London Property Market

 

Boom or Bust? 

 

The London property market of 2020 defied the forces of gravity. With the broader economy tanking, how did property turn in its best performance since 2015? And what does 2021 have in store? Is the market at a tipping point? Or will prices continue on their upward trajectory? On the back of an extraordinary year, we help you make sense of what’s coming next. 

 

Of course, not everyone will feel the need to understand the macroeconomic forces that are shaping the direction of the London property market. But isn’t it reassuring to know that the people you are trusting to guide you on your journey view the big picture with as much clarity as they do the features of your new London home? We thought so too.

 

Market Ignites

Market Ignites

We begin our story with a look back at 2020.
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Heading into 2020, industry experts forecast London property prices to edge up 1-2%. After several years of market stagnation, the result of endless dithering on Brexit, the market kicked off the new year with a surge in activity levels and prices.  
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Closing out 2020, Halifax reports that London property prices had climbed by an average of 6% with the borough of Islington posting stellar growth of 13.4% to be the UK’s top performing area.    
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Halifax UK Property Rankings 2020

UK's Best Performers

UK's Worst Performers

Area

% Change from 2019

Area

% Change from 2019

1.Islington

13.4

2. Hackney

-1.5

3.Croydon

10.9

5.Merton

-0.6

5.Hounslow

9.1

6.Greenwich

-0.2

10.Romford

7.6

Strong headline growth masks market volatility.

Pandemic Strikes

Pandemic Strikes

The dominant storyline of 2020 – politically, socially and economically was COVID-19. With lockdown, the UK economy craters.
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In the face of the unfolding health and economic crisis senior real-estate industry figures forecast a 20% crash in property prices.
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This worst-case scenario never materialized. As the market emerged from its first lockdown, the property market took off. It begged the question: Had the market become unhinged from its macroeconomic drivers?  
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The general direction of the market is shaped by a series of macroeconomic drivers:
  • Gross Domestic Productivity (GDP)
  • Employment
  • Wages growth
  • Inflation
  • Interest rates
  • Government policy
  • Supply and demand
How did these macroeconomics shape the 2020 market and what will be their impact in 2021?

GDP Collapses

GDP Collapses

With quarterly GDP figures on a rollercoaster ride the UK economy in 2020 suffers a major contraction. 
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With streets deserted and factories locked, the economy in Q2 records its biggest contraction in over 300 years, plunging 20.2%. With the easing of restrictions in summer, Q3 sees a rebound of 15.5%. By year-end, the UK economy was forecast to have shrunk 11.3% year-on-year.
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For 2021 the Government’s Office for Budget Responsibility (OBR) was forecasting GDP growth of 5.5%. This would put the UK economy on target to return its pre-pandemic levels in late 2022.    
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With the UK back in lockdown in Q1, 2021, GDP growth estimates need to be viewed cautiously. The Bank of England (BoE) is also forecasting Brexit to take two percentage points off growth. The path back to economic capacity being fully utilized will be bumpy and challenging. 
With economic growth constrained, the macros are not favorable towards a rising housing market.

Rising Unemployment

Rising Unemployment

As the economy ground to a halt, the UK government introduced a job retention, or furlough, scheme to prevent employment from going into freefall.
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At its peak in May, 8.9 million jobs were being protected through the government subsidizing 80% of employees’ salaries. Extended several times, the scheme is currently scheduled to expire at the end of April. 
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The furlough scheme couldn’t save every job. In the first wave of the pandemic, the media headlines were dominated by stories of companies in retail, tourism, aviation and hospitality either going into insolvency or slashing headcount.   
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By the end of 2020 the unemployment rate was forecast to be 6.8% compared to 4% pre-pandemic. It was expected to hit 7.5% (2.6 million workers) by mid-2021. If the lockdown in early 2021 persists the government will come under increasing pressure to extend the furlough scheme.
Rising unemployment could trigger an increase in mortgage defaults and price drops for the housing market.

Wages Growth Stalled

Wages Growth Stalled

With company earnings severely dented and unemployment on the rise, wages growth in 2021 will be pegged back.
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Willis Towers Watson (WTW) reported that 33% of employers initiated a wage freeze in 2020 to reduce costs and preserve cash. They forecast this number to shrink to just 3% in 2021. It was reported that 39% of employers cut annual bonuses with unpaid leave policies also promoted. 
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According to WTW, UK private sector employees are set to receive an average pay increase of 2.4% in 2021. This is a moderate increase on the 2.2% average increase of 2020. Variations in the scale of the increase will be dependent upon how the pandemic impacted different industry sectors.  
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WTW reports that the industries forecasting the largest pay increases include Retail (2.9%), Insurance (2.9%) and Fintech (2.8%). At the other end of the scale are Leisure and Hospitality (1.4%), Construction, Property & Engineering (1.8%) and Automotive (1.9%). 
Concerns about job security and lower discretionary expenditure will put a brake on house price and rental yield growth.

