybrid working model: working part of the time from a home office part of the time in a central office.
The actions of these professionals have been well documented – relocating out of cities, to benefit from for more space and lower prices in commuter towns which have very specific attributes:
- Direct rail services to London
- Good local retail, restaurants and local amenities
- Good schools
Towns which offer the right mix of accessibility to London and local amenities are the locations these buyers will consider. This increased demand drives both rents and capital values and the shift in working patterns also boosts local economies and retailers, with more people spending more time and money locally.
A reduction of rental inventory will become an issue in many markets and will drive rents (and therefore yields) above normal expectations.
As UK domiciled buy to let investors continue to sell their rental properties, the level of rental inventory will continue to decline, putting far greater pressure on rentals.
By global comparisons of rents and income, London has room for growth.
Rents and capital values in the UK residential market have grown in the past 12 years despite a lack of economic and income growth.
The UK economy is likely to move now move into a period of significant economic growth. This will increase wages which will drive UK residential property prices.
The government will look to create economic growth in the tech and green industries and growth is likely around economic centres in the UK which provide services to these industries.
Get the detail….
Interested to know the detail behind why we think what we do? The full research is set out below:
- UK Economy
- UK Housing Market
- Demand for Housing
- New Housing Supply
- Availability of Finance
- Government and Regulatory Authority Market Intervention
- Housing Market Performance
- Market Opportunities
The UK economy once again shrank in January 2021, however, the decline has been smaller than initially anticipated. Overall, the UK economy has contracted more than all its other G7 peers in 2020.
The third lockdown will cause the UK economy to further contract in Q1 2021, particularly as businesses deal with some of the initial friction created in the post-Brexit economy as some form of bedding in will be required as businesses try and familiarise themselves with the new rules.
UK Economy Snapshot
|GDP Growth 2020||-9.8%|
|Inflation Rate||0.7% (October)|
|Food Inflation||0.6% (October)|
|Trade Balance||-£1.7 b|
|Government Debt, as a share of GDP||110%|
|BoE Interest Rate||0.01%|
|Currency against USD (past year)||1.2%|
|Stock Market (FTSE 100) (past year)||-13.5%|
* UK employment has subsequently increased to 5%
UK Lockdown Measures
The UK government response to the coronavirus pandemic has been criticised by many people for its relatively slow reaction to the outbreak of the coronavirus. The UK has had one of the highest death tolls and infection rates from coronavirus. A summary of the situation as at 17 Feb 2021 is set out below.
|Total Cases||Total Deaths||Deaths
(per 1 m)
|Global Rank (Deaths per m)||% of Adult Population Vaccinated|
Summary of Lockdown Measures
A summary of periods of economic inactivity are summarised below (for England):
- Lockdown 1.0 (17 March – 15 June 2020) – England in a period of restricted economic activities
- Lockdown 2.0 (September – 2 December 2020) – England in a period of restricted economic activities
- Lockdown 3.0 (4 Jan 2021) – England returns to national lockdown
Impact of Coronavirus on Economic Output G7 Countries
The UK economy has performed the the worst in 2020 relative to its other G7 peers. UK GDP has declined by -10% according to IMF measures and -11.2% according to the OECD.
Source: UK House of Commons Library
Historic Economic Performance
The decline of UK GDP in the wake of coronavirus comes on the back of relatively weak GDP growth post the Global Financial Crisis of 2008. In the period between 2010 and 2019 average GDP growth in the UK was just 1.83%.
Relative Change in GDP
The drop in GDP from the shutdown of the coronavirus has been far more significant in 2020 (-9.92%) relative to the decline in 2009 due to the Global Financial Crisis (-4.11%).
UK National Debt
UK national debt increased significantly since 2008 in response to the Global Financial Crisis. The government had been making inroad to manage debt expansion, however, coronavirus lockdowns have meant that borrowing continued to expand.
Heavy borrowing has not been unusual for most countries during the pandemic, because of the requirement for additional public funds to cover the cost of economic measures to support the economy.
