On January 30 2020 the World Health Organisation formally declared a Public Health Emergency of International Concern.
In a matter of weeks, the UK was in lockdown, GDP was falling, and the housing market was closed. In June, house prices fell year on year for the first time since 2012.
Had someone suggested then that we were about to see the fastest housing market recovery in history, they might have been laughed out of the room.
Yet house prices ended the year 7.3 per cent higher than they started, according to the Nationwide.
There were 103,000 mortgage approvals for home purchase in December, the highest December figure since 2006. And outside of London, rental values rose by 2.8 per cent.
The story across the country
House prices rose in every UK country and region. Even London, where prices had been falling for much of 2019, saw values rise 9.7 per cent in the year to November according to HM Land Registry.
Growth was slower in the East of England, at 4.8 per cent, and the South East, at 6.2 per cent.
But these regions saw rapid increases in the number of transactions agreed. Data provider TwentyCi reported the number of sales agreed in those regions was more than 70 per cent higher in the last eight weeks of 2020 than the same period in 2019.
The story for rents is more nuanced. Average rents in Britain fell -0.5 per cent in the year to November.
House price growth year to Nov-2020 | Rental growth year to Nov-2020 | |
London | 9.7% | -6.1% |
Birmingham | 4.6% | -3.4% |
Manchester | 3.6% | -1.4% |
City of Edinburgh | 3.1% | -2.0% |
Cardiff | 4.8% | 1.7% |
Glasgow City | 10.2% | 3.4% |
Bristol, City of | 8.4% | 4.0% |
Norwich | 3.2% | 5.0% |
Nottingham | 4.8% | 3.9% |
Newcastle upon Tyne | 0.9% | 3.3% |
Leeds | 8.0% | 0.4% |
Source: Savills Research using Land Registry, Hometrack
But this hides a two-speed market: excluding London, rental values rose 2.8 per cent. Even within the capital, the story is mixed: London rents fell -6.1 per cent but falls were concentrated in the City centre.
Rents in outer London boroughs such as Bromley and Havering were still rising.
Urban markets outside London have had a similarly tough time, with rents in Birmingham, Edinburgh and Manchester falling -3.4 per cent, -2.0 per cent and -1.4 per cent, respectively.
What is different this time?
This is the first time ever that house prices have risen while the economy shrank. House prices and transactions are up against a backdrop of GDP falling more than 10 per cent and unemployment rising to 5.5 per cent.
There is a lot to set 2020 apart from other economic downturns. Unlike the global financial crisis and the early 1990s recession, interest rates leading up to the Covid-19 lockdowns were extremely low. Government acted swiftly to protect jobs, and by introducing a stamp duty holiday one of the single most visible barriers to buying a home was lifted.
That raises questions about what happens as government support scales back.
The stamp duty holiday looks like it will end on March 31, despite growing calls for a tapering to allow stalled transactions to complete.
At that point, Oxford Economics expects that unemployment will have risen to 6.5 per cent and the furlough scheme is set to end shortly after in April.
Lenders, who have been forbearing in their approach to distressed borrowers so far, will at some point have to bring widespread mortgage payment holidays to an end.
What happens next?
All this points to a year in three parts.
Everything points to a strong first quarter, with elevated transaction activity and price growth. Early data from TwentyCi shows there were 37 per cent more sales agreed this January than in January 2020.
The ongoing experience of lockdown and home-working and schooling will support demand from people looking for more space. This, with a rush to beat the end of the stamp duty holiday, will keep pressure on prices up.
As that stamp duty holiday comes to an end, we can expect a lull in activity in parts of the market. When government introduced a stamp duty surcharge for people buying additional homes in April 2016, transactions spiked in March before falling again in April.
Those 2016 changes affected only investors and second-home buyers. The current holiday came as many homeowners were reassessing their housing needs and will affect a much wider range of buyers.
The impact will be more limited in lower price bands, where stamp duty was and will continue to be low or zero anyway, and in prime markets where the £15,000 saving is a small proportion of the overall bill.
But in those areas and market segments with average values close to £500,000, where the holiday saving is greatest, the impact could be felt more widely.
Finally, as the vaccine rolls out and lockdown measures ease, confidence and housing market activity will return. There will be a return to City life as employees return to shop floors and offices; restaurants and pubs will re-open. Perhaps we will even see further government support to kick-start consumption ('Eat Out to Help Out 2: Eat Harder').
For many, trading urban life for a bucolic cottage or a semi in the suburbs will be the best decision they have ever made. But as cities’ vitality and buzz return, so too will the draw of city-centre living.
Younger people who left London for their family home and international students will return. We expect to see both house prices and rents recover in urban areas as social distancing restrictions ease.
The longer-term picture
Has Covid-19 changed the way we view our homes forever? Or will the patterns of supply and demand return to pre-pandemic levels as soon as enough people are vaccinated?
The reality is likely to lie somewhere between these two extremes. While we can expect employees to return to offices at some stage, it seems unlikely that all will be expected to commute in five days a week as before.
Professionals could Zoom into meetings from anywhere in the world, in theory, but the benefits of being able to commute to the office when needed, and the benefits of face-to-face meetings with colleagues, will support demand for homes in well-connected locations.
As lockdown eases and shops, restaurants, and bars reopen, their employees will return demanding conveniently located, affordably priced homes to rent.
Thus we expect rental values will make up much of the ground they have lost in 2020 over the course of the next couple of years.
Once the excitement of the stamp duty holiday passes, we expect to see a return to housing market fundamentals. Growth will be faster in the North and Midlands, where homes are more affordable.
In London, demand for prime central London properties (which look a ‘buy’ after price falls in excess of 20 per cent over the past five years) will drive price growth as international travel resumes, while growth will be more limited in outer London and the wider South East where affordability is most stretched.
Lawrence Bowles is a director in the residential research team at Savills
