Underperforming, but not by much - Capital Economics
UK Housing

Underperforming, but not by much

UK Housing Market Chart Book
Written by Andrew Wishart

While London house price growth and transactions volumes have underperformed their national equivalents over the past year, they have been robust in absolute terms. Indeed, the peak in house price growth of 6.7% y/y in November 2020 marked a four-year high. Even in boroughs where house prices benefit most from proximity to offices, such as Westminster and Tower hamlets (Canary Wharf), falls have been modest. And prices in other central boroughs have risen despite the likelihood of more regular remote working in the future. In contrast, rents have dropped sharply, but there are signs that rental demand has recently started to recover.

  • While London house price growth and transactions volumes have underperformed their national equivalents over the past year, they have been robust in absolute terms. Indeed, the peak in house price growth of 6.7% y/y in November 2020 marked a four-year high. Even in boroughs where house prices benefit most from proximity to offices, such as Westminster and Tower hamlets (Canary Wharf), falls have been modest. And prices in other central boroughs have risen despite the likelihood of more regular remote working in the future. In contrast, rents have dropped sharply, but there are signs that rental demand has recently started to recover.
  • Economic indicators show that employment has fallen more in London than elsewhere, but with the virus under control, the economy should recover strongly over the remainder of the year.
  • Housing market activity in London has recovered to pre-COVID-19 levels but not surged as emphatically as elsewhere. And the shortage of stock that currently characterises the national market is also less severe.
  • House prices and rental values in the capital have underperformed. Note though that there is not a clear trend of underperformance in central London suggesting that affordability, rather than pandemic effects, are the main reason for more muted price increases. Rents on new lets have dropped sharply, but surveyors expect this decline to unwind in the coming months.
  • Housebuilding has recovered swiftly to pre-pandemic levels and the changes to the Help to Buy Equity Loan scheme shouldn’t be a large drag. But new supply in central London is likely to remain weak.

Chart 1: London House Prices by Borough (% y/y, Sep 2020)

Source: ONS


Economic Indicators

  • The lockdown has succeeded in bringing London’s severe second wave under control and the successful vaccine rollout should mean that the government can reopen the economy in line with its roadmap (2). We expect a strong economic rebound when restrictions are lifted, and the economy to return to its pre-virus size by the end of the year (3).
  • While restrictions are still in place visits to shops, transit stations, and workplaces have recovered somewhat (4). The sectors hardest hit by the pandemic only account for a small share of the London economy (5). But residential property demand is still likely to underperform in the capital as house price valuations remain high and more remote working reduces the need for workers to live near their offices.
  • Indeed, despite the favourable sectoral composition of the London economy, employment in the capital has fallen more sharply than elsewhere in both labour force survey and PAYE tax data (6). And while we think that a strong economic recovery will mean that further job losses will be limited, with the furlough still supporting 18% of London employees there is a risk that employment drops more (7).

Chart 2: % of Population with COVID-19

Chart 3: GDP (January 2020 = 100)

Chart 4: Mobility (% vs Baseline)

Chart 5: Economic Output by Sector

Chart 6: Measures of Employment (Jan. 2020 = 100)

Chart 7: Employees on Furlough (%)

Sources: ONS, Refinitiv, Google, HMRC, Capital Economics


Housing Market Activity

  • After collapsing in the first lockdown, the survey data suggest that London transactions have recovered to pre virus levels. As of November 2020, transactions were weakest in prime central London (-30% y/y) and strongest in outer London (-14% y/y) (8). Meanwhile, reported sales per surveyor have recovered to pre-virus levels suggesting transactions have continued to recover (9).
  • Even so, activity is softer in London than elsewhere, where sales are more significantly above pre-virus levels (10). New buyer enquiries in the capital have also been a touch softer than nationally (11).
  • But the bigger difference is that sales instructions have not dropped as sharply as in the rest of the country (12). That might partly reflect landlords selling BTL properties given weak rental demand. Zoopla report about 13% of new instructions for sale are properties that have been let out, up from 5% normally. The result is a less tight market than elsewhere, albeit a more competitive one than in recent years (13).