However, this has been particularly difficult for the UK economy as it comes at a time of relatively poor economic growth, which has been caused by two significant economic events:
- 2008 Global Financial Crisis – which led to; massive increases in government borrowing and a period of UK Austerity imposed following the 2010 UK Budget – which significantly curtailed UK public spending
- UK Brexit Referendum (June 2016) – which led to; Slower economic growth as the UK economy was forced into a transition period with the European Union
The UK has been forced into a period where national debt has significantly increased at the same time as weaker economic growth. The net result has been that proportion of UK national debt has increased significantly relative to GDP compared to other large economies.
Gross Government Debt as a Share of GDP
|Country/Area||2019 (%)||2020 (%)|
The uncertainty caused by the Brexit Referendum (23 June 2016) has led to subdued economic activity. Which has made it difficult for companies to invest as well as foreign capital to come to the UK.
The recent deal between the UK and EU which came into effect on 1 January 2021, is better than most had envisaged. The new agreement has several advantages but most notably creates:
- Greater certainty for companies who trade with the EU
- Gives greater certainty for investors and FDI in the UK
- Allows the UK government to create new trading relationships outside of the EU
The speed of the UK vaccination rollout has significantly exceeded general expectations. At the time of writing this report over 23 m people over the age of 18 have received the first dose of the coronavirus vaccine. This represents 39% of the total population able to receive the vaccine.
The UK is currently leading the world in terms of most major nations, populations over 10 m.
|Country||Vaccine Doses per 100 people|
|United Arab Emirates||63.35|
The government’s target is that all adults in the UK will be vaccinated by the end of July. Achieving this target does not seem beyond the realms of possibility.
Future of UK Economy
The pace of a UK economic recovery will depend specifically on the ability of the UK government to roll out its vaccine program and re-open the economy. It is not yet clear what the UK government intends to do to drive economic growth in the wake of the coronavirus, however, it has signalled the following:
- Reducing the national debt is high on its priority list; and
- It is unlikely to return to a policy of national austerity
The national budget on 3 March 2021, was the first real insight that anyone had as to how the government intends to meet its objectives.
In the 2021, UK budget there was neither a wealth tax introduced or decision to change capital gain tax in-line with income tax. However changes to income tax were made:
- Freeze of income tax thresholds and the personal allowance for 4 years
- Increase corporation tax to 25% in 2023 (for profits over £50,000)
The Bank of England forecasts the UK economy to rapidly recover throughout 2021 forecasting GDP growth of:
- 5% – 2021
- 7.25% – 2022
The success of the vaccine rollout and the ability of business to adapt to lockdown most likely playing a crucial role in this better-than-expected economic recovery.
UK Housing Market
Apart from a period of decline during the Global Financial Crisis, where house prices declined by 14% – the UK housing market has seen consistent price growth.
In the year since December 2020, average prices have risen 8.5% to a record high of £252,000. Much of the recent rise has been in the North West which grew by 11.2%, whereas prices in London grew by 3.5%. (the lowest in UK).
In addition, demand has changed over the past 12 months with increased demand for detached houses which grew by 10%, whereas demand for flats and maisonettes increase by 5%.
Much of the recent growth in house prices have been largely attributed to the UK’s Stamp Duty holiday, which has been extended to end in September 2021.
In the March 2021 budget. the Chancellor made two announcements designed specifically to drive the residential property market:
- An extension to the stamp duty holiday (Sep 21)
- A new 95% government backed mortgage guarantee scheme
Other than general economic growth, housing markets are primarily driven by five broad factors:
- Income levels and the unemployment rate
- Housing demand
- New housing supply
- Availability of finance and Interest Rates
- Government and regulatory authority market intervention
Income Levels and Unemployment Rate
Incomes have seen no real growth over the past 10 years with incomes only recently returning to levels in-line with those immediately prior to the Global Financial Crisis in 2007/08.
UK Wage Growth Relative to G20 Nations
According to the 2017/18 Global Wage Report prepared by the International Labour Organisation (ILO) the UK has had the worst historic wage growth over the past 10 years compared to all other advance G20 countries. Significantly lagging United States, Canada, France, Australia, Germany, and South Korea.
