London Property Market Quarterly Review – March 2021

01 Apr 2021


The robust performance of the UK property market in 2020 prompted Andrew Bailey, Governor of the Bank of England (BoE), to wryly observe that if the only economic statistic available was the one for mortgage approvals you would never know that there had been a pandemic raging in 2020. If there had been any doubts beforehand, 2020 proved once and for all that property is Britain's national obsession.


By November 2020, the average price of London property had reached record highs, breaking through the £500,000 barrier for the first time. The Office for National Statistics (ONS) reported that annual growth for London house prices was 7% in November, slipping back to 3.5% in December as the average price in the nation's capital fell by £5,000.


Heading into 2021, prices across the UK slipped further in January. The Nationwide House Price Index (HPI) contracted by 0.2%, with Halifax also showing a 0.3% price reduction. This was the biggest fall since April 2020 when the property market was in lockdown and the government's stimulus package had yet to kick in. As the market ticked over into February, the Nationwide HPI rebounded to show monthly growth of 0.7%.


Rolling into March, property portal Rightmove's House Price Index showed that the average house price had risen by 0.8% amidst reports of the strongest spring seller's market in the past 10 years with two out of three properties on agents’ books sold subject to contract.


So, what are we to make of this uncertain start to the property market for 2021? Will it recapture the momentum of 2020? Or will sales evaporate as the government stimulus is withdrawn? In the following paragraphs we examine what cues the London market is following and why you should be cautious in basing your property purchase decision on average price indicators.


Lockdown Blues

As the muted Christmas and New Year celebrations receded into the background, the UK once again found itself in a hard lockdown. In the midst of rising infection rates, the dining room table again became a shared workspace for parents and children. Whilst property listings typically fall away in the winter months, this has been exacerbated by the restrictions of lockdown. Whilst the real-estate industry hasn’t closed its doors in the third lockdown, property viewings could only be conducted in a virtual environment.


For those consumers still searching for a new home, the key motivators were likely to be lifestyle related rather than the tax savings on offer through the government's Stamp Duty holiday, due to expire at the end of March. The 2020 themes of buyer demand for more space, both indoors and outdoors, and home buyer mobility was still in vogue as remote working encouraged consumers to look for larger homes in the greener outer suburbs.



Economic Outlook

It is no secret that the UK notched up two ignominious milestones related to the pandemic: one of the highest fatality rates per capita globally and, amongst developed nations, the steepest economic decline. During the first lockdown the UK economy fell off a cliff, output falling by a record 20% in Q2, 2020. The solid 15% rebound in Q3 was snuffed out in Q4 as productive capacity lay idle in the subsequent lockdowns leaving the UK economy 11% smaller by year-end.


By February the economic mood turned decidedly gloomy on the news that UK exports to the European Union (EU) fell by 40.7% (£5.6bn) in January, the biggest monthly decline in British trade for 20 years. These Brexit related concerns were reinforced by the ONS numbers showing that imports from the EU also fell by 28.8%. The only good news out of the 2.9% contraction in January GDP was that it outperformed market analyst forecasts of a 4% drop.


For all that, there is a palpable sense of defiant optimism in the national mood thanks to the success of the vaccine rollout. In May 2020 the UK government fortuitously provided seed funding for the development of several vaccines, including Oxford AstraZeneca. The expectation that the UK is edging closer to fully reopening its economy is cause for both cautious optimism and national pride. With formidable economic challenges ahead, it is vital that the government harnesses this ebullient mood.



Government Stimulus

The match that lit the fuse to the runaway success of the housing market in 2020 was the government stimulus program rolled out when the pandemic first struck. Firstly, through the furlough scheme, the livelihoods of millions of UK workers were protected, preventing a surge in unemployment that would have cratered the consumer economy. Extended several times, the scheme is currently due to expire at the end of September.


Secondly, the Stamp Duty Land Tax (SDLT) holiday provided tax savings of up to £15,000 on the purchase of residential property. For those in cramped accommodation on a diet of endless Zoom calls this provided the necessary encouragement to move from browsing property portals to actually buying the home that would meet their lockdown lifestyle requirements.


In his recent March budget, the Chancellor, Rishi Sunak, extended the SDLT holiday in its current guise until the end of June with a further tapering until the end of September. Essentially, this was done to ensure that the logjam of several hundred thousand sales that had not yet completed could reach fruition. It will also have encouraged a fresh round of property purchases post-budget with the probability of industry demands for a further extension.


The Chancellor also used his Budget speech to announce the launch of a revamped Mortgage Guarantee Scheme (MGS) to both encourage first-home ownership amongst ‘Generation Rent’ and housing ladder mobility. The scheme enables eligible lenders to offer mortgage products up to 95% of loan valuation through accessing government-backed credit facilities. Throughout 2020 home buyers without a 20% deposit were left struggling in the wake of tightened credit markets.



