Four reasons to be optimistic about the prime London housing market
There will obviously be significant challenges for the industry and the wider economy in the months ahead, says LonRes, but a few fundamentals should put the prime market in good stead to recover once conditions improve…
"It is not helpful to try and second guess when or indeed where prices, transaction and demand will find their level in the short-term”, asserts LonRes in its latest prime London update, warning that it’s just too soon to draw a comparison with the impact of the financial crisis in 2008 and the current pandemic.
For starters, interest rates before the GFC were at 5% and mortgages with little or no deposit and on interest-only terms were common; there was also little or even no government support for those who lost their jobs back then. It’s a very different story this time round.
While there will be some financial casualties who need to sell, the majority of those owning homes in central London have a more significant equity buffer than in 2008, says the research team, and holding costs (mainly servicing mortgage debt) are lower too; as such, the big theme is likely to be reduced activity in the short-term as vendors “revert to the frame of mind they were in a year ago, namely sit back, wait and hold off from transacting”.
“There will obviously be significant challenges for our industry and the wider economy,” adds the firm, “…but there are some fundamentals which should put the prime market in good stead to recover once conditions improve”…
1. Cash is king: prime London’s ability to move quickly
Prime central London has historically led the recovery of any recent downturn. Homeowners in prime areas of London traditionally have low levels of debt secured against their homes, with many owning them outright without a mortgage. In previous periods of recovery this has meant buyers have been able to act more quickly once the market started to pick up. Even those who do need a mortgage often have sizable deposits or additional assets to allay banks fears in times of uncertainty surrounding prices.
2. People will want to move
There is still pent-up demand. Activity in the prime market between 2015 and 2020 was down 30% on the previous five years and over this period the number of withdrawals often exceeded sales. This means there are a significant number of homeowners who would have liked to have moved over the last five years but have been unable or unwilling to do so. An extended period of time spent within their own homes will likely only increase this desire to move when the time is right. The real challenge in the short-term remains whether these households have the means or inclination to transact.
3. Uncertain times favour tangible and usable assets
One of the differences with this pandemic is the geographical spread. Although some countries have been spared the most severe levels of infection, the impact of this pandemic is global and has hit both domestic and global economies. This has meant traditional tradable assets, such as oil and (certain) stocks will be more adversely impacted as companies struggle in the wake of falling demand. With significant volatility within such asset classes, tangible assets such as prime London homes have often proved a haven. And they could do so again.
4. The lettings market can react quickly
Agents are reporting an increase in new applicants for lettings properties in prime areas of London. Once restrictions are eased the lettings market is well placed to react quickly to address tenant demand. Stock levels have risen compared with levels pre-lockdown and landlords will be keen to accommodate new tenants as activity increases.
Marcus Dixon, Head of Research, LonRes: “Obviously, the governments priority at present is how best to preserve life and control the pandemic. But it is important to remember the vital role of the housing market to the UK economy. At its simplest property transactions provide thousands of jobs, both directly and through many ancillary services associated with home moves. For most homeowners, residential property remains their largest asset and store of wealth. Not only providing a roof over their head, but also in many cases acting as a pension fund and security blanket for the future.
“There may be a rocky road ahead, and we are under no illusion that this could include some difficult times for the housing market, but we hope and expect government will do all they can to ensure that these assets remain secure in the longer term.”