We already know that house prices in the UK are currently at record highs.
The latest survey from the Royal Institution of Chartered Surveyors gives some clarity as to the drivers of the current market. In short, people are leaving London, and snapping up homes with gardens and seaside views.
The obvious question that this raises is – for how long can this keep the market propped up?
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If you don’t have to pay to commute, the city premium collapses
I was brought up in central Scotland. One of my uncles lived in southeast England, and I remember my parents talking about his daily commute being an hour and a half each way.
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I was nowhere near working age, but I was staggered by the idea that you’d spend three hours a day travelling to and from your job. The notion struck me as something close to barbaric. Flash forward about 15 years, and I was doing exactly the same thing. And while commuting wasn’t quite as awful as I’d envisioned it to be (the secret is to make sure you only ever need to get one train), it’s still no fun.
Something you notice when you first go house hunting in the areas around London is that, a lot of the time, what you’re gaining on the swings, you’re losing on the roundabouts. For example, when I was working in central London, and getting the tube in from the farthest reaches of Zone 6, it was very clear that most of the time, what you saved on rent, you lost on your tube fare. Your combined housing and transport costs were always going to be very hard to reduce.
This in part, is the key to what’s happening in the housing market right now. If you can work from home, you have no transport costs. So the “low-commute” premium that you pay for being close to your work has been hugely reduced, or even wiped out altogether. So it makes sense that in areas where this premium is very high (ie, London but to an extent, also Edinburgh and other big cities), you’re immediately going to see some correction.
Why pay up to live in central London if you can move to a decent-sized town less than an hour away, get a bigger home for less money, and no longer have to shell out £5,000 a year plus two hours of your life each working day? That’s just what the latest RICS (Royal Institution of Chartered Surveyors) survey suggests is happening. Surveyors and estate agents point to surging prices and activity in every part of the UK except for London.
You might think: “Hold on, are people not being a bit quick to act here? What if we all have to go back to working in the office?” All I’d say to that is that many of those who are moving probably were on the verge of doing so anyway, and also, the sheer amount of money they can save is still significant enough to take the risk.
If you want to buy a house, you need a big deposit
There’s something else at work here. The people who are buying, are those with more money to spend. The FT’s George Hammond notes that research from property portal Zoopla and data group Caci shows that “prosperous buyers accounted for a larger proportion of total sales in the past three months than they have in the five years prior.”
Why’s this? There’s no question that the mortgage market is getting tighter. If you have a small deposit and you need a big loan, then you’re going to struggle. The banks are cutting back on the size of loan they will give you, and they’ll charge more for it. That’s because the banks already expect to see a big surge in bad debt, and they really aren’t keen to put themselves on the hook for any more of it.
Bank of England data shows that the price of mortgage loans has risen sharply for those with anything less than a 25% deposit. Mostly, that’s going to be first-time buyers (not many of us start out in the property market with a 30%-odd deposit – that’s for when you’re moving house, not buying your first one).
As housing analyst Neal Hudson tells Hammond: “We’re back into a market like 2010-2012 where it’s all about access to cash.” These wealthier buyers are selling up in the big cities, and they’re looking to either buy on the coast (so on the assumption that they’ll be barely commuting at all) or in big towns within the commuter belt outside the capital (perhaps because lockdown has triggered a desire to get away, or at least get a garden).
The stamp duty cut, which will save these sorts of buyers £15,000 – although how that saving is split between buyer and seller depends on the canniness of their respective negotiators – has probably helped to catalyse some moves, but I imagine a lot of them would have happened anyway.
Where the best bargains are
So this explains why prices and activity are both up. It’s due to a higher-than-normal level of better-off buyers moving out of the big cities.
What does all this imply for the future of the market? Well, it should be pretty clear that you can’t sustain a market forever on pulled-forward purchases to dodge stamp duty. Nor can you keep it going off the back of wealthy people relocating.
The question then is: what comes in to replace that demand once the post-lockdown sugar rush is over? A lot of that depends on how the employment situation looks in a year. If the effect of Covid-19 is less awful than expected, then banks will very quickly relax lending again – if interest rates are still pinned to the floor, they’ll happily take advantage.
If the recession drags on and unemployment remains stickily high – that’s another issue. As I’ve indicated before, I don’t expect a crash in the absence of an unexpected surge in interest rates, but persistently high unemployment would certainly be a drag on the market.
What about bargain hunting? Again, I’ve said this before, but if you’re reasonably footloose and fancy free then I suspect the place you’ll find the best bargains right now is in the London rental market. There are a lot of landlords who have seen their supply of tenants dry right up, while an influx of AirBnB landlords has also boosted the number of properties available for long-term lets.
That’s before we consider the fact that the stamp-duty cut appears to have given amateur landlords the desire to pile in to certain areas again, suggesting that we’ll see even more supply hitting the market.
So if you’re looking for a place, you’re between houses or your current tenancy is up – do some window shopping and drive a hard bargain.
And if you’re looking to relocate somewhere more leafy – the weekly property back pages in MoneyWeek magazine might give you some ideas, or at least a serious bout of housing envy. Get your first six issues free here.
