On 4th October 2023, the Prime Minister, Rishi Sunak confirmed that the West Midlands to Manchester leg of the HS2 rail line would be cancelled. This followed the government’s decision in 2021 to scrap the eastern leg to Leeds. It means that the only stretch that still has funding is the Phase 1 line running from Birmingham Curzon Street to London Euston.

Inevitably, the decision has attracted criticism, not least from city leaders in the North, who had put great emphasis on the project, previously describing it as a catalyst that would unlock massive new potential for growth. That may indeed have been the case but, as the Prime Minister was keen to point out, the decision amounts to a redistribution of funding, not a total withdrawal.

It is the government’s stated view that prioritising other projects at a more regional level could drive better outcomes and deliver many of their benefits more quickly. In this article, we’ll consider whether that is likely to be true and, in any event, what the consequences might be for investors in residential property.

Why HS2 Mattered

It’s easy to see why the leaders of city regions in the North supported HS2. Until this month, the project had been highlighted to the world as an example of Britain’s ambition; a large-scale infrastructure scheme that would drive huge new investments into cities outside of London and the South East. That investment, in turn, was expected to drive economic growth, to boost average earnings and to generate thousands of new jobs across the North and the West Midlands.

For example, Cheshire East Council estimated that HS2 had the potential to boost the economy of Cheshire and Warrington by £2 billion per annum. In a similar vein, an HS2 fact sheet published before the line’s cancellation noted that “the Greater Manchester HS2 Growth Strategy has the potential to double the economic output of the region to £132 billion by 2050, delivering 96,000 jobs.”

These, of course, are just two examples among many. Economic development professionals across the North West and the Midlands had made comparable projections. Seeing those expectations dashed, they will understandably regard the policy U-turn as a blow, as might many property investors.

HS2 & Property Investment

For investors, the appeal of HS2 was obvious. The resulting boost to economic fortunes in key cities should have driven new job creation and a boost in average earnings. Both factors tend to support rising demand for property and a greater ability to pay for it, whether via renting or house-buying. In either case, the result is upward pressure on average values.

So, taken at face value, the scrapping of HS2 would seem to be at odds with investor interests. However, there are a number of good reasons why this might not prove to be the case.

A Redistribution of Spending

Making the announcement at the Conservative Party Conference, the Prime Minister said:

“I am cancelling the rest of the HS2 project, and in its place, we will reinvest every single penny – £36 billion – in hundreds of new transport projects in the North and the Midlands, across the UK… projects that will make a real difference across our nation. As a result, every region outside of London will receive the same or more government investment than they would have done under HS2.”

For property investors, this is an important point. The government’s argument is that the funds previously allocated to HS2 can now be used to support regional and locally-driven projects. In this way, it can produce more benefits for the regions, and more quickly. The claim is arguable, of course, but it should be seen in the context of a contentious national scheme that was already massively over budget and which, under the previous Phase 2b plans, was not set to reach completion until around 2033. It can be said with some confidence that at least some of the projects that will now be funded should reach completion within considerably shorter timeframes.

Beneficiary Projects

Although it’s clear that spiralling costs have been a key reason for the termination of HS2, the Prime Minister has sought to frame it as a change in strategic priorities. He said that “the facts had changed,” and that links between east and west were now “far more important” than those between the north and south of England.

He also claimed that when it came to supporting economic growth, it was misleading to suggest that rail links between Britain’s largest cities were "all that matters." The implication was that more regionally-driven schemes would distribute the economic benefits more fairly between towns and smaller cities, rather than concentrating them in the big powerhouses of Birmingham and Manchester. It’s an interesting point that plays to criticisms previously raised in parts of the Midlands and the North that would not have been directly affected by the HS2 route.

Against this background, he made a commitment to reinvesting the £36 billion in road, rail and bus routes across the regions. Examples of some of the proposed measures included:

£3 billion for upgrading and electrifying existing railway lines between:
o   Manchester and Sheffield
o   Sheffield and Leeds
o   Sheffield and Hull
o   Leeds and Hull
£4 billion for transport schemes in six northern city regions
Developing the Midlands Rail Hub, to support connections between 50 stations
Creating a new tram system in Leeds
Upgrading and electrifying existing railway lines in North Wales

Taking a broader perspective, a government press release stated that:

“The North will receive £19.8 billion for new inter-city and local links
“A new £1 billion fund for the North of England will also help fund new roads in the North West, cutting congestion and boosting capacity – with more money for more buses and more frequent routes.”

It adds that:

“Rather than just connecting Birmingham and Manchester, we will set aside £12 billion for links between Liverpool and Manchester to ensure the delivery of Northern Powerhouse Rail… Over £3 billion will also help deliver faster and more frequent trains between all the North’s main cities including Hull, Leeds, Sheffield and Manchester. We will bring Hull into Northern Powerhouse Rail, upgrade and electrify the line between Sheffield and Leeds, and upgrade the route between Sheffield and Manchester. We will also create a network where all the 9 biggest cities of the North are connected to each other by fast, electric trains several times an hour. “

Full details of the “Network North Plan” can be seen here.