Inflation Below Target

Inflation Below Target

The Bank of England (BoE) has the goal of achieving an inflation rate of 2%, set by the government. If inflation falls too low, companies can fail leading to job losses.
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The 2020 inflation rate, or Consumer Price Index (CPI), fell to just 0.3%. Generally, this is a reflection of falling global oil prices and companies cutting prices in response to sharp contractions in consumer demand. Inflation collapsed in Q4 due to aggressive discounting in the UK retail sector. 
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The BoE is forecasting inflation to reach 0.9% by March 2021 with OBR estimates projecting inflation to remain below the Bank’s target rate of 2% until at least 2025. Inflation is the most important economic consideration for the Bank of England in setting interest rates.  
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The ‘housing wealth effect’ is a well-understood part of economic theory that promotes the view that household expenditure is based upon perceived wealth. An increase in house values is a critical component in achieving this outcome. A low inflation environment makes this problematic.
One of the dangers of ultra-low inflation is consumers delaying expenditure in anticipation of even lower prices, thereby further cutting economic growth.

Zero Interest Rates

Zero Interest Rates

With inflation below the target rate of 2%, one of the monetary tools available to the BoE to support the government is the setting of interest rates.
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The BoE cut interest rates twice in March in response to the looming economic contraction. Initially, the benchmark rate was slashed from 0.75% to 0.25% and then just eight days later it was cut to 0.1%. This is the lowest rate on record for the UK.
2
In September it was reported that the BoE was considering cutting interest rates below zero in 2021 to support the economy with lower borrowing costs. The central banks of the European Union and Japan have already taken such action.  
3
As the vaccine rollout has gathered pace and the prospects of near-term economic growth improved analysts have viewed negative interest rates as unlikely. However, the era of ultra-low interest rates shows no sign of imminent signs of ending.
Home buyers are able to secure a mortgage confident that low interest rates are a fixture of the economy into the immediate future.

Stamp Duty Holiday

Stamp Duty Holiday

The government has rolled out a series of fiscal initiatives totalling in excess of £280bn to protect the economy. For the housing industry, the ‘stamp duty holiday’ proved critical.
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In July, 2020, the government implemented an aggressive cut in its Stamp Duty Land Tax (SDLT). The threshold at which residential property buyers in England pay stamp duty was raised from £125,000 to £500,000. The initiative, which expires on 31 March, 2021, is forecast to cost Treasury £1.3bn.
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Under the terms of the scheme, it is estimated that:
  • Nine out of 10 property transactions will occur with no stamp duty payable
  • An average saving of £4,500 to property buyers
  • A maximum saving of £15,000 on a purchase of £500,000.
 
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The government is under pressure to extend the scheme beyond the end of March. Zoopla estimated that only half of the sales agreed in January would be completed before the initiative expires. The government is unwilling to budge.
This initiative has been crucial to the success of the property market in 2020. There are fears that its removal will cause a collapse in activity. This is one of the biggest market risks of 2021.

Changing Consumer Sentiment

Changing Consumer Sentiment

Accommodative fiscal and monetary policy provided strong stimulus for the housing industry in 2020. As the real-estate market took-off, the lockdown experience changed consumer housing preferences. The key trends to emerge were:
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Size matters. Stay at home workers longed for extra space with a home office the most important consideration. 
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Outdoor space. Residents trapped inside their homes sought the sanctuary of a garden, balcony or terrace  
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Increased mobility. Working from home, property buyers started looking further afield as lifestyle considerations became more important than proximity to the office.
These changes in buyer preferences reshaped the narrative and direction of the London market.

London Market Reframed

London Market Reframed

We earlier referenced the fact that the 32 London boroughs had sharply contrasting price growth experience in 2020. But the volatility manifest itself in other market-defining trends.
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The theme of increased mobility played out in the fact that 73,950 homes were bought outside the capital by those leaving London, the biggest exodus in four years1. Young families headed for the country in search of a better lifestyle.

1 Hamptons International
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One of the biggest shake ups related to sales of London flats. Relative to other property types, demand dried up:
  • For the first time in more than a decade flats made up fewer than half of all property sales in London1.
  • In the previous decade the average price of a flat increased more than any other property type. In 2020, they were the weakest performer.
  •  
1 Hamptons International  
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The past year was notable for the absence of overseas buyers who, traditionally, have bought large tranches of London’s new-build apartment stock. According to Savills, sales over £2m to overseas buyers were down about 25%.
The volatility in the London market will continue. But not all of the 2020 trends will prevail. Understanding the changing market dynamics will be critical for London property investors.

Imbalance in Supply & Demand

Imbalance in Supply & Demand

London is a city whose population continues to swell, with growth running far ahead of the national average. However, new housing starts are failing to keep pace with this growing demand, creating additional pressure on prices.
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London’s population has been growing since the early 1990’s, the last five years at 1.39% per annum. Today, the national capital is home to an increasingly multicultural population of 9.3m. By 2025, London’s population is forecast to hit 9.8m according to the Office for National Statistics.
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The 2017 London Plan, a Mayoral project, identified that Greater London required an additional 66,000 housing units to keep pace with demand, two-thirds of them being Affordable Housing.  
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In 2020, London was targeting an additional 52,000 housing completions. However, Knight Frank reported that new housing completions would hit their lowest level since 2014 with 8,000 fewer homes set to be built compared to the five-year average. This is due to construction ceasing during lockdown and disruptions to the supply chain.
From a macro perspective, the lag in supply in meeting the capital’s housing needs helps underpin price growth. Given the diversity of London’s housing stock this inflationary pressure will be experienced on a sectoral rather than uniform basis.