Falling Rental Prices

Gross rental yields in London are in danger of slipping further behind its northern neighbors Manchester, Birmingham and Liverpool. The leading real-estate firm, Knight Frank, reports that in the year to January average rental values in Prime Central London (PCL) fell by 13%. In Prime Outer London the contraction was marginally lower at 10.7%.


The backstory to this narrative is equal parts an increase in supply and a collapse in demand. As the pandemic rapidly spread from Asia into Europe, the Americas and Africa one of the biggest casualties was international travel. Whilst the UK government did not close its borders, London's Heathrow and Gatwick airports came to resemble ghost towns with normally bustling concourses deserted.


London's short-term accommodation market, notably Airbnb, relies upon both international business travelers and tourists. With the collapse in inbound travel, landlords hastily converted their short-term lets into long-term rentals. Unfortunately, this extra supply hit the market at the precise time as demand was imploding. For the first time in 30 years London's population was going into decline.


The government funded Economics Statistics Centre of Excellence (ESCoE) has estimated that since the onset of the pandemic that almost 700,000 foreigners may have left the city. Whilst this is an estimate only, it is echoed by figures from the Oxford Migration Observatory analysis of Labour Force Survey which suggest that 4.3% of London's immigrants may have left.


Whilst some commentators predict that a significant proportion of these foreign workers will return when hospitality, travel and tourism industries rebound, the new Brexit induced points-based immigration system will be a significant barrier to entry. And, of course, tens of thousands of these hospitality jobs have simply disappeared forever. On top of this, the rental market has also been hit by international students and young, domestic renters choosing to return home to ride out the pandemic.


Predictably, the net effect of this excess supply meeting a collapse in demand is that some landlords are having to slash prices to attract tenants. Across central London, reductions of more than 25% have become relatively common. In many cases, tenants are taking advantage of falling rents to relocate to new parts of the capital. Until such time as international travel resumes and there is a return of immigrants, this theme will continue to play out.



Patchy Price Performance

The news that the average price of London property had broken through the £500,000 barrier made for an eye-catching headline. But does it really provide guidance as to what direction the market is taking? Of course, the term ‘London property market’ is itself a misnomer. Across the capital's 32 boroughs there is an array of sub-markets being pulled in different directions.


But let's start our review with a breakdown of pricing on geographic terms. According to Knight Frank, house prices in PCL declined by 4.3% in the year to January. The leading real-estate firm noted that across the same time period price growth in Greater London was an altogether healthier 9.6%. PCL has a high concentration of flats and according to the data company, Twenty Ci, the price of flats in inner London fell by 16.2% in the same time period compared to a more modest fall of 6.7% in outer London. So, what are the factors shaping this experience?


International investors have been active buyers of residential property in PCL over recent years, reflecting the fact that the London property market enjoys a reputation as a safe haven through times of social, political and economic turmoil. In the aftermath of the Brexit vote in 2016, these investors opportunistically snapped up prime residential property at heavily discounted prices, particularly when accounting for the favorable exchange rate resulting from the devaluation of the Pound Sterling. When global travel resumes, there is an expectation that these offshore buyers will return in force.


The market action in outer London boroughs is more driven by domestic buyers. As noted above, the lockdown experience has fundamentally changed the market dynamics. Couples and young families are shunning inner-city life in favor of the enhanced accommodation options to be found in London's outer suburbs or surrounding commuter belt. The net effect of this migration has inflated the price of terraced and semi-detached homes and, correspondingly, put a sizeable dent in the price of flats.



Non-Resident Stamp Duty Surcharge

Effective 1 April, UK non-residents will be hit with a 2% SDLT surcharge on their residential property purchase. The government's rationale in introducing this surcharge is to put a brake on the volume of offshore buyer activity, take the heat out of property affordability and improve access for domestic buyers.


As noted in our recent article on this subject, this rationale looks shaky on several counts. There is a distinct tendency, in London at least, for international investors and domestic buyers to be focused on different market segments rather than competing for the same properties. Offshore buyers are also active in the off-plan purchase of new-build properties, often flipping these properties prior to completion and avoiding SDLT.


Ironically, it was the government's SDLT holiday in 2020 that ignited the market and sent prices escalating. This price inflation was also driven by domestic buyers to a much greater extent than international investors.


With prices in PCL already depressed, it is doubtful that the imposition of this surcharge will provide offshore buyers with any significant leverage to negotiate further price reductions. Due to the pandemic, this price deflation is already baked in.


