Survival of the richest…

Recessions traditionally follow a standard playbook – a fall in output followed by a lagged rise in job losses and unemployment, triggering a decrease in consumer spending, hitting retail sales and the housing market.

The COVID-19 pandemic though spawned a new recessionary variant. The UK economy posted its biggest slump in output in over 300 years. Yet a comparable rise in unemployment did not occur. Similarly, a fall in house prices was viewed as a ‘no brainer’ but it too did not occur.

Rather than double-digit declines in house prices, almost every major economy is reporting booming house prices, marking the biggest rally in more than two decades. The local housing market has defied economists’ predictions too. 

Northern Ireland’s Residential Property Price Index (NIRPPI) reported its ninth successive quarter of growth in Q2 2021. Meanwhile the annual rate of residential property price inflation hit 9% in Q2 2021.  That marks the fastest pace of price growth since the tail end of the last property boom in Q4 2007. It is more than 2.5 times the rise in local private sector rents over the last year (+3.4% y/y).

It is not just prices that are booming – sales are too. What estate agent would have thought during the first lockdown that 2021 would see the best year for sales since the last boom in 2007. So, are we seeing another 2007-style housing boom and bust?  In a word no.

The scale of the price rises today is tame compared to 2006/07 where year-on-year increases peaked at over 50%.  Local residential property prices have increased by 58% relative to their trough just over eight years ago (Q1 2013) – injecting equity into the market.  But despite this growth, the standardised residential property price (£153,499) is still 32% below Q3 2007’s freak peak of £224,670. Adjusting for inflation, Q3 2007’s peak was £303,000 in today’s money – nearly double the price of houses almost 14 years later. 

Another difference is that the cost of credit is even cheaper today. The Bank of England’s Bank Rate was 3.5% in the summer of 2003; that was a record low back then. Bank rate peaked at 5.75% in summer 2007. Today it is 0.1% and mortgage rates are at record lows. 

Credit was too freely available during the last boom with self-certification mortgages, sub-prime etc.  There was an explosion of credit. Today, despite the surge in transactions, sales are only two-thirds of what they were in 2006. 

The last boom was fuelled by property investors, notably buy-to-let, speculators and property flippers – today the market is being driven by people purchasing homes rather than investments. 

Linked to the buy-to-let frenzy in 2005-2007, the dominant property type was terraced properties at and the lower end of the market. They accounted for 36% of the market followed by semis and detached. During the current boom, the ‘race for space’ has relegated terraced properties to third after semis and detached homes.

Since Q4 2020, detached home sales have exceeded all other property types. Q4 2020 and Q1 2021 were the best Q4 and Q1 for detached sales on record, with Q2 the best second quarter in 15 years. Larger properties are posting the steepest price rises too, with detached homes up 12% y/y – double the rate of terraced properties.

Two key factors explain what has happened with the residential property market. First, government policies to prevent an economic depression and soaring unemployment. Essentially a do whatever it takes approach with the furlough scheme the standout policy measure. Second, the behavioural response by homeowners.

A recent PropertyPal survey showed that for home-movers, the primary motivation is upsizing, with many chasing detached homes. For both first-time buyers and home-movers, the most important feature for a property purchase is having a garden / outdoor space.

In this ‘race for space’, the detached property market is the key beneficiary. Sales of detached properties in H1 2021 have more than doubled since last year and are up 43% since H1 2019. 

COVID-19 has awakened a new source of demand with GB homeowners (particularly in London and the South East) looking to sell-up and trade-up to large-detached properties in some of Northern Ireland’s most expensive postcodes. 

The new era of working from home means that the mantra of ‘Location, Location, Location’ has changed. Location relative to your workplace or employer for swathes of the workforce is no longer as important as it once was. Whereas location relative to the coast, rural areas and family has become more important.

This is opening up opportunities for NI ‘ex-pats’ to return home. We are seeing quality of life arbitrage, whereby people can improve their standard of living by working in a higher wage economy but living in a more affordable one. Similarly, in Northern Ireland, proximity to Belfast has become less important for telecommuters which partly explains the increased demand in other parts of Northern Ireland, notably the Causeway, Coasts and Glens which has seen annual price inflation of 17%.   

The inflow of GB property purchasers has pushed prices up in the detached property market, particularly at the top end of the price market. The average price rise of a detached property was 24% in the year to Q2 2021 which is double the increase for the median or middle value property sale. So, are prices set to keep on rising? 

In commodity markets, there is a saying that the cure to high prices is high prices, meaning that rising values will attract more suppliers to enter the market, pushing prices lower.

Unfortunately, we are unlikely to see this correction in the property market. Demand remains buoyant, but the availability of stock on the market has been falling. So too has housebuilding. There were 1,000 fewer houses completed last year, with the annual total a six-year low and about half the number built back in 2006.  There has been some recovery in H1 2021 but given the supply chain disruption within the construction industry, coupled with building materials inflation and skills shortages, we are unlikely to see a meaningful pick-up in supply over the next 12 months or so.

The arrival of purchasers from GB exacerbates the supply side problem, as the sale of their homes in GB does not free up properties for the local market. These GB sales equate to around 2,000 transactions per year. With these individuals likely to have higher incomes and equity than their counterparts in Northern Ireland.  This makes for fierce competition in the detached property market in the most expensive postcodes and at the top end of the market.  In effect we are seeing survival of the richest.

The market is more buoyant at the top end (larger properties), rather than the lower end (smaller properties) of the market. One consequence of this is the rungs on the property ladder – from starter home to family home – are growing further apart.

Strong demand and an undersupply of adequate stock look set to underpin house prices in the near future at least. But there are so many factors at play, including things like how stock markets perform, and how firms embrace working from home longer-term.

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