Chief Economist’s note: Housebound and the UK housing market
Chief Economist’s note: Housebound and the UK housing
Yael Selfin, Chief Economist in the UK discusses the continued impact on output as England enters a second nationwide lockdown and explores how the pandemic has affected the UK housing market.
- Second nationwide lockdown could see GDP fall by 2% in the fourth quarter and push output down by 11.8% for 2020 as a whole
- Stamp duty holiday could add 3% to the asking price of an average home in London
- As the need to commute falls, there are early signs of an uplift in demand for housing away from city centres
Tomorrow, England will begin another four weeks of lockdown as climbing cases of COVID-19 threaten to overwhelm the health system. A second lockdown could see GDP contract by 2% in the fourth quarter of the year, bringing the overall contraction for 2020 to 11.8%. Nevertheless, we are unlikely to see a repeat of the 19.8% drop in the economy experienced in the three months to June 2020 for a number of reasons. In contrast to the initial lockdown in March, this time:
- Manufacturing and construction businesses will continue to operate, as well as other workers that cannot operate from home;
- Schools and universities will stay open, boosting GDP directly as well as making it easier for parents of school aged children to work; and
- Lockdown will be shorter, and the already-fragile state of economy means there is less room for output to fall further.
Once again, the hospitality and travel sectors will be hit hardest, undoing the recovery seen during the summer months. While additional measures announced by the government will go some way to protect jobs, the rise in unemployment could put further pressure on the housing market.
A slowdown in the housing market
The UK housing market was effectively shut down between the end of March and 12 May in England, 15 June in Northern Ireland, 22 of June in Wales and 29 June in Scotland. According to Land Registry data, the number of transactions in April fell by 56% compared to a year earlier in England and by almost 80% in Northern Ireland.
Source: Land Registry
Since reopening, the latest data shows the restart has been gradual. If there was pent-up demand, there would have been a high volume of transactions during the summer months. Even allowing for a lag in transactions being completed, so far this is only evident to some degree in Scotland, where sales in September 2020 were 16% higher than in 2019. In England, Wales and in Northern Ireland, house sales have only just recovered to levels seen a year ago.
This means that for the UK as a whole, there was a shortfall of 187,000 transactions in the first nine months of this year, compared to last year. This suggests that home buyers potentially cancelled, rather than delayed, house moves.
House prices continue to rise
Meanwhile, the average house price in the UK continued to grow through the pandemic: it was 2.8% higher in August than in January. Strongest growth was recorded in the East Midlands, London and the North West, where the year-on-year increase reached more than 3.5%. On a local level, the picture is volatile: lower numbers of transactions and uncertainty generated by the pandemic have seen a 14.6% increase in prices in Islington and a 15.6% drop in the Shetland Isles, for example.
In the short term the stamp duty holiday, announced among the measures in the Summer Statement for England and Northern Ireland and mirrored in Wales and Scotland, will help boost demand in the next six months. The temporary nature of the cut, lasting until the end of March 2021 is likely to create a rush for completions. This could generate a spike in demand not unlike the one seen before a change to second home levies in April 2016.
In the meantime, sellers may absorb some, or all, of the stamp duty cut by raising asking prices. The impact of this is likely to be greatest in London and the South East, where the majority of properties are liable for some stamp duty tax. This could lead to a temporary increase in average prices of around 3% in London.
Source: KPMG analysis on Land Registry data
Homeowners are looking for more space
The bigger long-term question is how lockdown has affected preferences for housing. After months in lockdown, there is some tentative evidence of a shift in preference towards more rural areas. Post-COVID, it’s likely many office workers will continue to work from home, at least part of the time. This means they’ll have a less onerous commute and may shift their house search in favour of more space, gardens and a rural setting.
As the UK’s housing stock is largely fixed, this means that house prices will reflect a preference for gardens, and living further from expensive city centre locations. Eventually, new housebuilding may catch up with changing preferences, but these changes will be slow and cumbersome.
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