At the time of writing, circa 33% of the UK’s working population are effectively unemployed, most as a result of government policy. 30% are on furlough and receiving state benefits and 3% are considered as unemployed in the traditional sense of the measure. The remaining 67% of the UK’s workforce are now split into those for whom being present in a physical location is a requirement of the job, and those for whom there is no specific physical presence required.

As such, there are at least for the time being, four types of consumer in the property market:

  • Furloughed
    • Receiving state aid but with the unsecure promise of a job to return to when state intervention ends. 
  • Unemployed
    • Receiving state aid but with no confirmed prospect of a job.
  • Location Dependant Employment 
    • Employed in a field which requires a physical presence at a specific location; doctors, pilots, miners, farmers, delivery drivers etc.
  • Location Independent Employment 
    • Employed in a field which does not require a physical presence at a specific location; software developers, salespeople, designers, government administrators etc

The distribution of people among these four groups is not evenly distributed based on location or industry, and the specific impact of the current crisis is different for different groups and we will show, is having, and will continue to have a different impact on the housing market.

The prevalence of furlough and unemployment by sector

From the latest information there are currently ~9m people furloughed, about 30% of the workforce. The largest impact has of course been on sectors which by necessity have a high degree of interaction. Employees of the retail, restaurant, hotel and manufacturing sectors account for almost half of all furloughs.

At the opposite end of the spectrum there are sectors such as agriculture, energy production, mining and public administration which have had far fewer people furloughed, a few tens of thousands.

The prevalence of unemployment by sector

There are currently ~1m people unemployed, about 3% of the workforce. These are people in much the same sectors as those who had been furloughed and in a similar pattern the sectors with the lowest levels of unemployment are sectors such as IT, transportation, agriculture and public administration.

The difference in pay

Different sectors obviously have different average levels of pay. For example comparing Finance & Insurance with Wholesale, Retail and Repair of Motor Vehicles shows that one is paid approximately three times the other on a weekly basis.

However the sectors of the economy which are the most and least furlough and unemployed, are also sectors which receive the least and most pay respectively. The least furloughed sectors such as Public Administration, Mining and Finance earn roughly twice as much as the most furloughed sectors such as Retail, Accommodation and Manufacturing.

The impact of furlough and unemployment therefore has at present a disproportionate impact on the people with the lowest incomes. Who were also in many cases, the same group of people most likely to have died from the disease.

The Divided Market

The unequal financial impact is being reflected in rents at different ends of the market. We analysed a sample of 2,000 random rental comparables in Birmingham and Cambridge before and after the first lockdown we analysed to see how the rental market had reacted. The charts below illustrate the emergence of the two tier market, showing that the percentage change in rents for the top 50% of the market (‘expensive’) rose significantly while the bottom 50% of the market (‘cheap’) changed very little.

From this it would appear that whatever premiums exist for higher end rental properties, those are now attracting more value than ever before, whereas those at the lower end of the market, are much less sought after, presumably as a result of the financial impact on renters who are now furloughed or unemployed.

The Space Race

As the Location Independent Employees find themselves more and more working from home, their homes have had to become their offices and so demand for more space has increased pushing prices and rents for those larger properties higher. In the examples below, in every case three bedroom rents and prices have increased, whereas one bedroom prices have fallen, and one bedroom rents are mixed, demonstrating the preference for increased space.

Moving to the ‘burbs:

Not only are those Location Independent Employees looking for more space, but they’re moving out of the cities to find it. In part of course because lower density locations are more cost effective on a £/sqft basis, but probably also because of the greater availability of private or semi private outside space, gardens, parks and the like which throughout the crisis have become one of the few reliable constants.  

Below are the charts for the rents achieved across four areas of London, compared with their immediate more rural neighbours.

In countries which had the most effective responses to the crisis there has not been the same economic and social impacts. The streets of Taipei are still busy, office space in Seoul is still very much in demand and house prices continue to rise in Auckland, so the crisis responses and market impact are very much connected. Which implies the question of whether when the crisis ends, people will return to their prior ways of living and working, or not. 

It takes some time to develop a habit; shopping online, thinking twice before choosing to go out etc and so it also takes time to break those same habits. However people and organisations will only break habits when it is beneficial to do so. 

Lower housing costs, lower office space requirements, more hours of sleep, lower consumption of processed food, lower transportation costs, less wasted time in transport, these all lean towards a maintenance of the new status quo. On the other side, reduced interpersonal connection, degradation of social life, reduction in collaborative creativity and a reduction in unscheduled inspiration (e.g. overhearing a conversation in a coffee shop which sparks an idea) all point towards the resumption of classical norms. Between the two, a full ‘snapback’ is unlikely, but more of a middle way is probable which will allow employers and employees the ‘best of both’. 

Impact for real estate

As we can see now, the impact for real estate is the divergence between markets catering for a high income location independent workforce at one extreme, and a low income, furloughed or unemployed group of people at the other extreme. 

The innovative offer of the ‘Global Passport’ from the CitizenM Hotel group points to one end of the market. For £1,500 a month, the same rent as a 1 bedroom flat in Aldgate or Fulham, purchasers can spend a year travelling from hotel to hotel from city to city and country to country, working remotely but never more than a flight away from a face to face meeting if needed.

Detroit or Frisco

The city of Detroit stands as an example of how the hollowing out of an urban location can occur without a commensurate benefit elsewhere. A combination of wealth moving out of the center of the city to the suburbs, combined with an emergency which permanently shuttered and damaged many small businesses (in that case it was rioting not a pandemic) the gradual decline in major industry and the inability of the local government to stymie the ensuing spiral of criminal activity resulted in a -65% decline in population peak to present.

On the other side of the coin, the suburb of Frisco in Dallas Texas (no I’d never heard of it before either) has grown 71% in the past ten years alone with low taxes, adjacency to a major city, lower housing costs, higher incomes and economic stability, even during the pandemic all cited by residents as reasons for living there. It may well be somewhere that the world will need to learn from. 

Links and further reading.

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