Why are house prices rising? This is the question everyone is asking against a backdrop of increasing unemployment and an economy struggling with the impact of Covid-19.
We are a nation obsessed by property – as a home, as an investment and now as a place to work. This makes an initiative such as RESI Trailblazers more relevant than ever as the real estate industry seeks to adapt to and benefit from the ‘new normal’.
There is a huge volume of market data and it is always hard to pick out research that is helpful against a background of repetitive and sometimes conflicting information. There are many opinions and views on the market.
However, now, more than ever, it is important that we look beyond the headlines to understand the key drivers of growth, the headwinds that could blow the market off course and the unique factors in micro markets. One size most definitely does not fit all.
We are seeing interesting dynamics in the market, which have fuelled recent house price rises. The Help to Buy scheme, for example, has allowed first- and second-time buyers to purchase new-build homes at lower price points and with a deposit of only 5%. While this scheme represents an important support to demand in this sector, and one now extended from 2021 to 2023 (albeit restricted to first-time buyers and subject to regional price caps), the potential impact of any material correction in values is plain to see, particularly if it were to be accompanied by an economic downturn.
We are also seeing lifestyle trends directly influenced by the Covid-19 crisis. For example, some people are moving out of central London to the suburbs and home counties prompted by a desire for more space post-lockdown, and the shift to working from home gives them greater flexibility.
This trend is also reflected in the symmetry between capital and rental value falls in central London. Typically, a capital fall is matched by a rental rise as occupiers defer long-term decisions for short-term ones. In this case, the fact that rental falls have outpaced capital falls suggests that people have a slightly more optimistic long-term view of the capital’s value potential but are heading out of town for now – for more space, inside and out.
Notwithstanding these drivers, there are significant headwinds on the horizon: the end of the furlough scheme, salary reductions and redundancies, of which there is daily news as firms try to balance their books and secure their financial futures. Banks are also acutely aware of the risks of a market correction and are reviewing their exposures carefully, with lower loan-to-value ratios and a general tightening of lending criteria.
Demand holding up
Despite the complexity of factors at play, we are still seeing robust levels of demand and pricing across a range of markets, particularly for the best-quality assets. The pricing gap between prime and secondary property is widening, with strong prices and even competitive bidding for the best of the best contrasted against disproportionately subdued interest and price reductions for properties perceived to carry material weaknesses.
Houses with gardens are holding up much better than flats without outside space, which is a clear reflection of the shift in buyer priorities post-lockdown. We are seeing a flight to both quality and value, with realistic pricing being key to the success of all marketing campaigns.
In-depth market knowledge and expertise have always underpinned good advice
None of us has a crystal ball but one thing is for sure: we need to weather the Covid-19 storm. The trends we are seeing now may not ring true in the long term as people realise working from home full-time is unlikely to be sustainable just as much from an employer’s perspective as from a personal one.
For the residential property industry, in-depth market knowledge and expertise have always underpinned good advice and these pillars are now more important than ever as we continue to understand and react to changing market dynamics and provide our clients with important insights into the drivers behind value and market performance.
Neil Duffy is partner, residential valuations at Cluttons