Joseph Harnby is a PhD researcher in economics at the University of Bristol and a property investor
ViewRabbit is an online platform that charges people £30 to secure a viewing on a property. They’ve recognised the current high demand and undersupply of properties and are capitalising on it, causing quite a stir in the process. For my part, I applaud their opportunism and hope they can spin the current hype into a business model with slightly more longevity.
Whatever you think of ViewRabbit’s business model, it has given some of the usual online property doomsayers the opportunity to trot out their favourite phrase: “this is the end of buy-to-let”.
Their argument is that the high level of interest has pushed purchase prices too high and squeezed rental yields. This is clearly an overreaction that ignores the rental increases that make buy-to-let viable at even higher purchase prices.
However, the reason they are wrong is the same reason ViewRabbit’s business model is for the short-term: this undersupply is temporary, but price increases are not.
Search for space
As people have come to terms with lockdown life over the course of the pandemic, the demand for certain kinds of properties has risen dramatically. People want space. Home working has created a need for home office space and made more people willing to live further away from cities, where their office likely is.
Because people are spending more time at home they’re also spending more money there. This translates to high demand for 3+ bedroom houses within commuting distance to major cities.
A lot of the growth in house prices that we’ve seen over the last 18 months has come from people purchasing these bigger houses. Prices have gone up because people are willing to spend more on their homes than they were before, with so much time spent at home, and because supply of these houses is far less than the demand for them.
Around 25% of all UK workers are now working from home. There are a range of predictions for what this will mean for office space. If there is just a 10% reduction in commercial property this will wipe out around £100 billion in value. As people continue working from home much of this value can and already has been put into housing. This has driven up demand in the residential market at a time when supply is 20% lower than typical.
Housing supply – why it should stabilise
This lack of supply isn’t caused by the long term issues with housebuilding in the UK, but rather a lack of desirable houses coming to the market right now.
Why is this happening? Indicators suggest that people who are already occupying these bigger houses are reluctant to put their house to market. This is due to temporary conditions that should be alleviated by increased vaccinations – with anxiety about opening homes to viewers a key concern for potential sellers.
As vaccination numbers increase, with nearly 60% of the UK population fully vaccinated and 46 million people having received at least one vaccine dose, potential vendors will be less reluctant to list their property.
Combined with the end of the Job Retention Scheme in September and lifting of COVID restrictions in general, the housing market should stabilise in the coming months. This is when we’ll see the how temporary the current undersupply is.
Once people in these properties are more confident to put their houses on the market, so they can capitalise on the newly increased prices, the undersupply problem will be relieved. This reduces the overpaying for properties that is caused by high demand but it will not change the value added simply because people’s housing priorities have changed over the course of the pandemic.
Economic performance will push prices up, not undersupply
After this undersupply problem is overcome, continued price growth will be linked to economic performance over the next 5-15 years.
The reduction in economic activity caused by COVID lockdowns and Brexit has created significant space for the UK economy to grow into, creating a synergetic effect with government spending and political devolution to the North of England. UK economic forecasts have significantly boosted over the last 6 month even.
Far from being the end of buy-to-let, the next 5 years could be the greatest wealth transfer to landlords and home owners that we’ve seen since 2010. I’ll be taking a leaf out of ViewRabbit’s book and jumping on a good opportunity.