Are cities still the anchor in the housing journey?

Putting the urban living model to the test

Many unfamiliar behaviours emerged in the early days of the pandemic, from social distancing to the decision made by some young people to move back to their family home. Typically at this stage in our lives, when we are pursuing higher education or building our careers, we seek to connect with like-minded people, therefore proximity to university, work or nightlife is important. But with offices, bars and restaurants closed, this became irrelevant for a time.

With the ability to work remotely, practical limitations theoretically fell away, putting the concept of urban living to the test. The prospect of a less frequent commute on a long-term basis triggered a wave of relocations to city suburbs, typically by families already on that course. More space and access to good schools tend to outweigh social and professional priorities as we move along the lifecycle, though the pandemic has accelerated that timing for some people.

Sometimes renting before committing to a location or securing a purchase, an influx of city dwellers drove a rise in suburban rents, while a finite number of homes available to buy meant house prices rocketed. Cities saw the inverse, with vacant Airbnb accommodation and short-term rental property also flooding the market, creating a temporary surplus in many cities. Occupancy rates fell, followed by rents, however rent collection for residential sector assets exceeded all other property types.   

Social engagement underpins cities’ revival

As the world starts to change and cities reawaken, their lifeblood is returning. Certain dynamics appear omnipresent, including the fact that people are fundamentally social creatures. While technology has given us the tools to work from home, the true value of being able to collaborate in person has gained new recognition. For young professionals in particular, there is no virtual substitute for networking and learning from senior colleagues. Added to this is the likelihood that job recognition, promotion and fulfilment will be easier to realise in person than through a screen. 

Now with workplaces reopening and Covid restrictions lowered or dropped, the draw of the office as a place to come together and innovate has brought young people back to cities, since the reality of a long commute even a few times per week can be arduous and potentially more costly than travelling using a monthly or yearly season ticket. Some of those that pursued a long-held dream to relocate may even have mitigated this by seeking a city bolthole. Overall, our 2021 UK Home Renters Survey found that suburbs and rural areas had seen a net gain of just 5% of renters aged 25-40, compared with people moving back to cities.¹

Rental tension is set to return

The return of young professionals, students and international visitors has rolled up into a major demand boost for cities like London, Manchester and Birmingham in the UK, where inner city rent rises reflected an increase of almost 10% or more over 2021². Though this is bound to temper, demand for long-term rental accommodation looks set to remain robust given severely constrained supply, particularly in London. Rental affordability for tenants also looks relatively attractive, at just below the ten-year average³. Comparatively, house price to earnings’ affordability for first time buyers in the South East of England remains at its most stretched level historically⁴, meaning tenants may remain in rented accommodation for longer.

As buildings get back to maximum occupancy levels, rental tension is likely to return, slowly driving returns. This year should see especially strong rental growth, as rents climb from a lower base. The swell of capital targeting the Build to Rent Sector is also likely to place downward pressure on yields, further adding to performance potential.

Intrinsic behaviours continue to drive housing decisions

As ever, rich in culture and opportunities, cities’ attraction underscores the basis for the urban living model. If anything, the pandemic has served as a reminder of this. A shift towards greater flexibility has changed the way we work for the better, though we believe face-to-face collaboration will always take the lead, just as intrinsic behaviours continue to drive our housing decisions.

People’s needs through each stage of the lifecycle have not changed; just accelerated. Cities will therefore remain the anchor in the housing journey, with commuter belts surrounding large cities also set to expand. Both in cities and suburbs, social and physical connectivity is increasingly important, which is likely to hone focus on buildings and locations where people can come together easily. 

¹ M&G plc, UK renters prioritise home working space amid return-to-office plans, November 2021.
² Zoopla UK Rental Market Report Q4 2021.
³ Zoopla UK Rental Market Report Q4 2021.
⁴ Nationwide, Q4 2021.

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.