Is London property recession proof?
It’s back to school and back to work now that September has arrived. London has been a quiet scene during the summer months; usually buzzing with tourists and visitors from across the globe. Although home schooling has come to an end and many are heading back to work, Black Brick predicts that home-working will remain the norm for some time. This, alongside continued uncertainty is set to make for an interesting few months.
The UK is officially in a recession. The Office for National Statistics said that gross domestic product fell in the second quarter of 2020 by 20.4%, which is the biggest quarterly decline since records began in 1955. With lockdown causing almost every industry to cease trading for a period of time, including the property market, this comes as no surprise.
“We’re officially in a recession, but it feels different from previous recessions”, says Black Brick Managing Partner, Camilla Dell. Why is this? Unlike any other recession in the last 100 years, the UK has entered a recession following a public health crisis rather than a financial crisis. Critically, this means that the financial system has not halted in the same way it did in 2008.
The hallmarks of this recession are entirely different from the last recession of 11 years ago. The last two UK recessions of 1990-91 and 2008-09 led to a sharp fall in house prices but this was following all-time highs after several years of strong price growth. Entering the 2020 recession, house prices in central London were already down 20% after a steady decline for more than four years. It is also worth remembering that the Bank of England Base Rate jumped to almost 15% in 1989 making new mortgage lending unaffordable, whilst in 2009 the Base Rate fell to 0.5%, and mortgage lending dried up. In 2020 the situation is not the same: the banks are still lending and at the cheapest mortgage rates ever.
Indeed the UK property market appears to be experiencing a mini “boom”. Nationwide recently reported that UK house prices recovered from a recent dip to reach an all-time high in August. The mortgage lender said the increase of 2% in August followed a 1.8% rise in July, and it marks the highest monthly rise since February 2014. The recovery in activity has pushed average prices up to a level 3.7 per cent higher than a year earlier.
“The property market is clearly making up for lost time and reaping the benefits of the stamp duty holiday” says Dell. The question is, how long will the boom last?
Dell continues: “London property isn’t recession proof – but we predict that many parts of the market will continue to perform well – namely domestic markets such as Hampstead, St Johns Wood, Richmond and Barnes. These are areas that have larger family homes with gardens which are hugely in demand right now, with relatively little supply. However, there are areas that could see prices fall such as apartments with no outside space, located in secondary or high-density areas such as Canary Wharf, but it’s really too soon to tell.” This trend is starting to show through in some of the portals. Separate research from property portal Zoopla showed that in the third quarter there had been a surge in demand for larger properties in London, while demand for one-bedroom flats tumbled.
Data from Knight Frank indicates a clear uplift in the Prime Central London market. The number of new, prospective buyers registering in the Capital in the week ending 8th August was the sixth highest figure in more than 20 years. Partner at Black Brick, Casper Harvard-Walls comments: “We urge our clients to look beyond the headlines and assess what this unusual recession really means.” For example, according to Knight Frank’s recent Residential Market Outlook, there are now as many London-based buyers looking in the Capital as in the South East of the country. Before the crisis, London-based buyers seeking homes in the Capital would outweigh those looking in the South East by about three to one.
Harvard-Walls concludes: “Motivated buyers are still able to command competitive deals from property owners eager to sell. A recession should be an opportunity for many buyers, but it hasn’t quite played out that way this time around. It will be interesting to see how the next few months play out, with many of our clients hoping that as government support schemes come to an end and the Autumn budget nerves kick in, the buying opportunities become bigger”.
All eyes on the Autumn budget
All eyes will be on the Autumn Budget this November to see what changes Chancellor Rishi Sunak decides to bring in. Proposals under active consideration include raising Capital gains tax (CGT) so that it is aligned with income tax. Second home tax could rise from 28 per cent to 40 per cent, which would affect second home owners and buy to let landlords.
Managing Partner of Black Brick, Camilla Dell comments: “Any further changes to the way property is taxed would not be helpful. We’ve already received calls from concerned clients on the potential changes to CGT and how this may affect them. As CGT is only paid on sale, not purchase and only on gains with main homes excluded, PCL still represents a good long-term investment. As with any tax change, the devil is in the detail. It remains to be seen if property owned via corporate structures will be affected for example. Another trend we may see emerge is an influx of buy-to-let property hitting the market this month, in an attempt to avoid the new CGT rates if they come in. This could cause downward pressure on pricing, particularly on flats in secondary areas. What the market needs is certainty – we’ve had a good few months of activity post lockdown, which could come to a screeching halt.”
Still it’s not all doom and gloom, with Rishi Sunak saying there will be “no tax rise horror show” and dismissing the proposed tax rises as “speculation”. We will have to wait and see.