Average Real Wage Index for Advanced G20 Countries (2008 – 2017)
UK Unemployment Rate
The UK unemployment rate was 5% in September 2020. The unemployment rate got to as low as 3.8% in March 2019 following a recent high of 8.4% in Q4, 2011 which grew rapidly between Q3, 2008 and late 2011 as direct impact of the GFC.
The UK Furlough scheme has dampened the immediate effect of the pandemic on employment it is likely that the unemployment rate will increase once it ends.
Forecast Unemployment Rate
Unemployment is forecast to reach 6.8% in 2021 and peak in 2021.
Redundancies increased by a record 114,000 on December quarter of 2020, to 227,000.
Industries Impacted by Lockdown
Coronavirus lockdowns has disproportionately impacted those sectors of the economy which have been unable to effectively operate throughout the successive lockdowns.
Location of Workforce Impacted by Lockdown
It is likely that the impact of coronavirus will disproportionately impact larger cities in the UK where a significant proportion of the population work in ‘Other Elementary Occupations’.
Demand for Housing
The UK has seen significant population growth between 2000 and 2019, increasing by 7.9 m people (13.4%) over that period growing from 58.8 m in 2000 to 66.8 m in 2019.
Population growth has not been equally distributed with London growing at a much faster rate (23.6%) than the rest of the UK. With its population increasing by 1.9 m people over the period from 8.06 m in 2000 to 9.97 m in 2019. This trend is anticipated to continue.
London Population Growth relative to other UK Regions
London’s growth is anticipated to continue with ONS forecasts expecting to lead UK population growth over the coming years. With population growth forecast to be circa. 8.8% by 2026.
While demand and population figures are relatively easy to obtain it is more difficult to translate actual and forecast population growth into actual demand requirements for new housing. In 2015, the UK government set itself a target to deliver 1 million net new homes by the end of parliament, which was expected to be 2020.
A House of Lords Select Committee on Economic Affairs (2016) concluded that the target “was not based on robust analysis” and that the current UK housing crisis meant that an additional 300,000 new homes p.a. would need to be delivered for the foreseeable future.
Since 2009, assuming the UK national average of 2.3 people per household, net population growth has created a need for an additional 2.16 m homes in the UK and 417,150 in London. By contrast just 1.53 m were delivered in the UK over the same period. The backlog of housing demand for so many years of unfulfilled demand mean that housing demand will remain strong for many years into the future.
How much Housing is Required?
There have been two recent significant reviews to determine the UK’s requirements for new housing:
- Heriot-Watt University (National Housing Federation (NHF) and Crisis) – 340,000 new homes p.a.
- Redfern Review – 310,000 new homes p.a.
New Housing Supply
At its highest delivery level 2019 – 2020, England only delivered 243,770 new homes leaving a shortfall on the lowest forecast requirement of 56,230 (23.0%).
If the same rate of housing delivery continues at the current level there will be a cumulative shortfall of approximately 618,530 new homes by the end of 2031, putting even greater pressure on house prices.
Where has Housing Been Delivered?
New home delivery has increased in each of the UK’s four largest regions London, South East, North West (Manchester) and West Midlands (Birmingham). With the North West seeing the fastest relative growth.
London Housing New Construction Starts
Whilst the supply of new housing in London has increased from delivery lows between 2010 and 2013 there are now signs that there is going to be a supply shortage in London as new construction starts have rapidly decreased. New construction starts in 2020 were 22,574 just above a 2012 low of 18,180.
The issue has been most pronounced in Inner London where new construction starts have declined by 45% from 10,113 (2015) to just 5,559 (2020).
In Outer London supply has been much less of an issue. Although new supply has declined, there are signs that overall new supply is starting to level off. New construction starts have declined by 28% from a high of 18,092 (2015) to 13,061 (2020).