Stamp Duty Surcharge for Non-Residents

Stamp Duty Surcharge for Non-Residents

Over recent years the government has found itself under pressure on housing affordability. In order to improve access and affordability for domestic buyers the government is clamping down on international investment.
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The government is to introduce a non-UK resident Stamp Duty Land Tax (SDLT) surcharge of 2%, effective 1 April 2021. This new tax was framed in the 2020 budget.
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The backstory to this regulatory change is concern that international investors are squeezing domestic buyers out of the market. In 2019, 18% of London landlords were based overseas1.

1 Hamptons International  
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Treasury estimates forecast an additional £250m. in tax revenue in 2020-21, falling by £355m. in the following year. These estimates were based upon the assumption that sales would be pulled forward into the current financial year. These projections look questionable given the impact of the pandemic.
The new tax on non-residents will bring the UK in line with other international markets. It remains to be seen what impact it has in real terms considering the expected softening in domestic demand in 2021.

Pound Sterling Fluctuates

Pound Sterling Fluctuates

One of the mechanics of property investment unique to offshore buyers is the impact of currency fluctuations.
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Immediately preceding the Brexit vote in 2016, the Pound Sterling (GBP) was buying Hong Kong Dollar (HKD)11.52. In the aftermath of the vote, it had sunk to HKD10.04, (13% drop) and by August 2019 it was down over 17% from its 2016 peak.
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The bottom line is that in 2019 Hong Kong buyers were able to buy Prime Central London properties at discounts of up to 30% from the market highs of 2016 through a combination of favorable currency movement and a slump in the market.  
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As we ticked over into the new year, the Pound was still 8% off its 2016 high.
Viewed over the long run, Hong Kong investors are still at an advantage in buying assets denominated in Pound Sterling.

2020 Recap

2020 Recap

At the beginning of the new decade, the London market outperformed the most ambitious forecasts posting average price growth of 6%. But beneath this headline growth could be found a very fragmented picture – both geographically and by market sector.
1
The London market entered 2020 with strong momentum. As the years of Brexit impasse faded from view, pent-up demand lit a fire under activity and price levels. As the pandemic hit Britain’s shores, real-estate industry experts feared a price drop of 20%.
2
There were three things that saved the housing market: 1. Government fiscal policy in the form of the furlough scheme and ‘stamp duty holiday’. 2. BoE monetary policy that produced near zero interest rates. 3. The resilience of consumer sentiment, molded by the lockdown experience.  
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The London market splintered in directions that few, if any, saw coming. The lockdown experience of working and living under the same roof 24x7 created a whole new dynamic that, with the value of hindsight, made sense. Size. Space. Mobility.
It is tempting to think that we won’t see another year quite like 2020. Except that we will. The coming year looms as being even more volatile.

What Comes Next?

What Comes Next?

The London property market sets sail into 2021 with buoyant expectations…for Q1 at least. It’s at that point where the story becomes fuzzy. What are going be the defining themes? A return to normality courtesy of the vaccine? Or strong headwinds that blow the market off course?
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There is a popular view that says the market momentum of 2020 will be carried into Q1 2021. Possibly. There are several reasons consumer sentiment could dry up: 1. The community is back in lockdown. 2. The end of the ‘stamp duty holiday’ looms large. 3. The furlough scheme is also set to expire.
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As noted above, the government stepped up last year with accommodative fiscal policy that staved off economic Armageddon. But with these measures about to expire, it is important to note that the OBR is forecasting UK property prices to plunge by more than 8% in 2021 before staging a rapid recovery in 2022.  
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The economic risks are clearly pitched to the downside. Then there is Brexit. Whilst the UK has left the European Union with a trade deal, there is consternation that in the midst of the greatest health and economic crisis in a hundred years that Brexit will carve two percentage points off economic growth.
There are formidable economic headwinds confronting the property market in 2021: Uncertain GDP growth. Looming unemployment. Wages growth crimped. The withdrawal of government stimulus. 2021 will provide the astute investor with great buying opportunities.

Beyond Macroeconomics

Beyond Macroeconomics

The macroeconomic factors outlined above will set the tone for the general direction of the London property market in 2021. This, in turn, will guide your search in terms of the district and property sector that align with your financial goals. But that isn’t job done by any means.
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To find you the right property we need to get into the weeds. That means assessing the local market microeconomic factors that govern your decision-making. Everything from schools to transport links to neighborhood safety. Of course, we know your priorities from mapping them in your Discovery session.
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These are then built into your property investor profile. Along with an understanding of whether your property is for owner-occupy or investment purposes. As well as an estimation of how long you intend to hold the property for. That determines the relevance of infrastructure and regeneration projects on future re-sale values.  
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Because only with this level of granularity are you able to distinguish the astute investment from the opportunistic purchase. In this volatile environment, isn’t this the time to de-risk your London property investment?
London. Property. Prosperity.