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Buying a home in 2021

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Wed 18 Nov 2020

Buying a home in 2021

Nobody can claim that 2020 hasn’t been a year of surprises, among which has been the unexpected resilience of the UK property market – famously averse to uncertainty – to the devastating shocks of the coronavirus pandemic.

Buoyed by Rishi Sunak’s stamp duty holiday, which means buyers can save up to £15,000 if they manage to complete before the end of March 2021, “people have been buying homes like they were buying Andrex at the start of the first lockdown,” says independent buying agent Henry Pryor.

But, March 31, 2021 was looking like the end of the party with the tax break set to come to an end, along with the job-supporting furlough scheme.

That was until Pfizer waved their magic syringe and announced they have a vaccine in the works with BioNTech that is more than 90 per cent effective. Economic forecasts have been upgraded, there have been several consecutive daily gains on the FTSE 100, and it has even been suggested that GDP may return to pre-pandemic levels by the middle of next year.

If there’s one thing the property market thrives on (besides time-limited tax breaks), it’s optimism. So, will the jubilation surrounding news of an effective coronavirus vaccine bolster it against the plateauing house prices and faltering demand that have been widely predicted for 2021?

Information about the success, safety and speed of roll out of a potential vaccination programme in the UK and around the world is still limited and so any predictions are heaped with unknowns. Yet, the mere glimmer of an easing of, if not a total end to, the pandemic has created a palpable sense of hope in the air.

“The housing market is driven by emotion and if there’s a feel-good factor out there amongst buyers the market can really be on fire, it can be very heated,” says Marc Schneiderman, director of Arlington Residential.

Back in January, the UK property market was experiencing a ‘Boris bounce’ following the decisive Conservative general election win. After seven weeks of total lockdown, and much to many commentators’ surprise, home moves picked up where they left offand Land Registry figures showed London house prices at a record high of £489,000 in August.

House prices in every London borough, November 2020

 

Most major forecasts released since the first lockdown had already priced in the likelihood of a spring vaccine and expect London house prices to remain flat in 2021. Tom Bill, head of UK residential research at Knight Frank says we could see a “Brexit bounce” at the start of the year before a lull in Q2 if the stamp duty holiday isn’t extended. But, if the vaccine sees life return to some kind of normality next spring, he says, the market could well pick up again in the second half of the year.

“We’ve seen what’s happened in the financial markets with the positive news around the vaccine and I don’t see why the same won’t happen in the property market. It will mirror what we’re seeing on the traders’ dashboards but over a slower period of time.”

The bad news

Chief executive of NAEA Propertymark, Mark Hayward thinks an abrupt end to the stamp duty holiday presents the biggest threat to the housing market next year.

The regulating body is campaigning for an extension to the tax break in order to avoid price falls and a sudden loss of momentum in the market. “If people have made deals with the expectation of getting the break and then their completion date is delayed because the sector is overwhelmed by demand, those deals will be renegotiated, which will mean values drop. We’re estimating that up to 4,000 deals will be at risk, which will not be good news,” he says.

Henry Pryor sounds an additional note of caution, warning: “I still think 2021 is going to be pretty miserable for London homeowners. Capital values will soften, even if by less than I thought earlier this year. It’ll be a good 12 months before we’re all confident that we’re immune to coronavirus and meanwhile a large proportion of people are going to be unemployed.”

How will London first-time buyers fare in 2021?

The group expected to be most affected by job losses once the furlough scheme ends are first-time buyers who, until the pandemic hit, made up the bulk (52 per cent) of the UK property market.

With no equity in an existing home to fall back on and raising a deposit from scratch a struggle, especially in expensive London where the average first-time buyer deposit is an eye-watering £109,000, many first-time buyers have now found themselves locked out of the mortgage market as well.

Boris promises return of low deposit first-time buyer mortgages

At the start of this year, mortgages for buyers with a 10 per cent deposit were historically cheap, plentiful and easy to come by, but economic uncertainty now means lenders are no longer willing to offer mortgages to anyone with less than a 15 per cent deposit.