Much of the slowdown in new construction starts has been driven by an increase in surplus stock as sales have slowed, particularly in Inner London which has been most affected by the impact by:
- coronavirus lockdowns
- changes to stamp duty
- less favourable income tax terms for landlords
Availability of Finance
According to UK Finance, the average age of a first-time buyer in the UK in December 2019 was 32 and the average loans were summarised by the following:
- Average Loan Size – £174,275
- Average Income Multiple – 3.54
- Average Loan to Value – 77.0%
UK Mortgage Interest Rates
UK mortgage rates are at all time historic lows with a two-year fixed mortgage rate now 1.59% and a variable rate mortgage at circa. 1.68%.
Average UK Savings
The average UK savings peaked in Q2, 2020 at 27.4%, predominantly due to the impact of lockdown and an inability for people to spend household income. However, until that point household savings in the UK had rapidly declined in Q1, 2010 from 12.2% to just 6.3% in Q3, 2019.
Government backed 95% mortgages
The government announcement in the March 2021 budget that they would be launching a mortgage guarantee scheme to help make it easier for those with a 5% deposit to buy a property. The scheme isn’t restricted to first time buyers and applies to properties worth up to £600,000.
The combination of the 95% mortgage and the extension to the stamp duty holiday perhaps mean it as easy as ever to get on the housing ladder. The one major downside will be timing and the speed at which buyers can act. For those constrained by being in a lease or waiting to save their 5% deposit the longer they must wait the higher their costs to get on the ladder.
Government Market Intervention
The UK government has intervened in recent years with the intention of achieving two primary objectives:
- Helping more UK residents into property ownership
- Cooling the property market
Helping more UK residents into property ownership
Much of the government assistance for helping residents get on the property ladder has been centred around lowering deposit requirements for people to get onto the property ladder, specifically making it much easier to access lower cost financing. These schemes were first introduced in 2013 and have been tapering off since 2016 and are now limited to first time buyers and linked to property value. By 2023 most of these schemes will either have ended or been significantly reduced.
|Help to Buy Equity Loan||Direct government loans to first-time buyers worth up to 20% of the value of a newly built home. Buyer needs minimum 5% deposit (max house prices vary by region, from £ 186,100 in the North East, to £600,000 in London.||Launched Apr-13, due to end March 2023(extended by 2 years in November 18 Budget)|
|H2B Mortgage Guarantee||Government underwriting of mortgages, up to 15% of home value, buyer needs minimum 5% deposit||Launched Oct-13, ended Dec-16|
|London Help to Buy||As H2B equity loans, except:government loans worth up to 40% of the property value also applies to existing homeowners||Launched Feb-16, due to end March 2023|
|Stamp Duty cut for First Time Buyers||Elimination of Stamp Duty for first-time buyers of homes worth under £300,000 (2017 Budget) Elimination of stamp duty for first-time buyers of shared ownership homes worth up to £500,000 (2018 Budget)||November 2017, November 2018|
|Stamp Duty Holiday||UK Govt Introduced a Stamp Duty Holiday, which changed the threshold which buyers started paying stamp duty from £125,000 to £500,000. The SDLT holiday is due to come to an end on 31 March 2021.||8 July 2020|
|Help to Buy Extension||Help to Buy has been extended from 31 March 2021 to March 2023, however, new restrictions have been added to: Limit lending to 20% of the property price (40% in London) and limited to first time buyers only||March 2021|
Measures Introduced to Cool the UK Property Market
To moderate unfettered property price inflation, the UK government has introduced several measures, predominantly achieve two primary objectives:
- Significantly restrict runaway lending driving property price growth and creating a market bubble
- Levelling the playing field between, investors, owner occupiers and tenants
|Help to Buy Equity Loan||FCA imposed tighter checks on mortgage borrowers to ensure responsible lending.||
Launched April 2014
|FPC mortgage standards introduced||Restriction on mortgage lending whereby no more than 15% of a lender’s new mortgage lending could have a loan to income ratio >4.5
Borrowers must be able to afford a 3pp rise in their mortgage rate
|Stamp duty change||Slab structure smoothed, duty reduced for homes worth below circa GBP1mn, duty increased for more expensive homes||Launched Dec-14|
