As the sector seems to be shrugging off the lockdown conditions, we are often being asked if we believe the market is overheated and we are in for a torrid 2021.
Ordinarily, economic downturn and spikes in unemployment would drive house price falls, but the impacts of this pandemic are more complex. They are expected to be relatively short term and not structural in the way the Global Financial Crisis was, for instance. In addition, huge numbers have been motivated to consider their living conditions and move up the ladder or locations. The house price data, therefore, takes into account areas where price growth has been higher, for instance, family housing outside city centres, as well as where prices have fallen, such as Prime Central London.
Earlier in the year, the Government was swift to act to support the housing market through the pandemic. Construction work continued through both lockdowns, SDLT has been suspended on the first £500k for owner-occupiers and a short extension to Help to Buy has been introduced to sustain the market, in addition to further reductions in Base Rate. This stimulus, combined with pent up demand from the first lockdown has played through to rapidly recovering transaction volumes throughout the second half of 2020. Latest data shows that sales agreed were only down 8%3 on last year in September underlining the resilience of the market.
Of course, history has shown us that as unemployment increases, house price growth is negatively impacted4 on account of affordability. To date, the Furlough scheme has enabled many millions of workers to remain in employment despite the economic disruption caused by the pandemic. In addition, the housing market has not been so heavily impacted by unemployment, perhaps because the most pronounced job losses have been in the young5, who are generally renters, not homeowners.
Whilst house price rises are unlikely to be sustained throughout 2021 and some heat is likely to come out of the market, data does not point to a crash or correction. Knight Frank (KF) forecast a 1%6 national increase and Savills forecast prices to flatten across 2021. Only 8%7 of surveyors anticipate any price rise next year. Looking further ahead though, KF and Savills anticipate a cumulative increase of 15% and 20.4% for the 5-year period from 2020-2024.
Crucially for us as lenders to the development market, a national average can mask underlying trends, and geography and price point will show variations in performance. However, the UK’s structural shortage of housing at the affordable end of the market remains.
Through active management, to an extent, we can manage economic risks. We are avoiding certain areas of the market and diversifying investments to maintain a balanced portfolio, including developments that are intended for long-term rental and locations where there is a balanced economy.
