Overview
The U.K. housing market experienced a strong surge during lockdown. This was, in large part, due to the Stamp Duty holiday in July 2020. In addition, working from home increased demand for property away from metropolitan areas as buyers recognized that they did not need to pay more for more connected locations and looked for a higher quality of life. This resulted in an associated drop in demand for rentals and property in certain central locations.
The lower interest rates can be seen within the context of a ‘two tier’ mortgage offering for private individuals looking for a main residence. One ‘tier’ are, essentially, existing homeowners with significant equity built up in their property. This would, in all probability, be a property purchased when salary multiples and asset prices were much lower. They are essentially seen as a lower risk by financial institutions and can therefore benefit from remortgages or ‘product transfers’ as they are called in the industry at attractive rates. On the other hand, the second ‘tier,’ encompassing newer buyers such as first time buyers and recent property owners looking to move, are finding that banks are less willing to lend as they adjust for higher risk (e.g. increased unemployment, recession etc.) by raising deposit requirements or increasing interest rates on their deals.
A further ‘tier’, in addition to the first two private ones, is that of the Buy to Let landlord. In this part of the lending market, the picture is mixed. Certainly, lenders are adjusting for risk in light of permanent changes to the rental market post Covid (e.g. the exodus of professionals away from city centres previously mentioned) with a third of mortgage deals recently removed from the market. Additionally, this sector had already been greatly negatively impacted by changes to the taxation of mortgage interest. The picture remains mixed, however, as certain landlords are sure to experience a surge of interest in new areas of demand in the U.K. as work habits permanently change.
”Buy land, they are not making more of it.” Mark Twain
The Argument for Property as an Opportunity
· With new changes come new opportunities. With new property hotspots created by WFM it is likely that entrepreneurial developers and investors can benefit.
· With distressed assets or assets in sectors now experiencing lower demand (e.g. commercial office buildings) now coming onto the market, new opportunities to re-develop property can present themselves to investors.
· The Government has shown, historically, that it will encourage price increases in main residences in the UK for political reasons even at the expense of new buyers or first time buyers. This has been evidenced by the Stamp Duty holiday over the Covid lockdown. It can be reasonably assumed that this will continue.
· Q.E. is set to continue in the long-run and real returns on cash savings are at historic lows. Property as an asset class can present itself as a hedge against inflation and potentially generate a reasonable risk-adjusted yield.
The Argument for Property Being too Risky
· The property market in the U.K. still needs time to adjust. It is unknown to what extent people will return or be compelled to return to office environments and to what degree WFM is here to stay.
· Recent price surges in property caused by the Stamp Duty holiday and low interest rates suggest that a buyer may be buying close to or at a recent ‘peak’.
· Mass redundancies, unemployment and recession are still expected post-Covid and it is likely that this will impact indirectly on the property market as a whole. The ‘three Ds’ of Death, Divorce or Debt of property are likely to have a negative impact.
Summary
The current real estate market in the U.K. is a changing one, impacted by multiple variables. Historically, property has never been a ‘one way bet’ with periods of correction in the past. In my opinion, there will be both winners and losers in property with some segments of the market booming whilst others decline. Sadly, a lot of investors and developers will find their financial situation worsen if they are exposed to the wrong parts of the market. As previously stated, any decision our readers make should be very much an individual one and should depend also on the local property market.