|Buy-to-let stamp duty rise||3% stamp duty on additional (2nd, 3rd, etc) home purchases||Launched Apr-16|
|FCA tightens BTL underwriting standards||Various measures, including a need to check whether a landlord can afford a mortgage rate increase to 5.5%||Phased in Jan-Sep 2017|
|Landlord Tax Relief||By April 2021, landlords will no longer be able mortgage interest and finance interests as costs against rental income. Instead, it will be provided as tax relief, meaning landlords must declare all rental income, pay tax on the full amount and then claim back 20% as a credit (or 45% for those who receive the highest rate).||April 2017 – April 2021|
|Section 21 Notices||Under the proposed Renters Reform Bill landlords will no longer have the automatic right to regain possession of their rental property via the issue of a Section 21 Notice and would need to go to the courts to regain possession.||Proposed|
|SDLT Foreign Investor Surcharge||An additional 2% surcharge will be imposed on foreign buyers for properties in England and Wales.||1 April 2021|
For Offshore investors, even with the additional 2% stamp duty surcharge coming in to effect on 1 April this year, no changes to capital gains tax in the recent budget and the likely growth in house prices will leave these investors spotting the obvious opportunity.
However, future capital value growth and changes to the way in which mortgage costs are taxed, mean they are far more likely to see themselves as short-term traders who provide early access to capital to get larger high-density schemes off the ground. Selling their positions in relatively short order and taking the capital appreciation rather than holding for the long-term.
Housing Market Performance
Median house prices in the UK and the capital have experienced significant growth since 2002, with the average house price increasing by 105% from £104,000 in 2002 to £235,000 in 2019 at an average rate of 5.07% p.a. for the UK. However, more significantly in London the median house price has increased by 170% from £174,000 in 2002 to £470,000 in 2019 at an average annual rate of 6.07%.
Transaction Volumes (England and Wales)
Overall sales volumes have decreased by 30.4% in the first half of 2020 from 393,130 in H1 2019 to 273,552 in H1 2020.
Median House Price to Median Household Income Ratio
As real incomes and household savings rates have simply not grown, and median house prices have doubled the ratio of median house price to median income has increased significantly from 6.9 in 2002 to 12.77 in 2019 for London. And from 5.05 in 2002 in England and Wales to 7.7 in 2019.
Global Comparison of House Price to Income Ratio
Comparing the house price to income ratio of the UK to its peers in both Europe, OECD and other Commonwealth countries.
Although the UK has seen significant growth in the overall house price to income ratio, the growth has been broadly in line with growth in its peers. The UK trades at the lower end of the range of its peer countries. House prices would need to grow by an additional 14% for the UK to have a house price ratio in line with Canada at the upper end of the range.
UK Average Weekly Rental Growth
Average weekly rents have grown on average at 2.53% p.a. in England between 2009/10 and 2019/20.
UK Average Monthly Rents
Rental growth has been relatively stable across the UK apart from Inner London and London which declined between 2017 and 2018 but have seen the strongest overall growth.
Across the UK average Rental growth in the period between 2012 and 2019 is summarised below.
|Region||Average Annual Growth|
UK Average Rent to Average Income Comparison
In the UK average household rent to income is broadly in line across the England’s major centres.
Global Average Rent to Average Income Comparison
Although rents are relatively high in the London market, from a global perspective rents are still in the mid-point compared to other major global cities.
UK Home Ownership Rates
UK Home ownership Rates hit an all-time high in 2007 of 73.3% and hit a record low of 63.4% in 2017. Whilst there has been some growth in 2017 the rate of home ownership in the UK appears to be settling at just above 65%.
Based on the various information we have set out within this document; we believe that it is possible to draw the following conclusions.
The UK residential property market has predominantly driven by a combination of:
- Demand/Supply imbalance – high levels of demand which has not been met by long-term supply, even though new housing supply has increased it has not come anywhere near close to what has been required
- Low Interest Rates – interest rates are now at all-time lows. This has had a significant impact on affordability, particularly for those making the decision between own versus renting.
