Nick Barnes, head of research at Chestertons
The housing market has proved remarkably resilient in the face of the COVID-related disruption and buyer demand has been sustained at a high level since May.
UK residential sales in October reached their highest level since March 20161 and prices have also risen, reaching 4.7% growth across the UK in the year to September, the highest rate since October 2017.
In London there has been a notable divergence between the mainstream market and the prime locations.
Annual price growth across Greater London in September was 4.1%, whereas prime London prices have fallen by 2%-4%.
Although the hangover from COVID-19 will be felt throughout next year and beyond, the outlook for 2021 is positive for a number of reasons.
The rollout of a COVID vaccine has already started, whilst the stamp duty holiday will continue to motivate buyers until the Spring.
Brexit is thereby unlikely to have much short-term impact on the housing market as interest rates are set to remain low and the banks are still keen to lend.
This is particularly driven by the forecast for the economy to grow by 5.3%4 in 2021.
There is still a large number of buyers in the market with the financial strength and confidence to move; this includes foreign buyers who are likely to return to the market in significant numbers.
In London, Chestertons’ pipeline of deals was 43% higher at the start of December than at the same point in 2019 and buyer enquiries were 28% higher.
Assuming no further major systemic shocks, we anticipate that the brunt of COVID’s impact on employment is likely to be felt by the mainstream market and we forecast that price growth across the UK will slow to 1.5%.
The rise in unemployment will hit London hardest as affordability is already the worst in the country and we expect prices to fall by 2% in Greater London.
However, we think prices will stabilise in central London and rise by 2% in other prime London locations as wealthier buyers take advantage of prices which are now lower than for many years.
London Lettings Market
The coronavirus has also made 2020 a challenging year for London’s rental market.
Redundancy and pay cuts have hit tenants while demand from corporate executives and foreign students has fallen substantially.
The supply of properties available to rent has also increased considerably and landlords have had to lower their rental expectations or risk void periods.
Consequently, rents have fallen sharply across London and by 15%-20% or more in the prime locations.
Tenants and landlords alike remain under considerable financial pressure and 2021 is likely to prove another difficult year.
However, we expect tenant demand to increase once COVID restrictions are removed as we anticipate at least a partial return to normal office working, which should bring a rise in demand for rented accommodation.
A return to more normal life will also see the return of international students and corporate tenants.
An anticipated worsening in affordability in the sales market will drive more people to rent but supply is likely to fall as struggling landlords sell properties and tenant demand picks up.
On balance, we forecast that the rate of rental decline will slow in 2021 to 2% across Greater London and to 1%-2% in the prime locations.