UK house prices have hit a record high since the lifting of lockdown, after the fastest monthly growth in property values in August since 2004, fuelled by the release of pent-up demand and the government’s stamp duty cut.
Despite Britain plunging into the deepest recession in modern history in the second quarter, estate agents report a surge in interest from those with the financial security to move, and from those whose priorities have been changed by Covid-19. There are, however, winners and losers in this rapidly moving market, as Covid-19 creates a period of boom and bust.
First-time buyers have suffered a double whammy after the chancellor, Rishi Sunak, launched a stamp duty holiday until March next year. Fuelling a boom in prices that pushes property values further out of reach for those starting out, the change has also removed an advantage first-timers held over other house hunters. Many young buyers outside London were not paying this tax to get on the property ladder, thanks to stamp duty relief for first-time buyers. Now they face tough competition from movers and second-property buyers aiming to cash in on the stamp duty holiday.
Britain’s high street banks have also stopped offering high loan-to-value mortgages in order to protect themselves against any sharp drop in house prices, and this disproportionately hits first-time buyers, who usually have smaller deposits.
But even if the Covid recession triggers a plunge in prices, there is unlikely to be a silver lining for first-time buyers, according to the Resolution Foundation thinktank.
While prices have boomed in recent months, the Office for Budget Responsibility (OBR), the government’s economics forecaster, estimates that property values could fall by 21% by the third quarter of 2021 as the pandemic drives up unemployment and forces people to sell their homes or put off new purchases. But weak earnings growth for young adults as a result of the downturn will prevent them taking advantage of this.
With city centres still largely empty, owners of commercial property are coming under mounting pressure. Retailers, coffee chains and restaurants are closing hundreds of outlets and cutting thousands of jobs, as high streets adapt to fewer people travelling into city centres to work.
Despite the government encouraging a wider return to offices to protect businesses dependent on city workers, footfall in central London remains more than two-thirds below usual levels as firms delay the return of staff to densely packed office districts.
Early on in the pandemic, the chief executives of Barclays bank and advertising giant WPP predicted an end to crowded city centre offices and rush hours, and flexible working becoming the norm: “I think the notion of putting 7,000 people in a building may be a thing of the past,” Barclays’ chief executive, Jes Staley, said at the time.
The consultancy Capital Economics believes remote working, rising unemployment and shop closures will inflict severe losses on owners of commercial property. It warns that investors should expect returns to plunge 20% by 2025, with high levels of building vacancies until at least 2030.
With as many as 31 million fewer international visits expected this year – at an estimated cost to the UK economy of £24bn – hotels, too, have come under significant pressure. And universities are planning for a dramatic reduction in foreign student numbers this year, triggering a knock-on impact for owners of student property.
However, some experts are predicting a gradual return to usual working patterns. “After 9/11, commentators were saying people never wanted to work in tower buildings again,” said Mat Oakley of estate agent Savills. “Six months later, it was back to normality. I don’t want to say there is not going to be change. Most people hate commuting, and if given the option not to do it every single day will take it. The disaster scenario for the property industry is obviously everyone working at home forever, but I can’t see that happening.”
Homeowners looking to sell
With fewer people commuting and more people working from home, demand has shot up for homes that are large, have outdoor space, and are away from city centres.
Sales on property platform Zoopla are up 76% compared with the past five years, driven by pent-up demand and people re-thinking their plans. Prominent beneficiaries, Savills says, have been places such as Winchester and St Albans – classic London relocation markets.
There has also been a rush among wealthier buyers for second properties in rural and seaside spots, given the likely longer-term impact of Covid on international travel. The South Hams in Devon, the Isle of Wight and the Lake District have all experienced a surge in demand.
Lucian Cook, also of Savills, said three-quarters of people in a survey of clients said working from home had made them reconsider their work-life balance. “Many people are deciding now is the time to make that slightly bigger move than they normally would,” he said.
The stamp duty cut and the mini-boom in the property market has had a domino effect beyond buyers and sellers of homes. Housebuilders are set to benefit from increased demand and higher prices: share prices of some of Britain’s biggest construction companies have been boosted in recent months.
The boom is also rippling out to benefit tradespeople, consultants, estate agents and lawyers, plus businesses closely linked to activity in the property market – such as DIY shops, home and electrical stores and furniture makers.
Residential property building has fuelled a rebound in the wider construction industry, which is close to a five-year high, according to the IHS Markit/Chartered Institute of Procurement and Supply’s purchasing managers index. However, experts warn that activity will probably start to falter when pent-up demand is satisfied and unemployment begins to rise.
Hansen Lu of Capital Economics said: “With the unwinding of government support, there is likely to be a hit to occupier demand across all real estate sectors. This will further weaken values, and developers are likely to delay existing projects and be reluctant to start new ones.”
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