The start of any year is of course reason enough for optimism and celebration. In commercial terms however, 2021 has been ushered into existence with a hefty dose of pessimism and fear thrown into the mix. In the midst of another lockdown due to the coronavirus pandemic, most business sectors are bracing themselves for the inevitable turbulence that lies ahead. The UK property market may turn out to be one of the sectors that not only comes through the current crisis relatively unscathed, but actually prospers. How? Why? Read on …
There are both temporal and fundamental factors underpinning the strength of the property marketplace. During these unprecedented times, the ongoing effects of the Covid-19 pandemic upon the economy in general and the sector in particular cannot be underestimated. The drag on sales in the sector caused by three national lockdowns has however been largely offset by the reduction in taxes payable, the so-called ‘Stamp Duty Holiday’, which will last until (as a minimum) the end of Q1; indeed, many experts believe that this measure has provided a tangible boost to the property market, with some regional surveys predicting year-on-year growth as high as 8%. The government’s own forthcoming House Prices Index for 2020 suggests a national increase in the region of 4.7%.
The outlook is unclear, with bullish forecasts for growth contradicted by bearish analysis suggesting the end of the SDH will herald a period of stagnation in the short to mid-term. When assimilating all the significant data available in order to assess the economic outlook of any sector it is essential to call the fundamentals into play; and the fundamentals in the UK Housing Sector are very strong. Many sector reports published during 2020 cite 2 primary factors:-
- the general shortage of housing in the UK and the need for significant continual development
- the imperative mandate to embrace environmentally friendly construction techniques not only for new-build developments, but also in beginning the long haul process of replacing the many toxic structures that will fall foul of acceptable pollution tolerances in the future
A key driver in the HPI is interest rates. The current generation of first-time and second-step homebuyers are blissfully unaware of the recession-driven interest rates of the early 1990’s, when many homeowners faced mortgage repayments of 15%, and the property market crashed in the wake of record repossessions and general uncertainty. The 21st century has witnessed an unprecedented period of ultra-low interest rates, with only the financial crisis of 2008 having a strong negative impact on property values. Barring an unforeseen and dramatic increase in interest rates the housing sector is generally forecast to retain the stability afforded by the fiscal policy borne of the last two decades.
Of the external factors that could negatively affect the marketplace in the UK, there are two that require serious attention – Brexit and unemployment.
Brexit is still in its infancy and the implications of a change of such magnitude are unquantifiable. Unemployment is rising largely due to the combined effects of both the UK leaving the European Union and the coronavirus pandemic. Whilst sounding a strong note of caution these twin concerns are not in themselves a barrier to success. In fact all the new economic predictions are more bullish than the surveys of Q3 2020, many of which predicted large scale business disruption and unemployment approaching 12%. Revised analysis now predicts unemployment to peak at under 7%, and December’s Trade Agreement with the EU should provide relative stability to UK commerce. As a result of these recent reports the much vaunted ‘headwinds’ facing the UK economy have largely subsided, with UK GDP forecast to rise by circa 5% during 2021. The need for new housing as proclaimed by the UK government, combined with low interest rates and generally favourable economic conditions, suggests a positive outlook for the Housing Sector.
The UK government is targeting construction of one million new homes by the mid-2020’s – meaning 300,000 new homes a year – but housing completions are well off this pace. House-building has fallen behind the formation of new households for many years now, leaving the UK with an increasingly severe shortage of homes. Recently announced government policy has pledged long-term support for the housing sector in the form of ambitious house-building targets, and from the need to repair, maintain and improve the UK’s housing stock and other buildings.
Housing starts reached 35,710 units in the third quarter of 2020 as the UK began to emerge from the restrictions imposed during lockdown, well behind the governments quarterly target of 75,000 units. Despite the fact that the housing sector has been robust in recent decades, the UK has never approached the number of housing starts required under the government plan, as can be seen in the Ministry of Housing data below.
Housing Starts in the United Kingdom increased to 35710 units in the third quarter of 2020 from 15930 units in the second quarter of 2020. Source: Ministry of Housing, Communities and Local Government, UK
‘Demand versus Supply’ is a fundamental consideration in any intelligent business and investment strategy. As demonstrated in the UK Government’s stated targets and the Ministry of Housing data above, demand for housing clearly outstrips supply.
Whilst nobody can confidently predict how 2021 will unfold, here at Griffin we firmly believe that the property sector will not only retain its fundamental strength, but prove to be relatively immune to the current crisis (no pun intended)! Therefore we will persist with our stated business plan in the belief that our sector is as desirable as ever.
Happy New Year!
Steven Earlam
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