Meanwhile the surge in pent-up demand over the summer has overwhelmed banks’ processing capacity, meaning they have pushed up interest rates for borrowers with lower deposits in an attempt to stem demand.

Dominic Agace, chief executive of Winkworth, says: “London is always going to appeal to aspiring young professionals nationally and internationally, looking to make a career and wanting to own their own property. The real question is, will a vaccine convince the banks to lower their deposit requirements for first time buyers, now the imminent prospect of an effective vaccine will reduce the potential risk?”

Mark Harris, chief executive of mortgage broker SPF Private Clients, thinks this might be the case. “With more positive noises coming out from the government and scientists, this will no doubt have an impact on consumer confidence and the economy as a whole,” he says. “With a more positive outlook for the economy, we may see lenders' appetite for higher LTV lending increase and therefore, through increased competition, rates fall, but this is unlikely to happen overnight.”

Will a vaccine bring central London back from the dead?

The trend nobody would have predicted pre-Covid is the hollowing out of London’s property market, for so long the safety deposit box of the world.

House prices in prime central London fell 1.6 per cent compared to last year, according to property analyst LonRes, as buyers scarred by lockdown fled inner cities in search of leafier neighbourhoods, larger homes conducive to home working, and outside space.

Many die-hard urbanites have started to question the benefits of living in the heart of a city with no theatres, galleries, restaurants or nightlife – a studio flat is one thing when it’s a place to crash within cheap Uber distance of a night out and a swift commute to work. It’s quite another when it has to act as home, office, gym and leisure space.

 

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Should a vaccine bring back the city’s buzz, most people agree London’s lustre will return.

“The real challenge for London’s prime market is supporting buyer demand and attracting buyers willing to pay more to be in a buzzing city full of all the entertainment venues, restaurants, theatres, etc. that they have come to expect. It’s difficult to put a number on it but prices are definitely looking rosier with a vaccine than without next year and beyond,” says Marcus Dixon of LonRes.

Dixon is not convinced that full-time working from home will persist once things “return to normal”, which he says will boost the city centre housing market once again as the commute returns.

Knight Frank’s Tom Bill thinks the ugly duckling of the current property market – the one-bedroom city-centre flat – could then be due a resurgence.

“If you look at one-bedroom flats in urban locations that have perhaps fallen out of favour in the past months, it’s quite a good time if you’re a buyer or investor to look at those. These are the types of early signifiers that smart money reacts to and further down the line rest of the market following suit.”

Among likely buyers of these now comparatively good-value properties are London leavers who are finding themselves needing to be present in the office more than they expected and several central London agents expect to see growth in the pied-a-terre market, funded by the money left over when trading in a house in the capital for one in the country.

Brexit be damned

A vaccine successful enough to bring back international travel will see the return of one of the biggest sectors in our cosmopolitan capital – the international buyer.

“Over the past 10 years, 68 per cent of the property we’ve sold has been to an international buyer. In Knightsbridge, Belgravia and so on that’s pretty common. But in September, Heathrow arrivals were down 81 per cent,” says Jamie Hope of Maskells, a Chelsea estate agent.

Ashley Wilsdon of buying agents Middleton Advisors says the vaccine announcement has led to a spike in enquiries from international buyers on a scale usually reserved for an election result or major Budget announcement.

“Most people are taking a long-term view. There’s an expectation that London will return, it’s a question of when, not if,” he says.

What will new stamp duty rules mean for London property?

There are two major events that might be expected to put off foreign buyers in 2021: Brexit and an impending two per cent stamp duty surcharge for buyers based outside the UK.

There is some indication that the stamp duty change – which could see some international buyers paying as much as 17 per cent tax – might lead to a spike in sales before it is introduced in April followed by some dampening of the mood. However, some experts point out that the additional tax burden could be offset by currency exchange rates and by London’s relatively cheap property taxes in comparison to other international cities.

On the other hand, Brexit no longer seems to be an issue for many buyers. “In fact, we’ve seen an influx of French, Spanish and Italian buyers over the summer because, as bad as the coronavirus situation has been here, things have been much worse in some other countries,” says Wilsdon.