Property Demand and Supply
We will continue to measure supply by looking at the volume of New Instructions – property coming to the market where the owner of a property has instructed an Estate Agent to advertise their property for sale.
As we will also talk about rental property in this client briefing, supply will also be measured by looking at the volume of New Instructions in the rental market – in this case where a landlord has instructed an Estate Agent to advertise their property for rent.
In terms of demand, we will be using the volume of Sales Agreed on properties for the sale market and Lets Agreed on properties for the rental market. These are both exceptional indicators of immediate demand.
Within the sale marketplace, the facts are as follows:
In the whole of 2020, compared to the prior year
- Demand was up by 10%
- Supply was down by 1.5%
In 2021 to-date, compared to the prior year
- Demand is up by over 17%
- Supply is down by 20.5%
We could probably end this briefing right now as that is the conclusion. In plain English, there is more property being sold than is coming to the market and that is an unsustainable situation. However, 2021 (thus far) truly is an extraordinary state of affairs and to get across exactly how extraordinary, we need to look at the past.
Property Equilibrium Index (PEI)
Looking at the past, we tend to find that a “normal” market is where demand volumes are 73% of the supply volumes. In other words, there are 100 properties for sale and 73 of them get a sale agreed
If we normalise this, at an index of 100, the following chart shows how this breaks down by year…
Note that for four years from 2016 to 2019, the equilibrium is maintained nicely and not a lot of change occurs. In 2016 and 2017, we have a slight seller’s market (i.e. where demand is stronger than supply). In 2018 a buyer’s market and then back to the norm in 2019.
Along comes 2020, where there was most definitely a seller’s market, fuelled by year on year 10% increase in demand and if we thought this was a high demand market since it has been decades since we had a 10% increase…
We get to 2021 – wow!
We have also broken this property equilibrium index down by quarters so that we can see the detail of when the relative high demand started…
Outside of normal seasonal influences, you can clearly see that Q4 2020 changed things in terms of demand outstripping supply and this has continued into 2021.
Rental Property Market
We have heard industry colleagues prior to now state that sale and rental markets are linked – when one is strong, the other is poor and vice versa. However, in looking at the data in this way we have not observed this. In fact, the rental market, is also a seller’s (or in this case landlord’s) market right now.
The norm is for Let Agreed volumes to be 64% of New Instructions. In 2020 in the rental marketplace, despite the pandemic, supply and demand were pretty much in equilibrium.
However, in 2021 demand is higher and this gives us an index value of 107. It is nowhere near as “hot” as the sales marketplace, but on a national footing and excluding London, I suspect most landlords will be happy with demand right now.
So, again we ask with respect to the sale market, where does this all leave us?
As we said at the outset, the market is unsustainable at the minute and therefore requires a correction, which either comes in the form of reducing demand most likely by increasing property prices or increases in supply.
With respect to the latter, some of our Estate Agent clients are reporting that instruction activity is set to increase post lockdown 3.0 and wider vaccine deployment as they have sellers waiting to list. This is presumably as sellers become more comfortable with potential buyers visiting their home and are just waiting for safe conditions post the next phase of the vaccine roll out. Some might say that this cannot happen soon enough.
We will explore this topic further in future issues of our client briefing, drilling down into regions of the UK and taking a specific look at flats.