Our analysis suggests that the apparent sudden drop in the population of the UK last year has led to a huge rise in vacancy rates in the London and Midlands rental markets. House prices in those regions are also most at risk, both from the direct reduction in demand from foreign citizens, and the risk that landlords respond to higher vacancy and lower rents by selling up.
- Our analysis suggests that the apparent sudden drop in the population of the UK last year has led to a huge rise in vacancy rates in the London and Midlands rental markets. House prices in those regions are also most at risk, both from the direct reduction in demand from foreign citizens, and the risk that landlords respond to higher vacancy and lower rents by selling up.
- The labour market data suggests that there was a mass exodus from the UK last year as people born outside the UK returned home. The ONS data on employment by nationality suggests that the number of foreign citizens in the labour force dropped by 12% y/y in Q3 2020. As foreign citizens previously made up just over a tenth of the total workforce, that is enough to reduce the size of the labour force by about 1%. (See Chart 1.)
- What’s more, as we set out in a UK Economics Update, the actual number of people that have left the UK is probably larger than shown by the labour market data. Errors in weighting the statistics highlighted by the Economic Statistics Centre of Excellence (ESCoE) mean that the number of people leaving the UK ascertained from the labour market data is an underestimate. They suspect that the population dropped by 2% last year, marking an abrupt departure from annual population growth of 0.7% over the preceding decade. (See Chart 2.)
- Tragically, the rise in excess deaths due to COVID-19 is part of the reason why the population may have dropped. But most of the decline appears to be due to a surge in outward migration of foreign-born workers. (See Chart 2 again.) The rise in deaths in 2020 meant they matched births, so the contribution from natural change to population growth was reduced from +0.2ppts to zero. At the same time, outward migration may have taken a whopping 2ppts off population growth, down from +0.4ppts in 2019.
- Population growth hasn’t affected the balance between supply and demand in the UK housing market much over the past two decades because the average 0.7% annual increase in the population has been matched by the total supply of dwellings rising by an average of 0.8% a year. But if the mass exodus of 2020 isn’t reversed, or is only partially reversed, the change in the population would be much more akin to the swings regularly seen in Canada and New Zealand, where population is a critical driver of housing demand.
- We have used ESCoE’s estimates of the change in the population by region to estimate how many households have left the UK rental and owner occupier markets. There are two clear takeaways. First, most of the outward migration last year was from London and the Midlands, so demand in those regions was likely most acutely affected. In contrast, there doesn’t appear to be any impact in the South West, Wales, and Scotland. Second, foreign-born residents are more likely to rent than own their home, so rental demand has probably been worse affected than owner-occupier demand.
Chart 1: Contribution to Workforce Growth from Foreign Nationals (y/y, ppts)
Chart 2: Contributions to Population Growth (y/y, ppts)
Sources: Refinitiv, ESCoE, Capital Economics
Sources: ONS, Capital Economics, ESCoE
- Combining our estimates of the number of renting households that left the UK last year with data on rental supply suggests there has been a staggering increase in vacancy rates in some regions. The vacancy rate in London may have risen by over 9ppts. If ESCoE’s estimates are correct, there should also have been a surge in vacancy rates in the Midlands. (See Chart 3.) Historical vacancy rate data is not readily available for the UK residential market, but for context, the peak vacancy rate in the US apartment market during the financial crisis was 8%.
- That helps explain why asking rents were down by 5.2% y/y in London in September 2020 according to Zoopla. The West Midlands rental market appears second-worst affected, which corresponds with the Zoopla data showing asking rents there stagnated last year, the weakest performance outside London.
- Strangely given the evidence that many tenants left the country, rental instructions fell in 2020. That might reflect landlords deciding not to re-let immediately while they are benefitting from mortgage repayment holidays, in the hope that demand and new let prices will recover when COVID-19 restrictions ease. (See Chart 4.) There isn’t evidence of landlords selling their properties either.
- Chart 3 also shows a significant drop in demand for owner occupied property. Admittedly, our estimates are based on the same proportion of foreign-born households leaving regardless of whether they rent or are owner occupiers. That is probably a flawed assumption. Presumably renters are more likely to have left the UK due to their greater flexibility and the likelihood they have less family ties to the UK than those who own their homes. Our analysis probably overstates the impact on the house purchase market. But by the same token, it might understate the impact on the rental market.
- Even so, demand in owner occupier markets in London and the Midlands may be weaker than elsewhere. Thus far, the impact has been more than offset by the boom in overall housing demand. But this analysis adds to our conviction that London house prices will see the largest falls this year as demand softens.
- The big question is whether the people who have left the UK will return. Most of the people that left the UK probably did so because they lost their job or were furloughed. The impressive vaccination rollout, the implication that restrictions might be eased sooner than elsewhere, and our forecast that the economy will make a fast and full recovery are all good reasons to think that inward migration will bounce back.
- Moreover, Brexit shouldn’t be a barrier. The number of EU nationals who have secured settled or pre-settled status, allowing them to live and work in the UK without a visa, is higher than the ONS’s estimation of the number of EU citizens in the country in 2019. Meanwhile, the Home Office thinks that 257,000 might immigrate to the UK via the new scheme allowing Hong Kong residents to become British citizens.
- But given our view that remote working will remain more widespread after the pandemic than before, many may decide that they do not need to live in the UK even if they are working for a company based there.
- The most likely scenario is that most, but not all, of the drop in the population is reversed over the next couple of years. That adds to our conviction that London rents and house prices will underperform over the next two years. (See here.) The apparent drop in the population of the Midlands suggests that rents and house prices struggle there too. And there is a risk that migrants don’t return, which would suggest a bigger permanent adjustment in the Midlands and London rental markets.
Chart 3: Impact of Population Change on Rental Market Vacancy and Owner Occupier Demand in 2020
Chart 4: RICS Rental & Sale Instructions Balances (2020 Average)
Sources: ESCoE, ONS, gov.scot, gov.wal, gov.uk, Capital Economics
Sources: RICS, Capital Economics
Andrew Wishart, Property Economist, +44 (0)7427 682 411, firstname.lastname@example.org