UK Property Market Outlook: Week Beginning 14 December
There is an assumption that when the furlough scheme ends, unemployment will spike and house prices will crash. However, 2021 is likely to be far less straightforward.
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It is a curious moment for the UK housing market.
While sales activity has been exceptionally strong over the last six months, there is a prevailing belief that this will come to an end in 2021.
We have covered the arguments around property taxes, Help to Buy, Brexit and vaccines, but the assumption that prices and sales volumes will fall next year has primarily centred around the end of the furlough scheme in March.
Before the latest bout of Brexit uncertainty, UK house price forecasts from the Office for Budget Responsibility, Oxford Economics, Capital Economics and the Centre for Economic and Business Research all pointed to declines that ranged between 5% and 14% next year.
Knight Frank forecasts an increase of 1% in 2021. The figure, which is subject to review, highlights how a set of countervailing forces may result in a more static picture for house prices in 2021.
First, underlining just how much momentum has built this year, the Nationwide and Halifax both said prices rose by more than 6% in the year to November. Predictions that prices would fall by 20% this year were not uncommon in April.
It is proof that short-term forecasting during an event as unprecedented as a global pandemic is not a straightforward exercise. Indeed, the difference between UK GDP performance and the Nationwide UK house price index in the three months to April this year was almost 21 percentage points, the highest such figure since 1955.
Second, comparisons with previous recessions, with their own unique labour market dynamics and interest rate backdrops are also of limited use.
Indeed, there has been very little uniformity in the performance of different sectors of the economy in 2020.
A government assessment of which parts of the economy will be most affected draws some unsurprising conclusions. Hospitality, retail, construction are among the worst-affected sectors. On the other hand, finance, tech, the public sector and science and are examples of sectors that have added jobs this year.
“I talk to people in finance every day and I’m not picking up any signs of distress,” said Lee O’Neill, head of Knight Frank’s Canary Wharf, Wapping and City offices. “The main thing that’s changed since the lockdown is that many are making quicker decisions that are more emotive and less pragmatic.”
While the impact of Covid-19 has been random across different sectors, it has so far had a disproportionate impact on younger people. More than half the jobs lost between Q1 and Q3 this year were among 18-24 year-olds, a group where renting is more prevalent. The age profile of those still on furlough is more evenly-spread. The impact has also been greater in lower socio-economic groups.
The increased ability to transfer skills is another reason that 2020 is different to previous recessions, says Savvas Savouri, chief economist at Toscafund.
“I’d put a red line through the theory that the end of furlough means house prices will crash,” he said. “In previous recessions you had whole industries collapsing, whether it was milling, ship-building or coal-mining and that meant whole towns and cities were affected. Skilled manual labourers who were the main breadwinners had to take jobs on inferior pay. Of course unemployment will rise next year but while bricks-and-mortar retail and leisure companies will cut jobs, there are industries who need similar skills that are hiring, like e-commerce and logistics. That’s where the narrative around house prices fails.”
It is also worth considering how much wealth has accumulated during the pandemic and the role that will play in supporting housing demand.
Bank of England chief economist Andy Haldane has estimated that £100 billion in excess savings built up during 2020 and that spending was coming back at “real pace”.