We revisit our 2020 Residential Forecasts in light of the Covid-19 pandemic, discussing its likely impact on house prices, transactions, housing starts and the rental market in the UK over the next five years.
Disclaimer: The Covid-19 pandemic has created a material uncertainty in real estate investment market performance. Across Europe, there is considerable variation in the extent of the human implications unfolding and their impact on economic activity, including the trajectory, duration and extent of these impacts on all real estate sectors. Varying recent and ongoing policy responses across the region and mitigating implications will differ by market and sector.
As a result, caution should be applied to usage of our latest market forecasts contained within this document.
JLL forecasts UK house prices to fall by 8% in 2020
Predicting the full impact of Covid-19 on the performance of the UK housing market is a complicated exercise. The steps taken to contain Covid-19 have led to a steep contraction of the economy. The Bank of England and the Office of Budget Responsibility are predicting the UK could face its deepest recession in 300 years. However, the Government has taken unprecedented steps to protect businesses and households with the aim of enabling the economy to grow quickly again.
Ultimately the longer it takes to fully return to ‘normality’, the more severe the recession will be. Hopes of a more immediate V-shaped recovery are fading fast. The great unknown of how long this crisis will last remains the key challenge in arriving at a robust housing market forecast.
We have assumed Covid-19 will continue to impact our ability to go about our daily lives throughout the remainder of 2020 and into 2021 and ultimately until a vaccine is widely in circulation. We have also taken account of the growing signs of economic scarring with a significant rise in unemployment now expected in 2020.
There will be regional variations to our forecasts of course with some parts of the country more affected than others. And, at a more local level, there will be some areas that are more resilient and perform better. There is an upside potential to our forecasts. For example, a new Government stimulus response could trigger a stronger than anticipated bounce in home buying demand.
However, there are downside risks also. For example, if it takes longer to find a Covid-19 vaccine or a Hard Brexit could ensue.
Subdued sales and starts
The housing market has re-opened for business and there may be a small bounce in sales due to pent-up demand. But there remains continued uncertainty as well and this is expected to leave buyer sentiment subdued for much of the remainder of 2020 and running into early 2021. Due to the extent of the recent full market closure and the continued social distancing measures we expect annual transactions to drop to around 650,000 in 2020 from 1.2m in 2019 – below the bottom of the Global Financial Crisis when transactions fell to 750,000 in 2008/09. Annual transaction volumes would be expected to start growing again from the second half of 2021 as confidence gradually starts to return, getting back to around pre-Covid levels of just below 1.2m by around 2023.
Meanwhile, we expect UK new housing starts to plummet to 80,000 in 2020, well below the Global Financial Crisis in 2008, when starts bottomed out at 100,000. New home completions should fare slightly better as housebuilders prioritise these in the short term. However, social distancing will extend the length of time it takes to deliver a traditionally built new home by up to 50% compared with pre-Covid-19 which will create a fundamental dampening effect on new supply.
JLL home sales and housebuilding forecasts May 2020
*Regional and locational variations will apply
London prices to recover more quickly
The UK housing market has effectively now been re-opened for business following an unprecedented drop-off in new buyer activity over the past two months. Once the dust settles, the buyers who remain active this year will typically be more opportunistic in nature and will seek to secure a deal. However, the Government’s job protection schemes should limit the number of forced sellers. As a result, we forecast this will lead to price falls of circa 8% in 2020, around half the level of falls witnessed in the global financial crisis.
Across Greater London we expect price falls will be similar to the UK average in 2020. However, the most exclusive Prime Central London (PCL) market, which has already seen several years of weak performance and is now looking ‘good value’ relative to other global prime markets, should see lower falls of 4% off a very low base of sales activity.
Prices are expected to recover more quickly in Greater London and PCL, led by a spike in demand from investors and opportunistic owner-occupier buyers.
JLL house price forecasts May 2020
*Regional and locational variations will apply
Rental falls expected but BTR more resilient
The UK’s circa 5m private rental households are expected to feel disproportionate pressure on their incomes due to the Covid-19 crisis. This will particularly be the case for those employed in the hospitality and retail sectors, who have a much greater difficulty working from home. We expect that, in the Q3 peak letting season, many of these lower income PRS households will look to negotiate down rents resulting in average value falls of circa 2% across the whole UK rental market in 2020.
However, these falls will be tempered by an increase in rental demand from people opting to delay their purchasing ambitions over the short-term and we forecast that positive rental value growth should start to return from 2021.
And as with the sales market, there will be regional variations in performance. The Build to Rent sector should also prove more resilient for several reasons. Longer average tenancy lengths mean BTR customers are less likely to be facing a tenancy break in the short term. Our research also shows that BTR customers earn c 30% more than the UK average salary shielding them somewhat from short-term pressures on their incomes.
JLL Rental Market Forecasts May 2020
*Regional and locational variations will apply
Nick Whitten – Head of UK Living Research
