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The COVID-19 pandemic plunged the UK into its deepest recession in 300 years. Large parts of the economy closed down and interest rates crashed to zero. But, defying all expectations, housing markets were vibrant and property prices soared.

“It's been one of the busiest periods I've ever seen for the bank,” says Katherine Waller, managing director at RBC Wealth Management in London. “Property transactions in the British Isles are up 80 percent in 2021, compared to the previous year.”

What drove the surge in housing markets?

Waller says that, for many people, the period spanning late 2020 and early 2021, has been something of a perfect storm, with low interest rates and a changing tax environment: “With nowhere else for cash to go, there's been a flight to property and investment into the stock markets.”

And it's certainly been a good time to invest in property. “There's been an enhanced amount of wealth being created on the back of available cash,” says Waller. Private equity companies have been investing their capital and there's been a lot of business sales. Another contributing factor, she explains, has been people stuck at home, “spending time thinking about their property and maybe moving away from that train station.”

The strong surge in property transactions has been dominated by domestic buyers. According to Camilla Dell, managing partner, Black Brick Property Solutions LLP, 80 percent of property transactions in the second half of 2020, and first half of 2021 involved UK residents. Dell says COVID-19 travel restrictions discouraged foreign buyers because they prefer to see properties before purchasing. “It's rare for clients to buy unseen,” she says. However, as travel restrictions are lifted, she expects foreign buyers to return and sees strong pent-up demand from the U.S. and the Gulf region.

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Jamie Morrison, head of tax at HW Fisher, thinks tax changes could also help explain the dominance of domestic buyers. He says the stamp duty holiday introduced by the government in June 2020 – and subsequently extended to June 2021 – encouraged domestic buyers, while the two-percent tax surcharge for non-residents discouraged overseas investors.

Where people want to buy, and the type of properties they're interested in is very different from pre-pandemic days. Dell says houses in prime residential suburbs of London, such as Hampstead, St. John's Wood, Wimbledon and Dulwich, have particularly benefited from the buoyant housing market. There's also been a “dash to the countryside,” she adds, by people working from home. Interest in prime central London property, particularly flats, has been much quieter.

The combination of low interest rates and tax changes has also significantly altered how people structure their property purchases. Zoe Longman, director, Burges Salmon, says there's been a notable rise in purchases of property companies as well as individual property purchases. However, tax changes and high administration costs have made purchasing a property through newly established companies much less attractive now, though trust structures remain popular.

Low interest rates and the stamp duty holiday have encouraged people to take on debt for property purchases. Waller says RBC has seen an 80-percent increase in loans for property purchase in the British Isles in 2021 vs 2020– not only mortgages but also loans against investment assets held at the bank.

Borrowing against investment portfolios can enable a buyer to be deemed a “cash buyer,” giving them access to discounts and off-market properties. It also enables them access to credit - and therefore to execute property transactions - much more quickly, which, in hot housing markets, gives them an advantage over mortgagees.

What's next for the London housing market?

Buyer trends have shifted away from apartments and towards houses, says Dell. But she thinks the market for city apartments is set to rebound. “If you believe ... that one day the world will go back to normal and we're all going back to offices and people will want to live close to work and close to transport links again ... then I think it's creating a bit of an opportunity at the moment,” she says.

Dell says she's already seeing signs that the “dash to the country” is slowing as people realise that working from home might still mean spending some time in the office.

The buy-to-let market, too, seems set to return. The rental market has been badly hit by COVID-19, with rents falling as much as 15 percent in London last year. But Dell says it is already springing to life as workers return to offices and young people move out of their parents' homes. Still, the buy-to-let landscape is changing. Recent restrictions on mortgage-interest tax relief have made buy-to-let less attractive to private landlords; instead, corporate investors and funds are moving in. “Large funds with deep pockets are shopping around for buildings in London,” says Dell.

Off-market transactions are another growth area. According to Dell, they were already increasing before the pandemic and then rose sharply during the pandemic as many sellers understandably avoided multiple viewings for health reasons. Dell says she expects this trend to continue in areas of strong demand.

On the financing side, interest rates seem set to remain low. Waller says RBC Wealth Management's view is that inflation will prove transient. She continues to see strong demand not only for mortgages but also for leveraging investment portfolios for property purchases.

Taxation is a cloud on the horizon. Morrison says higher taxes are inevitable because of pandemic costs and believes this will inevitably impact property purchases. However, if the housing market stagnates, there might be more stamp duty holidays.

All in all, the housing market seems set to return to its pre-pandemic trend – but with some long-lasting changes due to tax reforms and the continued cost of the pandemic.

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