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The property market is set to lose 124,000 sales in 2020, with a combined value of £27bn, as a result of the COVID-19 market suspension.
UK house price inflation in the 12 months to June 2020 edged higher to +2.7%, the highest level of annual growth for almost 2 years.
The post election rebound boosted sales and activity over Q1 which is still feeding into the headline index.
The monthly UK growth rate has halved to +0.2% and city price indices are registering slower annual growth as a result of the lockdown (Fig.1).
There is no evidence of any material, localised price falls across the index series at regional or city level. A small proportion of local areas are registering small month on month price falls of up to -0.2%.
Given current trends we do not expect the headline rate of annual growth to move into negative territory over 2020.
A growing imbalance of supply and demand is set to support prices over 2020 and sales agreed today will be completing up until November. Any price falls in the headline UK Index are more likely in 2021 H1.
The lockdown and 2-month closure of the housing market has impacted the dynamics of supply and demand which influence the near-term direction of pricing.
The strong rebound in market activity since the market reopened in May has been well documented, but it is important to put this into a longer-run context; specifically, comparing how key market metrics have developed year to date from January 2020 and comparing this to the same period in 2019.
The closure of estate agents over the lockdown reduced the flow of new supply and agreed sales by 90%. Both have now recovered to pre-lockdown levels.
However, the cumulative growth in sales and new supply over 2020 (1 January to 19 July) remains almost 20% lower than the same period of 2019.
Overall levels of sales inventory are 10% lower than this time a year ago (Fig.2). In contrast, demand for housing is running ahead of last year.
Over the last month the level of applicant demand to agents is double the same period last year. On a cumulative basis since January 2020, demand is still 25% higher than the same period in 2019 (Fig. 2).
A result of 2019 being weighed down by Brexit uncertainty, the strong start to 2020 ahead of the lockdown and the rebound in buyer demand.
Figure 3 provides a city level picture of the cumulative growth in new supply and demand over 2020 and 2019.
The increase in demand compared to 2019 has been stronger in regional cities across northern England. The flow of new supply has been impacted across all areas as a result of the market closure.
The greatest short-term support for prices will be in cities where demand has grown the most over the first 7 months of 2020 compared to 2019.
Manchester, Liverpool and Nottingham have registered the highest growth in demand, and it is notable that they are also in the top 5 cities for annual house price growth (Table 1).
There has been much speculation about the long-term outlook for housing demand in cities.
COVID-19 has boosted demand outside the major cities but we believe this is more a one-off factor than a long-term ‘seismic shift’ in home buyer attitudes.
London ranks 4th for the growth in demand since the start of 2020 (Fig. 3) but our ‘London city’ definition includes the most important adjacent commuter areas.
When we split London into inner, outer and commuter areas we can see that the share of housing demand has shifted to outer and commuter areas while slipping back in inner areas since the lockdown.
A recent Zoopla consumer survey of 2000 households found 55% of those who commute expect to do so less often, while the top change in priority was to have a garden or outside space.
If households increase the prioritisation of more space, a garden and less commuting, then housing demand will increase where this supply of this type of housing is more readily available, which is outside inner-city locations.
COVID-19 has impacted household decisions but we would characterise this as a shift in priorities rather than a structural change in market fundamentals.
As cities start to re-open, we expect some rebalancing in between demand for homes in higher density areas of cities and their suburbs and commuter hinterlands.
While there has been a lot of focus on the impact of COVID-19 on house prices, the greatest impact will be felt in sales volumes which we expect to be 15% lower than in 2019.
This is a much better outcome than many, including us, expected in mid-March. We estimate 124,000 sales will be lost over 2020 as a result of the market closure.
The stamp duty changes in England and Northern Ireland have delivered an immediate boost to sales in London.
Our data shows new sales agreed have increased by over a quarter (27%) in London where the greatest benefits of the changes are to be found (Fig.4).
This trend has not been replicated in other regions where average prices are lower and less responsive to changes in stamp duty.
The stamp duty changes will continue to support demand in higher value markets across southern England in the months ahead.
The staggered reopening of housing markets across countries and the added impetus from the stamp duty holiday means we expect levels of demand and new sales to remain above pre lockdown levels over the next 1-2 months.
The net result will be continued support for the headline rate of house price growth. We expect the headline UK house price index to remain in the 2-3% annual growth range for the remainder of the year.
Sales agreed today will not complete for another 2-4 months so momentum today will feed into headline measures of pricing into the latter part of the year.
For those operating in the market, and others looking in, the latest forecasts for increased unemployment and a sharp economic contraction over the next 12-18 months certainly seem at odds with current levels of market activity.
We expect rising unemployment to weigh on market activity over the final quarter of 2020 and into the first half of 2021.
While some have forecast annual house price falls by the end of 2020, the pricing impact is set to be delayed thanks to the £188bn of Government support for the economy and businesses.
Further support cannot be ruled out while forbearance by lenders, and the availability of the mortgage payment deferrals which can start up until the end of October and last for 3-6 months, is likely to limit the scale of downside for house prices.
The latest Office for Budget Responsibility (OBR) projections for ‘peak to trough’ house price falls are between -3% and -16%.
We expect any price falls at a national level will be at the lower end of this range and will materialise during 2021 rather than 2020.
Demand from buyers searching for space, and making lifestyle changes after consecutive lockdowns, has further to run. Balancing this however, will be the more challenging economic environment as we move into Q4.
Mismatch between supply and demand still driving house price growth, now at 6.0%
The ‘search for space’ has been a factor driving price growth for houses to 7.3%, compared to 1.4% growth in average prices for flats over the last year
UK house prices have increased by an average of £10,246 per property over the past 12 months - the largest rise in value recorded since October 2016.