Why UK property will endure COVID-19 better than most
Jamie Johnson is CEO of FJP Investment
The UK government’s implementation of strict social distancing laws in a bid to contain COVID-19 have been affecting the ways that businesses are able to operate, and how consumers are able to manage their finances.
At the moment, the government is providing the financial stimulus necessary to ensure the private sector is able to overcome the initial challenges posed by COVID-19 and the associated lockdown measures.
The direct and indirect impact of COVID-19 has affected the performance of different sectors and financial markets in different ways. The world’s major indices have suffered considerable losses – recently, it was reported that The Dow Jones Industrial Average crashed by almost 32%.
Other financial assets have so far proven resilient, such as UK real estate. I explore the reasons why this has been the case and what recent statistics tell us about property’s projected performance below.
The ‘Boris bounce’
House prices are typically used as an indicator of capital growth for real estate. In 2019, the political deadlock over Brexit resulted in significant market uncertainty and modest house price growth.
Some commentators feared house prices would drop significantly as a consequence of Brexit – however unlikely such events actually were.
Boris Johnson’s victory in the 2020 General Election and his subsequent ability to pass the EU Withdrawal Bill through parliament resulted in surging investor interest in residential real estate. House Price Indexes for March 2020 provided evidence to this affect.
Both Halifax and Nationwide recorded that average residential property prices that month were 3% higher than they were the year prior.
With Brexit uncertainty forgotten, sellers were again eager to place their properties on the market. Coupled with the government’s growing excitement about ushering their new ‘housebuilding revolution’, it seemed that the UK was finally ready to confront the ongoing housing crisis and match the growing demand for housing with the adequate level of supply; generating strong increases market activity and a return of strong value returns all-round.
COVID-19 has put a pause on transactions
Lockdown measures imposed by the government in a bid to contain the COVID-19 outbreak has had a significant impact on the real estate market.
For the moment, the government is actively discouraging people from buying and selling properties, and some lenders have reacted to this news by deciding not to take on new enquiries.
However, I believe the momentum around the post-‘Boris Bounce’-market has not disappeared. In fact, in lieu of transactions being available, pent-up demand is likely to further exacerbate market activity once the pandemic is over.
Global realtor Savills, in November 2018, forecasted that the average UK property’s value would increase 15% by 2024 – assuming a majority government is elected and a Brexit deal is agreed.
Although both of these events occurred, COVID-19’s economic disruption could have been a new impetus for Savills to revise this figure. However, Savills is confident that long-term demand for UK real estate will drive prices higher, resulting in them not changing their original projection.
Short-term forecasts were revised to take into account significantly the decreased transactions levels expected for the next two months or so, but the long-term predictions for growth weren’t altered.
Ultimately, it can be said that COVID-19 has, in a sense, taken the place of Brexit uncertainty in artificially supressing market activity and, thus, property price growth.
It is also worth mentioning that COVID-19 is a public health crisis, not an economic one. This means that once the virus is contained there is no reason to suggest why the property market will not make a quick recovery.
That’s why I am confident we will see a surge in activity once lockdown measures are lifted and the virus outbreak has been effectively resolved.