The UK Real Estate Market 2020 - Post COVID 19

 Whether you are a homeowner or hoping to buy a property in the future people are questioning what will happen to the UK housing market. If you're a homeowner and have no plans to upsize or downsize, the short term movement of the housing market won't have a significant impact on you. However, if you were thinking about bringing your asset into the market it may not be the ideal time for several reasons. Also if you are a buyer, it may be worth waiting for a few more months, as it is highly likely the market will be shaken considerably due to the following factors.

 COVID 19 effect

One of the obvious reasons for not putting your property on the market is the economic impact of the global pandemic that we are struggling with. As forecasted by The Office for Budget Responsibility; a 35% drop in GDP, the biggest drop in 100 years (In comparison to the drop of 6% between the first quarter of 2008 and the second quarter of 2009) will squeeze wages and increase unemployment, compromising the buying power substantially in the coming years. This will undoubtedly impact the demand in the housing market. We are still blind about how many jobs will be swept out completely and its full impact on the economy. This is an unavoidable effect of the COVID attack. Therefore, this will certainly harm the housing market for the next 18 to 24 months.

Location independence  

Amid COVID 19, a surge in remote working and online shopping is having a long-term impact on the real estate as well. The demand for hot locations may be less and less attractive in the long run. However, schools and communities (and some other factors as well) will somewhat balance the impact in the short term. However, we will start to witness a noticeable reverse trend, accelerated by the WFH movement due to the pandemic. What this means is that the demand for city properties will decrease over time and the location premium will gradually dissolve. 

Post Brexit economy  

Brexit has had a reasonably negative impact on the housing market over the past three years and will continue to do so. Transactions of prime London assets felt the hit from Brexit very early on and the rest of the UK market felt the impact in the past three years. The Brexit factor will continue to add its contribution negatively to the UK real estate market over the next few years.

 Diminishing dominance

For decades international investors have had their eye on the UK housing market, predominantly in London. UK real estate assets have been a way of storing wealth for many private and institutional investors around the world. Cities like London, New York, and Hong Kong were like magnets for foreign buyers until now. Several factors have affected the dominance London has had both in the short term and the long term. The new additional 2% stamp duty surcharge from April 2021 on overseas investors will undoubtedly turn some of the investors away. However, the biggest impact will be from the reputational damage the UK suffers due to poor handling of the COVID 19 pandemic. The UK's status has been tarnished to some extent by the disappointing way the situation has been handled. There is no guarantee that the world will see the UK as one of the safest go-to places anymore.

 Financial market impact 

Frankfurt has been a clear winner of Brexit. Germany has scored another goal with its prudent handling of the COVID 19 pandemic and will certainly catch substantial business from London’s prestigious financial market. For decades if not centuries, highly paid bankers made a clear impact on the London property market and the shift in financial markets surely weighed negatively on London house prices. The impact on London's housing market will spread further into other UK locations eventually.

 Net effect – 15% to 20% fall 

What this all means is that the UK property market is highly impacted by the number of negative contributors and we can expect an adjustment taking place. The impact will continue to shake the market for at least 18 to 24 months unless there is a dramatic pumping of cash into the UK economy by the government. The government borrowings are at an all-time high. With a clear drop in fiscal income due to COVID 19, it is unlikely the UK government would take a dramatic action in place of a natural healing process.

 In 2008, the UK market has experienced the biggest drop of 16% in a calendar year on record. Although the circumstances were different then, the impact on the overall economy in the 2008 recession was less intense than the present situation. Also, several other negative contributors are shadowing over the UK property market at present as stated above. 

Overall, the impact on the market will be substantial and therefore my expectation would be a 15% to 20% drop over the short term and a long recovery. We could anticipation a drop in the number of transactions in the market and a notable slowing down on activities. Surely, there will be winners and losers depending on individual circumstances. 

The knock-on effect of the falling property prices on the UK economy would cause a drop in consumer spending and incur additional costs to the banking system (as high LTV increases the cost of funds for banks). We are assured that the UK government would utilize all its tools in the bag to stabilize the housing market which we see as a positive factor. However, even in the most stable economies in the world are helpless in the face of today's complexity.

Notes from the author 

Commercial and specialist real estate such as warehousing, event and sporting venues, agriculture lands, etc will impact differently. Should you like a personalized review on any of the specialist asset classes or strategic reviews on specific regions, please get in touch.