- Market Interventions – UK market interventions have significant impact on specific parts of the market, at different points. Specifically, the following:
- Help to Buy – has had a significant impact on the growth of property prices of up to £600,000
- Changes to SDLT and Income Tax – have made buy to let investment less attractive (particularly for UK domiciled investors)
- Stamp Duty Holiday – has propped up market prices throughout the pandemic
However, the following have not had a significant impact on values:
- Income Growth – for the past 10 years average real income growth across the UK has been negligible, this has had no detrimental impact on the real estate market.
- Economic Growth – GDP growth has been low in the UK over the past 10 years due to a combination of the GFC, austerity and lockdowns in response to the coronavirus pandemic
Room for growth in Rents and Values
By global standards it would appear there is room for both growth in capital values and rents, specifically:
- Capital Values – from a price to income ratio, the UK is trading at the lower end of its peer nations, there appears to be room for growth in capital values.
- Rents – particularly in London are trading at the lower end of income to rent ratio compared to other global cities.
Government Housing Measures have not worked
Measures introduced by the government to increase new housing have been largely ineffective, specifically:
- Housing Supply – the government has targeted new housing delivery of 300,000 new homes p.a. (a target anticipated to be less than what is required) but has not been able to meet this target.
- Increase levels of Home Ownership – whilst there has been a minor increase in the overall level of homeownership in the UK, the trend has been largely on the decline.
Government Market Interventions
Regardless of their ambitions to get as many new buyers as possible into home ownership and the housing inequalities which exist, the government is unlikely to undertake many more changes to the housing market and the way in which it is taxed due to the following:
- Chronic undersupply of new housing – any measures which impacted the delivery of new housing, would likely further hamper the ability for new housing to be delivered.
- Limited capital – high levels of government borrowing mean they will have limited funding for the creation of government funded new housing
- Housing market is performing well – the housing market is performing well at the moment (i.e. it has seen no decline in values throughout lockdowns) therefore they are likely to focus their attention on other parts of the economy.
Withdrawal of UK Domiciled Buy-to-Let Investors
For many investors in the UK, the option of buy-to-let investment is likely to look far less attractive than it has been recently. The combination of the ability to offset mortgage interest against rental income, the inability to evict tenants and the recent activity created by the stamp duty holiday has potentially driven these investors to sell their assets. If this were the case it would create the following:
- Reduction of housing stock available for rental
- Put greater upward pressure on rents
Most landlords became landlords because they saw the opportunity for a sound long-term investment which would contribute to their future income once they had retired. Quite sensibly, these people didn’t trust banks or financial institutions ‘to take care of them’ in retirement. They wanted to take control of their own finances. Their desire for long-term secure income will not change. They will simply just look to invest elsewhere, just at a time when the UK is looking for investment within the country. We might well see a growing trend of domestic buy-to-let landlords looking for safe and secure income elsewhere. As the past 12 months has demonstrated, this will not decrease property values or help new developments get off the ground, but it will put far greater pressure on rental growth.
Coronavirus will further Exacerbate Housing Inequalities
If the UK comes out of its third lockdown in June 2021, the UK will have spent 12 of the past 17 months with significant parts of the economy closed. Whilst some will have been largely unaffected by the lockdown as they have been able to work from home and may well have been able to increase their savings. However, there are many who will not have fared anywhere near as well. As of 13 December 2020, there were 9.6 m people furloughed many of these people will be significantly impacted.
The combination of several years of low-income growth, low levels of savings and financial scarring created by the impact of coronavirus is likely to create further housing inequality in the UK, particularly in Inner London. For many people, the thought of home ownership will now no longer be a reality, these are likely to be those in two specific cohorts:
- Lost Generation– those who were impacted by the GFC and had significant periods of unemployment or periods of slower career progressions
- Furloughed Workers– ‘Other Elementary Occupations’ account for more than 30% of the population in London, Greater Manchester and the West Midlands.
