The increase in working from home that appears to have led buyers to put less emphasis on location and more on space has not undermined London house prices. As of September, house price growth in the capital of 4.1% y/y was only marginally below that in England and Wales, of 4.7% y/y. And while prices in Camden and Tower Hamlets have dropped, there was no general trend of weaker price growth in central boroughs. However, the rental market has suffered from a plunge in tenant demand that has led to a drop in rents.
- The increase in working from home that appears to have led buyers to put less emphasis on location and more on space has not undermined London house prices. As of September, house price growth in the capital of 4.1% y/y was only marginally below that in England and Wales, of 4.7% y/y. And while prices in Camden and Tower Hamlets have dropped, there was no general trend of weaker price growth in central boroughs. (See Chart 1.) However, the rental market has suffered from a plunge in tenant demand that has led to a drop in rents.
- Economic indicators show that while the news on the vaccine is welcome, many Londoners remain on furlough suggesting there will be further job losses next year before employment rebounds.
- Housing market activity in London has joined in the nationwide boom in housing market activity thanks to pent up demand from the first lockdown and the stamp duty cut. That said, sales haven’t surged quite as emphatically as in the rest of the country, so there appears to be some truth to the story that home buyers are looking to move to more suburban and rural areas, as working from home is likely to remain popular after the pandemic.
- House prices and rental values in the capital have underperformed the UK average. While strong, London house price growth is a touch softer than nationally. And it is likely to drop more sharply when the stamp duty holiday ends in in March. Meanwhile, falls in rents are likely to continue in the near term until vaccines allows the hospitality sector and offices to reopen properly.
- Housing supply in central London was already weak before the pandemic. Supply in outer London has since dropped too. While housing starts have started to recover, relatively soft demand for new builds and the end of the Help to Buy scheme in 2023 suggests supply won’t recover to its pre-virus level for the foreseeable future.
Chart 1: London House Prices by Borough (% y/y, Sep 2020)
- An imminent vaccination program means that GDP will recover faster than we previously expected. Nevertheless, employment still has further to fall before it turns the corner. Renewed restrictions caused the recovery to stall in the autumn and our Business Impact of Coronavirus Survey Indicator suggests that the second lockdown caused GDP to fall outright in November (2). But after the vaccine is rolled out, the economy should recover to close to its pre-virus trend (3).
- Judging by our Mobility Trackers, which have a good relationship with national GDP, economic activity in London has fallen more sharply than in the UK overall in the second lockdown (4). Employment in the capital has also been harder hit than nationally (5). But London jobs also appeared to recover more swiftly between the first and second lockdowns suggesting they could bounce back quickly next year.
- That said, 9.5% of those “employed “ in London in September were on furlough compared to 7.5% in the country as a whole, and those figures have probably risen since (6). Some of those are likely to lose their jobs when the scheme ends in March. We think that the cumulative the drop in UK employment will grow from 1.7% in September 2020 to 5.0% in Q2 2021, putting downward pressure on house prices (7).
Chart 2: Capital Economics BICS Indicator & GDP
Chart 3: GDP (Q4 2019 = 100)
Chart 4: CE Mobility Indicators (% Change vs January)
Chart 5: Employment (100 = Jan. 2020)
Chart 6: No. of People on Furlough Scheme (Millions)
Chart 7: Employment & House Prices
Sources: ONS, Refinitiv, Moovit, Google, Apple, HMRC, CE
- After collapsing in the first lockdown, London transactions have rebounded strongly. Land registry data up to July show that the drop in sales was most pronounced in outer and non-prime central London (8). But more timely survey data from the RICS up to October point to an impressive recovery thereafter (9).
- However, the rebound in activity has been a bit weaker in London than elsewhere, with sales per surveyor yet to surpass their February peak (10). That’s mainly down to buyer interest recovering a less strongly. (11). Meanwhile, new sales instructions appear to have risen a touch further than elsewhere (12).
- Overall, it seems the large benefit that the typical London home buyer will have seen from the temporary stamp duty cut is being outweighed by households bringing forward a move to the suburbs in response to increased homeworking. (See here.) Surveyors’ expect house prices to stagnate in London, but we think prices will fall and probably by more than the 5% y/y we expect at the national level (13).
