UK Property Market Outlook: Week Beginning 4 January
A vaccine roll-out is underway at a time when the virus has become more contagious. The risk of a no-deal Brexit has vanished but the response of the pound was less than emphatic. How should the property market interpret these conflicting signals at the start of 2021? The answer is to avoid placing too much emphasis on temporary trends and remember the lessons of 2020.
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While a more contagious strain of Covid-19 has raised the stakes for the UK economy, its impact on the housing market is ultimately likely to be limited in 2021.
One self-evident reason is that buying and selling a property takes several months.
Most buyers will assume that a search started this week won’t reach completion until spring, by which time the vaccination programme will have changed the landscape.
Furthermore, while the end of the stamp duty holiday in March will clearly have an impact on transaction numbers, the effect will be reduced if the pandemic has entered the endgame. Some buyers and sellers may hesitate in coming weeks, but sentiment will ultimately improve over the course of the year.
There is, however, the credible prospect of tighter restrictions, which may limit or stop the property market from functioning. It is not yet clear if this could mean something similar to the eight-week shut-down of last year.
If this were to happen, an extension of the stamp duty holiday would presumably be introduced.
As we saw last year, any temporary closure would also delay rather than halt transactions, a fact that accounts for some of the current pressure on the conveyancing system. Many deals held together in 2020 without the certainty of a vaccine in the background.
There would, however, be an ongoing impact in prime London and Home Counties markets if international travel restrictions remained tighter for longer, a subject we have previously explored.
Ultimately, though, while the ‘escape to the country’ trend boosted activity last year, the ‘return to normality’ drive will do the same over the course of 2021, whatever the logistical barriers at the start of the year.
To demonstrate how pent-up demand continues to work its way through the system, the number of viewings, new prospective buyers, offers, exchanges and instructions to sell were all above the five-year average in the UK throughout December.
It is also true that unemployment will rise in coming months as the longer-term effects of the pandemic become clearer. Tax rises to pay for government support measures may also curb spending power.
However, the end of the furlough scheme will not necessarily have a marked impact on the property market, as we have previously noted. Ultra-low interest rates and forbearance by mortgage lenders will also limit any effect on transactions and prices, as will the stamp duty holiday.
As a result of these contradictory forces, Knight Frank forecasts an increase of 1% for UK property prices this year. The fact supply and demand will rise and fall in unison as restrictions tighten and relax will also limit downwards pressure on prices, which is another lesson from last year.
Meanwhile, the threat of a no-deal Brexit has been averted by the signing of a trade deal between the UK and EU.
While it won’t mark the end of political acrimony around the subject, the key point is that it removes the risk of a no-deal cliff-edge.
The pound was trading at US$1.37 over the weekend, which is the highest it has been since the second quarter of 2018, although it hasn’t strengthened to the extent some had expected.
An analysis of the impact of Brexit on various overseas currencies shows international buying power has risen markedly since the EU referendum.
Tighter Covid restrictions and uncertainty surrounding how UK services businesses will trade with the EU have been cited as reasons why Sterling didn’t bounce back more strongly.
Savvas Savouri, chief economist at Toscafund, says this situation may also prove to be temporary.
“Those keen to acquire UK assets, but held off because of ‘Brexit uncertainty’, will act,” he said. “When foreign exchange markets are shocked, as they inevitably will be, by the weight of this arriving capital, it will force them to react by reappraising the price of sterling.”