Robin Johnson is managing director of Kinleigh, Folkard and Hayward Professional Services
Inflation generally receives a negative press. It is an economic measure, but also an important political tool. Indeed, the government has changed how it calculates inflation many times since 1978. However, we easily forget that it is a welcome presence when it helps boost consumer confidence, demand and consumption and underpins economic growth.
Like most things, it purely depends on where you are in life when you experience inflation as to how you might feel about it.
If you have assets of any type, then it can be very helpful. What is key is that whatever measure you use to understand inflation, your real evidence remains your understanding of how it is working on the ground in the many micro-markets that make up the national overview.
UK house prices have increased by an average rate of 13.2% over the year to June 2021. When the value of homes goes up, voters – otherwise known as homeowners – feel a warm glow at the paper profit made and feel more confident.
Even in London, the Office for National Statistics (ONS) reported recently that that capital, the part of the UK hardest hit by the repeated coronavirus lockdowns of the economy, recorded an annual increase of 6.3%.
Inflation, it appears, is alive and well in the UK property market – stoked by lack of supply, fiscal interventions such as the stamp duty holiday and the 95% loan-to-value (LTV) guarantee scheme.
Some commentators are busy predicting that prices will fall back from October when the stamp duty holiday ends; others are predicting that the froth of the past 12 months will continue apace, underpinned by labour shortages in the construction sector, material shortages pushing costs up, and the long-term mismatch between supply and demand.
Rather than it being a question of up or down, I think the market is due for a rather more subtle shift.
The pandemic provoked extreme behavioural, social and demographic change in a very short space of time. We’re all aware of the effect lockdowns have had on people’s work-life balance, the changing use of our homes, the need for space, a shift from inner city to leafy suburb or beyond.
International travel bans have disrupted short-term leases on high value properties in London, with demand from the international super-rich and corporates falling through the floor.
Some of the changes wrought by the pandemic will stick around. Others will adapt to the world ‘AC’ (after COVID), while some will revert to the way things were ‘BC’ (Before COVID).
In the capital, we are already seeing one of those things getting back to BC normal. The supercars, flown or freighted over from the oil-rich Middle East for summer in London, are reappearing. The internationally wealthy are returning, particularly now that quarantine restrictions for vaccinated visitors to the UK have been lifted by the government.
Add to this the fact that house price inflation in London hasn’t kept pace with the dizzying rises in other parts of the UK, and not only is there increasing interest in six month lets in ultra-prime areas, but London’s property looks very good value at the moment.
Working in the London property market is a small world, and already I am hearing that the number of viewings by international investors have soared from August.
A cooler market in London, combined with a year of being stuck at home with nothing to do, is also driving younger renters and buyers into the city. They see value in purchase prices; landlords see value in stronger yields. Prices are reasonably flat, while rents are rising.
The latest analysis from Acadata provides some further insight into how nuanced the behaviour changes are.
It notes that the region with the highest increase in sales in 2021 was the Southeast (+53%), where one might have thought sales would have been low, given the assumption that many were choosing to migrate to more rural locations.
The analysis also observes that sales of detached properties in Q1 2021 were up by 70% compared to Q1 2020, and that similarly, sales of semi-detached and terraced homes increased by 50% and 40%, respectively.
This appreciation of nuance is a timely reminder that micro-markets are important when you are trying to unpick the likely trajectory of property – especially in a city like London and its environs.
Lending decisions are often broad-brush, but opportunities are very present in London and the South East if you know where to look for them.
What we are experiencing in the capital’s prices today, as well as those of its regions, reflects a nascent growing confidence that good value is very real and present.