Chart 8: London Transactions (% y/y)
Chart 9: Measures of London Housing Sales
Chart 10: Sales per Surveyor
Chart 11: New Buyer Enquiries (% Balance)
Chart 12: New Sales Instructions (% Balance)
Chart 13: London House Price Expectations (% Balance)
Sources: RICS, Land Registry, Capital Economics
- House price growth has picked up in central London but is a touch softer than the national average (14). And both the RICS data on agreed sale prices and the stock to sales ratio point to a further acceleration in price growth in the months ahead (15 & 16).
- London’s rental market has been much more acutely hit by the pandemic. Tenant demand has held up well elsewhere. But more widespread working from home, the closure of hospitality businesses, and employment dropping most among younger workers has reduced demand in London sharply (17).
- With landlord instructions a little higher than the national average, that has led to a big drop in the demand-supply balance, which is now consistent with falling rents (18). The ONS data are based on the stock of rents, so will take some time to catch up with changes in market prices. Zoopla reported that rents on newly let property were down 5.2% y/y in September and the RICS rent expectations balance suggests that the drop may have worsened since then (19).
Chart 14: House Prices Split by London Area (% y/y)
Chart 15: Surveyor Past Prices and House Price Growth
Chart 16: London Stock to Sales Ratio and House Prices
Chart 17: Tenant Demand (% Balance)
Chart 18: Rental Demand/Supply Balance & Rents
Chart 19: Rent Expectations (% Balance)
Sources: ONS, RICS, Nationwide, Refinitiv, Capital Economics
- While the hard data do not show it yet (20), new home sales appeared to have recovered in the Autumn. But while the RICS survey suggests that total sales in London have continued to strengthen, the homebuilders’ survey points to a renewed dip in that reservations of new homes (21).
- Housing starts in central London were low before COVID-19 hit and have now dropped in outer London too (22). The construction PMI suggests that starts have since rebounded strongly up to November (23). Nationally, we suspect a slump in transactions in 2021 will cause the recovery to peter out before starts reach their pre-virus level. In London starts could remain weaker for longer.
- The jump in interest rates on high LTV lending will only serve to make the Help to Buy scheme more popular (24). Even before interest rates on high LTV mortgages rose the scheme was used in around two-thirds of new home purchases in London. (25). The end of the scheme in 2023 a clear risk for supply.
Chart 20: London New Home Sales (000s)
Chart 21: London Sales and Reservations (% Bal.)
Chart 22: Housing Starts Split by London Area
Chart 23: UK Housing Starts and Housing Activity PMI
Chart 24: % of New Home Purchases That Use HTB
Chart 25: Proportion of New Home Sales in London That Use HTB (%)
Sources: HBF, ONS, MHCLG, Bloomberg, Capital Economics
Table: London Databank
Official House Price Index (% y/y)
RICS Past Prices (% Balance)
RICS New Buyer Enquiries (% Balance)
RICS New Sales Instructions (% Balance)
RICS Newly Agreed Sales (% Balance)
Land Registry Sales (000s 12m. total)
ONS Private Rent Index (% y/y)
Average Rents (£ per month)
Employment (% y/y)
RICS Tenant Demand (% Balance)
RICS New Letting Instructions (% Balance)
London share of UK (%)
Gross Value Added (% y/y)
Sources: ONS, RICS, MHCLG, Refinitiv
London Region Definitions:
PCL: Kensington & Chelsea, Westminster.
Central London: Kensington & Chelsea, Westminster, Camden, Hackney, Hammersmith & Fulham, Islington, Lambeth, Lewisham, Southwark, Tower Hamlets, Wandsworth.
Outer London: Barking, Barnet, Bexley, Brent, Bromley, Croydon, Ealing, Enfield, Greenwich, Haringey, Harrow, Havering, Hillingdon, Hounslow, Kingston, Merton, Newham, Redbridge, Richmond, Sutton, Waltham Forest.
Andrew Wishart, Property Economist, firstname.lastname@example.org, +44 (0)7427 682 411