Is the race for space over?
Now that life seems to be back to normal, the race for space seems to be coming to an end. The suburbs are out and city flats are in - but will the market return to (exactly) how it was before the pandemic? Find out our thoughts in this post.
Did you know that the average price of a two-bedroom home in Mayfair is an eye-watering £2.7 million? That’s because it’s slap bang in the middle of trendy central London. Buyers can easily pop out to Theatreland, pop into The Ritz for tea, and pop a few champagne corks in Leicester Square afterwards… unless there’s a pandemic on, of course. The race for space is what preoccupied the nation’s homebuyers when Covid-19 locked down the world outside London’s prime location pads.
However, now that life seems to be back to normal - and we pray it stays that way - the race for space seems to be coming to an end. In the words of one central London buying agent, “it’s over… flat searches are back on, when 18 months ago the market for flats was tumbleweed… now we are just inundated.”
But will the market return to (exactly) how it was before the pandemic? After all, the average house still costs 35% more than the average flat - the biggest difference recorded since 2005. This doesn’t sound like people are shunning spacious living quarters for marvellously located micro flats to us. So let’s examine whether the race for space is really over...
The Covid effect
There’s no doubt that Covid-19 had a big impact on what buyers looked for in a property (at least in the short term). The grass literally seemed greener in the suburbs, with properties boasting spacious gardens becoming more attractive than ever before. Suburban agents, therefore, became busy bees while city centre slickers where left snoozing under their sombreros.
Although people were already migrating away from urban centres somewhat beforehand - a side effect of sky-high prices - the pandemic certainly accelerated this trend dramatically. According to our partner Hamptons, price growth in rural areas in the first 10 months of 2021 was 8% - double the inflation witnessed in urban centres.
Here’s another little nugget for you, too. In 2019, average prices were only higher than London in three local authorities outside the capital: Elmbridge, St Albans, and Three Rivers. But by the end of 2021 there were eight, with Cambridge, Hertsmere, Mole Valley, Tandridge, and Windsor joining this esteemed list. Mole Valley might not sound as plush as Mayfair, but the winds of change were certainly blowing buyers towards Wind in the Willows lifestyles during lockdown.
Running its race
This ‘race for space’, as it’s commonly understood, has definitely slowed down since its pandemic peak. After two or three years of runaway growth, when prices rose by as much as 16%, properties in rural and coastal locations increased by just 1.2% according to Savills last summer. Meanwhile, annual growth in ‘well-connected urban markets’ has risen by 7% over the last year. This demonstrates that prime location pads in urban centres are finally increasing in value faster than homes in the surrounding countryside again.
Halifax’s research has revealed a similar picture. They claim that prices in UK cities rose 9.2 per cent between January and October last year, whereas suburban homes increased in value by 7.9%. This suggests that ‘normal’ was very much on the way back.
However, to coin a cliché from the worst days of lockdown, we’re expecting this to be a ‘new normal’ rather than a completely restored status quo. Yes, urban centres will fetch a pretty penny moving forward, but we don’t think things will be exactly the same as they were before that bat with a nasty snuffle introduced itself to Wuhan’s wet markets. And here’s why…
New challenges
Sadly, just as vaccines and natural immunity pushed Covid into the background, another crisis reared its ugly head. We’re referring, of course, to the cost of living crisis and, in particular, the increased cost of borrowing that was exacerbated by Liz Truss’s notorious mini-budget.
Rates climbed to 6.5% for 5-year fixed mortgages in October (up from 4.75% beforehand) and although they’ve now retreated below 6%, the Bank of England is still expected to raise the base rate higher this year. And it could stay at an elevated rate for some time. This means that prime pads in Piccadilly and Pimlico will inevitably become less affordable. And this should push buyers toward the suburbs again as they seek more square footage for their money.
We shouldn’t forget, either, that the pandemic has changed the way that people work. Covid-19 locked the workforce down but opened bosses’ minds to the advantages of remote working. Less commuting meant more time to get things done. What’s more, some studies even showed that remote working actually increased productivity and reduced burnout, as well as lowering office costs of course.
The bottom line is therefore this: yes, workforces have been returning to the office. However, not everyone is going back as frequently. And some aren’t going back at all. With new technologies and better cloud-based collaboration tools also making home working simpler, many businesses have retained a remote, or at least a hybrid, working model. And this, of course, means that employees aren’t so desperate to live close to their urban offices.
The race for energy-efficient space
Having said all this, however, another aspect of the cost of living crisis has been the eyebrow-raising and morale-lowering price of energy. And it doesn’t take a genius to realise that more spacious homes are much more expensive to power - one-bed flats cost around £670 per year to heat on average whereas four-bed houses cost approximately £2,300. That’s a huge difference that’s bound to impact buyers’ thinking.
Meanwhile, those looking to maximise a capital gain in the long run might also decide that a small but perfectly formed property is better than a big and roomy one. Flats in London, for example, are still being valued at 9% lower than their peak pre-pandemic values. Houses, meanwhile, have almost recovered entirely with just a 1.7% difference from their 2015 historic peak. This shows that investors might consider prime urban locations a better bet. Downsizers might also think that the time is right to take a step down the property ladder.
So is the race for space actually over?
Whilst a slowdown in the race for space was inevitable once the UK emerged from the pandemic, the overall picture is more complicated than the headlines often suggest. The world isn’t quite the same as it was back in 2019; therefore it’s unrealistic to expect the property market to slip back into exactly the same pre-pandemic patterns.
Rising mortgage rates should, for example, push people away from traditional urban hot spots and increase demand in the suburbs. However, the future is notoriously hard to predict. What if, in the short term at least, buyers decided to pounce on those prime location properties before interest rates climb even higher? There’s also the possibility that a general fall in property prices this year, which has been predicted by many experts, suddenly makes city centres more affordable again.
Consequently, as with all things in the property sector, we shouldn’t count our chickens. There are reasons to believe that suburban and rural homes will retain much of their appeal as more companies switch to remote or hybrid working on a permanent basis. However, on the flipside, we can’t argue that recent statistics do suggest that the race for space could be coming to an end. We’ll have to wait and see whether the chequered flag is imminent or the ‘out of town’ trend is just taking a quick pit stop.