Prime residential market holding up
At the moment competition is strongest for the prime domestic house market and this is set to continue to the end of the year at least. It is less strong for lateral flats popular with the international buyer market. There is typically a natural cadence to the UK property market – it is highly seasonal. Domestic deals and new listings typically peak each year in the springtime, boosted further by international buyers visiting London to avoid the heat of the Middle East or SE Asia in June, July and August. Dell adds: “We are not going to see a big influx of international buyers coming into London as unlike every other year, there was not the traditional influx of Middle Eastern buyers this summer. We see PCL new build struggling for the remainder of this year and into next year due to the lack of international buyers. There are however some investors circling, looking to take advantage of this. Once travel restrictions ease, we could see a backlog of deals go through where deals have been agreed subject to viewing.”
Lag or lull?
September is traditionally associated with a return to work after the European summer holidays. Dell continues: “Following this logic, and the closure of the UK property market in Q2, it would be sensible to expect a ‘lag’ rather than a lull.”
Also supporting this theory, the RICS UK Residential Market Survey indicates that sales are expected to climb for at least the next three months. As agreed home sales in the UK rose to an unprecedented level in July, the pandemic lockdown pushed the busy spring-buying season into the summer months, according to Knight Frank.
However, there are two major ‘unknown’ factors for Q4. Firstly, it is difficult to predict what the impact of the end of the furlough scheme will mean for the economy and the impact on the property market.
Harvard-Walls comments: “Sadly, as we have seen a first wave of redundancies from major corporates in recent weeks, it seems reasonable to expect more to come as the furlough scheme ends.” RICS also envisage a slow down within the next 12-months once the furlough scheme is phased out in October and the Stamp Duty holiday expires after March 2021.
Secondly, the Q4 outlook appears to be hamstrung whilst overseas buyers and tenants face restrictions upon re-entering the UK and undertaking 14 days quarantine. Dell adds: “The sudden restrictions placed on travellers returning from some of our closest markets such as France, Spain and Belgium have made us all wonder ‘where will be next?’ with Portugal being the perfect example. This volatility is holding back a number of transactions to complete on agreed sales because buyers are reluctant to travel to the UK.”
Dell concludes: “There have been many winners and losers in the global perception of who has efficiently managed the COVID-19 crisis. New Zealand stands out as a world-class example of containment and control. London is entirely dependent on how it is perceived from international audiences and how the situation in the UK is being reported globally. It may be some time before the dust settles and overseas investors realise that London is coping well with the pandemic, and heading back towards economic stability.”
Acquisition of the month: South Hill Park Gardens, Hampstead, NW3 – £4,950,000
This month’s acquisition demonstrates how the domestic house market is performing strongly. Our client wanted to purchase a family home in either Primrose Hill, Hampstead or Swiss Cottage with a maximum budget of £5,000,000. The competition for family homes in prime residential neighbourhoods, with gardens and within easy access to a park pre and post the Covid lockdown is fierce, and so ensuring early access to possible options was going to be crucial.
Our search started in mid-February when the residential sales market was seeing a rebound as a result of the Conservative election victory and more certainty over Brexit. Whilst a number of possible options were identified vendors were, in general, being very bullish about their asking prices which continued as we entered the lockdown period. We remained in close contact with our network and were made aware of a beautiful, double fronted house which was due to come to market on South Hill Park Gardens which is a beautiful street in Hampstead close to the Heath, shops and walking distance into the village. The house was 3000 square foot, with an asking price of £4,950,000 or £1650 per square foot and had been painstakingly refurbished by the current owners who were planning to move out of London. The house was perfect for our client and unsurprisingly there were a number of other interested parties. As a result we had to pay the asking price but we were able to take the house off the market to prevent any further viewings taking place or offers being solicited.
Early access to best in class is crucial. In a highly competitive market, retaining Black Brick meant our client was able to secure their perfect property without entering into a competitive bidding situation.
Managed sale of the month: Goldhurst Terrace, South Hampstead, NW6 – £3,100,000
We were appointed by a Trust Company to manage and oversee the sale of a lovely, semi-detached house in South Hampstead. Unfortunately the house had not been lived in for almost a year and had fallen into disrepair. In addition there was no budget to enable the house to have a light refurbishment prior to marketing.
We were appointed just as lockdown was lifted. The house, whilst needing work, was the perfect example of what buyers are looking for in a post Covid world. Plenty of space, secure and set back behind gates with off street parking for several cars and the benefit of a large south facing garden. We knew that the house would appeal to family buyers and could sell quickly given the price point. We decided to keep the house off market, and send it out to our network which includes other buying agents. We were inundated with viewings and received several offers within just a few weeks, finally selling to the client of another buying agent for £3,100,000, close to our guide price of £3,250,000.