The housing market boomed over the course of the pandemic, owing to cheap mortgage deals and a stamp duty holiday. But what’s the outlook for the next 12 months, how can investors take advantage and where should they be looking? Tom Bill, Head of UK Residential Research at Knight Frank, offers his thoughts.
Can you provide an overview of the UK residential property market in 2021?
Last year was dominated by the stamp duty holiday, which ran until the end of September. It had an impact across all price points, and it meant that seasonality went out of the window for the second year running.
The other defining feature of the market last year, and since the start of the pandemic actually, has been a lack of supply compared to very high demand. This has given us the gravity-defying house price growth we’ve seen over recent months. We’re still waiting for the final ONS figures but, in the UK, it was effectively double-digit growth in 2021. Ten percent isn’t out of the ordinary, but it’s surprising given the background of a global pandemic. When you look below the surface, however, you can see the important role that low supply played in distorting normal housing market economics.
Once the stamp duty holiday ended, we had a pause in October where the market caught its breath. And there were signs in November and December that the supply/demand issue was rebalancing, with more people booking in valuations. In fact, those numbers are actually rising consistently for the first time in a long time, suggesting supply will build this year.
What’s the outlook for 2022?
I’d say a return to normality. In 2020 and 2021, we saw a race for space with people completely rethinking their property requirements. It won’t be quite as intense as it was, but it will continue.
The other thing to remember is that London house price growth was underperforming the rest of the country before the pandemic. Covid has accelerated that and highlighted the affordability issue, which we talked about a lot pre-2020 and we’ll talk a lot about after the pandemic, I’m sure. The so-called ‘race for space’ means people have been leaving the capital, which has boosted house prices around the country. That trend will eventually calm down, but the affordability constraints that have seen people leave big cities will persist.
The other key thing for us to monitor will be international travel. The relaxation of travel rules didn’t actually translate into business as normal for overseas buyers. There were a few reasons behind this. The first was the time of year that it happened, which was the normally quieter month of October. Discretionary buyers, including those from overseas, tend to stick to more traditional seasonal patterns – they’re more active in spring and autumn.
You’ve also got recovery processes going on in different countries around the world at a fairly erratic pace. So, while UK buyers might be thinking one way, those in other markets such as Asia or North America or the Middle East will be taking a different approach to the pandemic. It’s a fairly patchwork picture across the globe for now. Inevitably, international demand will pick up more meaningfully but I would suggest it will happen in Q2 of this year. That will benefit prime markets in particular.
What are the key trends you’re seeing?
Flats have underperformed across the UK, but people are looking at them again – certainly ones with outside space or access to communal gardens. We’re also seeing what we call the boomerang effect. This is where people have moved outside of the M25 but have found that their commute is slightly longer or more frequent than they thought it would be. So, they’re looking for a bolthole in London – either to rent or to buy. We’ve actually seen the rental values in W2, around Paddington, increase by almost the highest amount across the capital over the last six months. This is because there’s a lot of people who have moved to the west of the country that are looking for somewhere to rent in the city, near the station most convenient for them.
I think the race for space will keep playing out, which has made the Cotswolds, the west of the country and places like Yorkshire popular. It’s not just about picture postcard destinations though – a lot of people have been returning to their family roots.
Is sustainability impacting the market?
I think it’s creeping onto the radar of buyers and sellers. People are more aware of it but I’m not sure we’re at the point where it’s informing decision making for large numbers of people when they’re purchasing a house. I think buyers, rightly or wrongly, probably still look at the number of bedrooms rather than how their house is heated when they’re making a decision. Inevitably, that’s going to change because of regulations governing the housebuilding process as well as the sustainability of all homes. Financial incentives – such as green mortgages – will inevitably have an impact and focus minds as they become more widespread. Essentially, these sorts of initiatives are in their infancy at the moment, but will grow in importance over time.
The so-called ‘race for space’ means people have been leaving the capital, which has boosted house prices around the country. That trend will eventually calm down, but the affordability constraints that have seen people leave big cities will persist. - Tom Bill, Head of UK Residential Research at Knight Frank.