Richard Donnell, our director of research and insight, explains why the housing market is booming despite the recession.

Q. Richard, the UK has gone into recession – yet the housing market is performing at its strongest for five years. Why is that?

A. The pandemic has been the catalyst for a lot of movement. It’s led to a once-in-a-lifetime re-evaluation of housing requirements. Both homeowners and renters are reprioritising what they want in a home, resulting in an appetite for more space and changing work and commuting patterns. It has also created a lot of pent-up demand.

With half of all homeowners having no mortgage and a large part of the remainder having significant equity in their property, there’s a lot of flexibility for people to move.

Meanwhile, despite the economy contracting and unemployment rising, consumer spending has picked up and purchasing manager indices (economic indicators) suggest a wider rebound in the economy.

Every recession has different underlying drivers and this one is no different. What matters the most in the housing market is the impact on household incomes, credit availability, mortgage rates and unemployment.

Q. To what extent is the supply-demand gap closing – and why?

A. Buyers were still contacting estate agents remotely through lockdown so demand rebounded quickly when restrictions were lifted. But it was impossible for estate agents to take on new sales during lockdown. This has contributed to the supply-demand imbalance.

However, the gap is closing slowly. Over the last month, the flow of new supply has run 50% faster than the same time last year because more demand brings more homes to the market. Many sellers are also buyers. But the housing market shutdown has meant that supply is still 3% lower than this time last year.

Q. What impact has lockdown had on activity?

A. Lockdown has driven unseasonably strong interest, with the holiday season doing little to dampen the strong market conditions.

Since restrictions were lifted, homes have been selling at a faster rate across all regions and countries. At a UK level, they are transacting in just 27 days. That’s 31% lower than this time last year.

As I mentioned earlier, it has also changed what buyers are looking for in a home. Three-bedroom houses remain the most in-demand type of property in the UK. But drilling down to a regional level, there has been a noticeable uptick in demand for three-bedroom houses in London and south east England, as people look for more space.

Four and five-bedroom houses across the UK are selling 33% faster than last year for the same reason.

For the last three to four years, first-time buyers have been the engine of the housing market, but they have been particularly impacted by lenders reducing high loan-to-value mortgages and uncertainty in the wider economy. We’re now seeing an increase in wealthier sellers coming to the market compared with last year.

Q. What does all this mean for house prices?

A. The housing market got off to a strong start in 2020. With lockdown restrictions now lifted, it has taken off again. Government has played a key role in supporting consumer confidence.

House price growth is holding steady, with 16 of the 20 cities tracked by the House Price Index recording growth of 2% or more. Average prices are increasing at more than 4% per annum in Nottingham and Manchester.

It’s also interesting to see the housing markets reigniting in London and south east England. They’ve had weak market conditions in recent years but improved affordability and the recent stamp duty holiday have had a knock-on impact on activity.

Q. What’s in store for the housing market later this year?

A. Recessions typically impact sales volumes more than house prices. The number of sales is already low by historic standards and we expect it to be 20% lower this year as a result of the housing market being shut for almost two months.

We still believe that house prices will end the year 2% to 3% higher than at the start. There are a number of reasons why we don’t expect a major fall in UK house prices.

Firstly, house prices are rising at low rates and a jump in forced sales seems unlikely. Lenders are supporting existing borrowers and credit is still available for buyers seeking low loan-to-value mortgages.

Secondly, unemployment is rising but it appears to be focused on the younger generation who are typically renters rather than homeowners.

Thirdly and finally, mortgage regulations restrict borrowers’ ability to ‘bid up’ the price of housing – and therefore limit the downside for house prices.

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