Based on our knowledge of the market and our analysis we believe that UK residential market will create the following market opportunities in response to the lockdowns and the economic recovery post.
Demand and Supply Imbalance
A demand and supply imbalance has been the main driver of market-based growth over the past 10 years, post the GFC. We have reviewed the demand/supply situation in each of England major housing markets, by comparing actual supply against estimated demand (increase in population / 2.3) to determine estimated demand for new housing.
London– there were 180,010 new houses delivered between 2015 and 2020. Between 2016 and 2026 the population is forecast to grow from 8,770,000 to 9,543,000 or 774,000 people, or at an average of 77,400 people p.a. Assuming this translates roughly to a requirement of 33,652 new homes p.a. (based on one home per 2.3 people). Based on our rudimentary measure demand and supply are broadly keeping pace with each other.
South East– there were 193,380 new houses delivered between 2015 and 2020. Between 2016 and 2026 the population is forecast to grow from 9,030,000 to 9,605,000 or 574,000 people, or at an average of 57,400 people p.a. Assuming this translates roughly to a requirement of 24,957 new homes p.a. (based on one home per 2.3 people). Based on our rudimentary measure supply has outpaced demand, however, new supply is beginning to slow down.
North West– there were 133,470 new houses delivered between 2015 and 2020. Between 2016 and 2026 the population is forecast to grow from 7,224,000 to 7,467,000 or 243,000 people, or at an average of 24,300 people p.a. Assuming this translates roughly to a requirement of 10,565 new homes p.a. (based on one home per 2.3 people) there is some clear evidence to suggest that housing supply may well be exceeding what is required in terms of new population growth.
West Midlands– there were 108,550 new houses delivered between 2015 and 2020. Between 2016 and 2026 the population is forecast to grow from 5,811,000 to 6,125,000 people, or at an average of 31,400 people p.a. Assuming this translates roughly to a requirement of 13,652 new homes p.a. (based on one home per 2.3 people). Based on our rudimentary measure supply has outpaced demand, however, new supply is beginning to slow down.
Based on our measure of 1 new home required to 2.3 people. There are clear signs in the North West that there may we be some level of future oversupply in the coming years after many years of increased supply. There is moderating supply in the West Midlands and South East, however, in London supply is most closely matched to demand.
Reduction of Rental Inventory
In the short-term the levels of rental inventory will increase as short-let accommodation generally available for holidays lets is vacant, due to the collapse of the tourism market. However, there is likely to be significant medium-term pressure on rental stock as a combination of UK (domiciled) buy-to-let investors sell their investments and a reduction of supply will put more upward pressure on rental levels. This is likely to be most significant in inner London, which has suffered from a significant reduction of new supply where new construction starts have reduced significantly and new starts are now at the same level as those in 2011.
The increased corporation tax in the BtR sector may mean the government stifles supply of rental stock inadvertently, particularly in London.
Demand for inner-London
Decreasing supply in inner London is expected to drive demand in the fringes of zone 1 through to zone 6. Developers need to give a significant thought about what type of property is going to be required, cinemas as swimming pools may no longer be the order of the day.
As investors become more analytical in their approach to investment and with the type of tenant changing (unsurprisingly, most tenants will not be a city lawyer on a £300,000 p.a. basic salary!) investors will be looking for property that suits the needs of their potential tenants and drives the performance of their investment.
UK High Street/Market Towns together with Changing Occupier Preferences
There is no doubt that the coronavirus lockdowns have irreversibly changed the acceptability of ‘working from home’. Whilst we believe the impact of this switch is overstated, we do believe there will be a switch of some professional workers to a more hybrid model where they work both from a home office and in a central office. These work from home professionals will potentially look to relocate to more de-centralised locations, two of their key requirements from a potential town will be rail connectivity and the quality of the high street.
Rents and capital values in the UK residential market will grow irrespective of whether there is economic and income growth. However, we do believe that there is significant opportunity for the UK economy to experience a period of significant economic growth this would have an impact on wages and will likely further drive UK residential market growth.