This surcharge is supplementary to the existing 3% surcharge for second-home buyers. Whilst the BNO visa does not provide exemption from the non-resident surcharge, those visa holders who meet the UK government residency requirements may find that they are able to gain relief from the impost. This should be thoroughly assessed pre-purchase with a UK tax accountant.



Market Direction

As we have indicated, it is a misnomer to talk about the London property market in terms of it being a homogenous market. This is the reason you need to be very clear about the specific dimensions of your property search before you start on your homebuying journey. And do your homework to understand the forces that are shaping the market segment you intend to buy into.


So, let's look at how things are likely to play out. Firstly, the extension of the furlough scheme is a positive development for the housing market. A blowout in the unemployment rate could result in an escalation in mortgage delinquencies leading to foreclosures and prices cratering. But the Chancellor has made clear that not every job can be protected. At the end of 2020 the unemployment rate had risen to 5.1% and major retail brands are fast disappearing from the high street.


It is unlikely that the SDLT holiday extension will have the same effect as it did in 2020, particularly in the luxury segment of the London market which prospered last year. With the average sale taking 18 weeks to reach completion from offer acceptance it is improbable that buyers will beat the 30 June deadline, at which point the scheme tapers off.


The first homebuyer market could prove to be the exception. With the government MGS encouraging ‘Generation Rent’ to gain a foothold on the housing ladder with a minimum 5% deposit, the abolition of stamp duty on purchases up to £250,000 through ‘til the end of September could prove enticing. With the UK poised to break free of all lockdown restrictions in late June, the return of something resembling ‘normal life’ could breathe new life into the languishing market for affordable flats as first homebuyers take advantage of these government initiatives.


In the short term there is no sign of borrowing costs increasing to cast a shadow over the housing market. But with bond markets providing more than a hint that inflation on both sides of the Atlantic may escalate sooner than central banks had planned, astute buyers would do well to look at five-year interest rates.


The narrative concerning homebuyers moving to the outer boroughs in search of larger homes shows no signs of abating. Post-lockdown, many employers intend to move to a hybrid model where employees split their time between working from home and office. This meets employee lifestyle requirements whilst allowing companies to reduce their expensive commercial lease commitments.


With employees no longer tethered to the daily commute to their inner-city offices, the exodus to districts that offer enhanced home accommodation options will continue. Combined with the fact that there will be less foot traffic on the high street, property in the inner London boroughs will continue to struggle, flats in particular. 


At a micro level, one of the less publicized outcomes of the lockdown and transition to remote working has been the effect on London property values within close proximity to a tube station. Pre-pandemic, being situated close to a tube station was a highly valued property attribute. Research by real-estate agent Benham and Reeves earlier this year found that in the preceding 12 months the value of such property has fallen by 2% on average and on the Waterloo and City line by 11%.


The significant fall in demand for rental properties has implications for the sales market. With rental yields falling, prospective buyers will be inclined to play hard ball in their negotiations. If there is a surge in listings of flats as landlords look to cut their losses in the face of falling demand prices could drop sharply. The likely beneficiaries here would be first-time homebuyers.


The bottom line is this: the extension of government stimulus will help the property market ride out the economic bumps ahead. This view is supported by industry analysts and leading real-estate firms who have taken on a more positive tone post the March budget. The expectations are that the London market will experience an increase of 1-2% in 2021.


Based upon the macro and microeconomic data that we are assessing, backed up by our experience on the ground, we are bullish on the opportunities that are emerging in distinct market niches. We welcome the opportunity to share our views with you and secure the London property that meets your unique requirements.



2022 & Beyond

In the longer term one of the issues we will be carefully appraising is the anticipated redevelopment of the British high street. With non-essential retail stores closed for much of the past year due to lockdown, there has been a significant change in consumer behavior. The ONS reports that in January online sales generated a record 35.2% of total retail spending up from 19.5% a year earlier. According to a report by Alvarez & Marsal and Retail Economics in mid-2020 this trend is set to continue with 25% of UK consumers stating their intention to make permanent changes to the way they shop.


Already prominent retail brands including Topshop, Dorothy Perkins, Wallis, Burtons and Miss Selfridge have disappeared from the high street. Major department store Debenhams has also been forced to shut up shop whilst another venerable high street fixture, John Lewis, is closing stores and diverting resources online.


There are two critical property related questions stemming from the transformation of the high street. How will town planners and commercial landlords redevelop shopping precincts to draw consumers back? What proportion of these defunct retail premises will be converted into housing? Allied to this is the question concerning the conversion of office premises into retail housing. With innovation and careful assessment of community needs, this could produce vibrant town centers that provide retail and entertainment options geared for the decades ahead. In turn, this will support residential property values in surrounding neighborhoods.