Residential Market Outlook
Week Beginning 11 May 2020
5 minutes to read
UK context
Last night Boris Johnson laid out a sketch of the roadmap for the UK’s exit out of lockdown, with moves to ease restrictions being enacted through May, June and July. Further details of this plan will be discussed in parliament today.
There is a readiness among business to resume operations, with a survey by the British Chambers of Commerce revealing that most businesses could be up and running only days after restrictions are lifted. Almost two-thirds of companies with fewer than ten employees and half of large businesses said they could be ready within a week, with nine in ten able to resume trading by the three-week mark.
At the Bank of England meeting last week, the MPC voted to maintain Bank Rate at 0.1% and to continue with the programme of £200 billion of UK government bond and sterling non‑financial investment‑grade corporate bond purchases. CPI inflation declined to 1.5% in March and is likely to fall below 1% in the next few months, in large part reflecting developments in energy prices.
In their Monetary Policy Report the Bank of England outlined “a plausible illustrative economic scenario based on a set of stylised assumptions”. This scenario forecasts a fall in UK GDP of 14% for 2020 but a strong rebound of 15% in 2021, with unemployment nearing 10% by the end of 2020. They also outline key sensitives including length of lockdown and how consumers and businesses react to easing of restrictions.
As attention turns to the rest of the year, economists are continuing to predict the shape of the UK’s economic recovery. Savvas Savouri, the chief economist at asset manager Toscafund, told us why a lot of the negativity had been overdone and why comparisons with 2008 are not particularly useful.
Transactions
Attention has already begun to turn to what life after the lockdown restrictions are eased may start to look like. This will include physical viewings, which are set to re-start within social distancing guidelines, something we explored in more detail here.
The sharp decline in web views, new buyer registrations and even transaction numbers appear to be being slowly reversed.
Based on data, as of 5 May 2020, the total potential spend of all buyers registered with Knight Frank in London was £52 billion. This compares to £43.5 billion on the same day in 2019, a 20% increase.
The Land Registry has signalled that transactions after the lockdown may get smoother. It is now accepting electronic versions of deeds, although documents will still need to be signed before being scanned and sent, a common approach in other industries.
Prices
The difference between asking prices and exchange prices is widening, slowly. In April 2020, the average sale price was 94% of the original asking price in the capital, down from the 97% average recorded in January, a time when the effects of the so-called “Boris bounce” started to take hold. This reflects the ad hoc renegotiations that are taking place between buyers and sellers.
Knight Frank’s prime central and outer London indices for April are broadly flat over the last 12 months, reflecting how thin trading conditions remain. The index in prime central London fell 0.3% between March and April, leaving the annual decline at 1.3%. It was the first time the annual decline had widened in more than a year.
This pattern reflects what the sales evidence is showing. The average price achieved on a per square foot basis across prime London in April 2020 was £1,054, marginally down from a figure of £1,057 in April 2019.
Our indices for Edinburgh and the Country houses show how a slow recovery in prices had started to pick up following the general election, although we expect a slowdown in these indices as the impact of Covid is revealed in the Q2 results.
London rental market
Renters are turning their attention to life after lockdown even more keenly than buyers. The number of new prospective tenants registering across the Knight Frank London network has doubled over the course of lockdown, albeit from a higher base than the sales market.
The number of new tenant registrations was 59% below the five-year average in the week ending 28 March but that decline had narrowed to 38% by the week ending 2 May.
Residential development
Housing minister Robert Jenrick last week encouraged construction firms to restart work, where it is safe to do so, in order to help maintain and improve the country’s infrastructure.
The comments come as firms continue the process of gradually reopening sites. Data from Barbour ABI suggests that, as of 30 April, nearly 350 closed housing sites had restarted work, albeit with social distancing measures in place. Later this week, we will examine whether new on-site working practises could act as a boost for the offsite and modular sector.
What is not in doubt, however, is that the building hiatus will impact housing delivery this year. Data released by MHCLG, looking at the number of Energy Performance Certificates (EPCs) awarded for new homes in England, suggests housing delivery was above 255,000 in 2019/20. It increasingly looks like this will represent a peak in new home delivery.
Finance and mortgage markets
The Bank of England's decision to hold the base rate at 0.1% will mean borrowing costs remain lower for longer.
Since March's rate cut, existing customers with variable rate mortgages have seen the largest changes. The average effective rate on these mortgages in March fell by 11 basis points relative to February and that rate is likely to fall further in the coming months.
It’s been a hectic period for the lenders as they have grappled with the effects of Covid-19, whether that be from an influx of calls from customers seeking tracker mortgages and payment holidays, to the shutdown of many international-based call centres.
Amid all of this, the behaviour of rival banks, once operating largely in tandem, has diverged depending on their cost of capital and appetite for risk. Some have retreated, while others are looking beyond the lockdown by reintroducing products, raising the loan-to-value ratios they are willing to lend at, and competing for business. We expect this to continue as the British government eases the lockdown, and lenders attempt to gain market share as activity begins to pick up from a low base.