UK Market Review – 2021

UK Market Review

April 2021

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.

1. Is investing in UK residential property investment still worth it and why?
2. 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:

1. Have specific investment objectives – capital appreciation will be a bigger driver for most investors
2. Focus more on areas of under-supply – because growth is most likely to occur
3. 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:

1. 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
2. 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
3. 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
4. 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

1. 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
2. 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
3. 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
4. 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:

1. UK Economy
2. UK Housing Market
3. Demand for Housing
4. New Housing Supply
5. Availability of Finance
6. Government and Regulatory Authority Market Intervention
7. Housing Market Performance
8. Conclusion
9. Market Opportunities

UK Economy

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

Measure	Performance
GDP Growth 2020	-9.8%
Current Unemployment	4.8%*
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
4,437,938	125,926	1,848	6th*	39%+

Source Worldometer as at 19 Mar 2021

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%.

Source: UK Public Spending.co.uk

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%).

Source: UK Public Spending.co.uk

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 (%)
United Kingdom	85.7	108
Euro Area	83.6	101.1
Germany	56.9	73.3
France	99.2	118.7

Source: various

BREXIT

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:

1. Greater certainty for companies who trade with the EU
2. Gives greater certainty for investors and FDI in the UK
3. Allows the UK government to create new trading relationships outside of the EU

Vaccination Rollout

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
Israel	99.88
United Arab Emirates	63.35
UK	33.71
US	26.29
Serbia	24.5
Chile	24.13
Denmark	12.22
Morocco	12.17

Source: BBC

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:

1. Reducing the national debt is high on its priority list; and
2. 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.

New Taxation

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:

1. Freeze of income tax thresholds and the personal allowance for 4 years
2. Increase corporation tax to 25% in 2023 (for profits over £50,000)

Economic Growth

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.

Source Nationwide

In the March 2021 budget. the Chancellor made two announcements designed specifically to drive the residential property market:

1. An extension to the stamp duty holiday (Sep 21)
2. A new 95% government backed mortgage guarantee scheme

Other than general economic growth, housing markets are primarily driven by five broad factors:

1. Income levels and the unemployment rate
2. Housing demand
3. New housing supply
4. Availability of finance and Interest Rates
5. 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.

Source: ONS

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.

Source: Various

UK Redundancies

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.

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).

Surplus Inventory

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:

1. Helping more UK residents into property ownership
2. 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.

Measure	Description	Timing
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

Measure	Description	Timing
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	Launched Jun-14
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.

Source: OECD

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.

Source: VOA

Across the UK average Rental growth in the period between 2012 and 2019 is summarised below.

Region	Average Annual Growth
Inner London	4.09%
Outer London	4.06%
North West	2.03%
West Midlands	2.53%
South East	2.48%

 

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.