Chart 8: London Transactions (000s per Month)

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: Months of Unsold Stock

Sources: Land Registry, RICS, Capital Economics


House Prices and Rental Values

  • House price inflation accelerated in London during 2020, but not as much as in the rest of the country peaking at 5.1% y/y in Q4 compared to 6.8% y/y on the national measure (14). The slightly more muted performance probably reflects that affordability is still a much more significant restraint in London (15).
  • While prime central London appears to be underperforming, the data are volatile. And there is little evidence more generally of a pandemic affect dragging down prices in central boroughs (16). More widely, while the stock to sales ratio in London is not as low as nationwide, the market still appears tight enough to support further price gains in the near term (17).
  • Growth in the ONS index of the average rental price of all rental properties should continue to slow as the sharp drop in new let prices gradually feeds into the index (18). But there are signs that the collapse in London rental demand has bottomed out, and surveyors expect rents to increase again over the coming months (19).

Chart 14: London & National House Price Index (% y/y)

Chart 15: House Price to Earnings Ratio

Chart 16: House Prices Split by London Area (% y/y)

Chart 17: London Stock and House Prices

Chart 18: Rental Growth (% y/y)

Chart 19: Rental Demand & Expectations (% Balance)

Sources: ONS, Refinitiv, Capital Economics, RICS, Zoopla


Housing Supply

  • Weekly data on the number of energy performance certificates issued for new dwellings show that since the Christmas lull completions have rebounded above pre-virus levels in London (20). Building control data (which exclude conversions) show an even stronger rebound (21).
  • Housing starts have also recovered, but the trend of a slowdown in housebuilding in the capital relative to England as a whole has persisted as construction in central London remained very weak (22 & 23). That seems unlikely to change given concerns around the impact of post-pandemic working patterns.
  • New build sales data for recent months is unreliable, but the rebound in the number of equity loans issued per quarter to around the usual 1600 in Q3 2020 points to a strong rebound (24). That is despite the HBF survey suggesting a less robust recovery than in sales of second-hand stock (25). The equity loan scheme supports around half of new build sales in London, but the recent changes shouldn’t be a big drag in London as 94% of users there were already first-time buyers and the price cap was unchanged at £600,000.

Chart 20: New Dwelling EPCs (Completions) Per Week (4-Week Average)

Chart 21: Housing Completions per Quarter

Chart 22: Housing Starts per Quarter

Chart 23: Housing Starts per Quarter

Chart 24: HTB Equity Loans Extended in London (Quarterly)

Chart 25: RICS Agreed Sales & HBF Net Reservations Balances

Sources: MHCLG, HBF, RICS, Capital Economics


Table: London Databank

Monthly Indicators (s.a. unless stated)

Oct 2020

Nov 2020

Dec 2020

Jan 2021

Feb 2021

Prices

Official House Price Index (% y/y)

3.9

6.7

4.5

5.3

RICS Past Prices (% Balance)

+29

+11

+5

-7

+20

Activity

RICS New Buyer Enquiries (% Balance)

+9

+15

-2

-34

-23

RICS New Sales Instructions (% Balance)

+29

+30

-22

-7

-18

RICS Newly Agreed Sales (% Balance)

+19

+45

+6

-28

-4

Land Registry Sales (000s 12m. total)

69,469

68,173

Rents

ONS Private Rent Index (% y/y)

0.9

1.1

0.9

0.8

0.8

Average Rents (£ per month)

1648

1652

1653

1653

1652

Labour Market

Employment (% y/y)

1.4

0.6

0.3

-1.4

Unemployment (rate)

6.3

6.9

7.0

7.2

Quarterly Indicators (s.a.)

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Earnings Growth (% y/y)

11.1

0.5

3.8

7.1

MHCLG Housing Starts

3,580

1,930

4,670

4,030

RICS Tenant Demand (% Balance)

+20

-60

-11

-38

-28

RICS New Letting Instructions (% Balance)

-12

-64

+25

+21

+1

Annual Indicators

2015

2016

2017

2018

2019

Population (mns)

8.67

8.77

8.83

8.90

8.99

London share of UK (%)

13.3

13.4

13.4

13.6

13.6

Gross Value Added (% y/y)

1.9

3.9

1.6

2.1

5.4

London share of UK (%)

23.2

23.7

23.6

23.6

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, andrew.wishart@capitaleconomics.com, +44 7427 682 411