Mr Sunak’s statement included a promise to support improvements to a number of main arterial roads. Opposition parties have remarked that many of these schemes had already been announced prior to the cancellation of HS2 so the funding was not technically ‘new’ or additional. But in any event, the consequences of such investment must still be positive for the regions in question.

Yorkshire and the North East

The redistribution of funds to include schemes in Yorkshire and the North Sea coast will come as some consolation to those who criticised the 2021 decision to terminate the Phase 2 leg to Leeds. The original plan would have meant improved capacity and shorter journey times on routes running from London to Leeds, and HS2 trains would then continue – on improved Northern Powerhouse Rail lines – as far north as Newcastle.

The scrapping of the Leeds leg was criticised for exactly the same reasons as this latest announcement. However, the Prime Minister’s decision should at least deliver some new investment for those areas left stranded by the previous cancellation, and any investment that’s valued in the billions must inevitably have a noticeable effect.

Connecting Growth Areas

The point about connecting “all the nine biggest cities of the North” is significant. It’s important to remember that, despite everything, many of England’s northern cities have been faring relatively well in terms of economic resilience and employment. Manchester has remained a potent economic force, as have Leeds, Sheffield and others. Many smaller towns are also buoyant – think Bolton, Preston, Doncaster or York – and they will undoubtedly benefit from better transport links and from whatever money is spent in and around them. In short, those east-west links certainly matter, if only for the sake of keeping economic activity focused within those regions, rather than letting it bleed out to the south.

It’s open to debate whether, overall, more benefits would stem from HS2 or from a series of smaller schemes, but the fact remains that large amounts of money are still being ringfenced for regional infrastructure projects. Whatever form it takes, improved connectivity can only enhance the prospects for economic growth and job-creation.

Impacts on Housing Demand

This last point is important for property investors. Whatever your views on HS2, the biggest property market impacts were always going to come from economic growth, job creation and subsequent movements in the workforce; not from the mere presence of a prestigious infrastructure project. It has always been the consequences of such projects that matter when it comes to achieving a return, and investors should bear in mind that many of those same consequences could still arise from smaller, regional projects.

A crucial issue here is timescale. For those in the North, HS2 was unlikely to precipitate any major changes in transport activity until around 2033 – ten years from now – and by that time, market conditions could have changed markedly. In recent weeks and months, price growth has been depressed as a result of affordability concerns, but those affordability pressures are likely to ebb away over time. Average earnings are rising at above the rate of inflation, mortgage rates are falling and inflation looks set on a downward path, on track to hit the Bank of England’s 2% target at some point in 2025. Those are all ingredients for a slow resumption in activity and a gradual return to price growth. In ten years’ time, however, a whole different set of factors could be at play.

To put that another way, the promised benefits of HS2 would have been welcome but they have generally been too far distant in time to matter greatly to investors facing the realities of today’s market. Many landlords would welcome anything that can help to reenergise the market sooner rather than later.

In that sense, the government’s announcement could mark a positive step. “Hundreds” of smaller regional schemes could drive economic improvements significantly more quickly than one slow but gargantuan national project. Unlike HS2, they will not tend to concentrate their economic effects in a narrow band stretching between Birmingham and Manchester; they will have a more widely distributed effect. Individually, those effects might not look so dramatic but, at the local level, they could potentially benefit more people and help to revive a much larger number of local property markets.

By way of illustration, consider the towns and cities along the Northern Powerhouse Rail routes stretching between Liverpool, Hull and Newcastle. Key destinations along those routes include:

Warrington
Manchester
Stockport
Sheffield
Bradford
Leeds
Doncaster
Hull
York
Darlington
Durham

Plenty of these urban centres are economically buoyant and could undoubtedly make good use of better connections and inward investment. However, many of them have been frustrated by slow progress. The axing of the HS2 eastern leg to Leeds was an obvious disappointment, and it was then compounded by delays and uncertainty surrounding Northern Powerhouse Rail. Funding and plans for these lines have been plagued by setbacks and reversals, and in the current climate of economic austerity and negligible GDP growth, further delays could easily occur.

However, if some of the £36 billion freed up by HS2 can be allocated to accelerate progress along the Northern Powerhouse route – as the government’s press statement claims – then the shift in policy could fuel some very important changes in local market conditions.

Local Property Market Impacts

For investors, the consequences of redistributed funding are likely to be most visible at the local level – and, really, it’s probably fair to say that they matter most at the local level, too. It’s a point that underlines something that has always been true of the residential property market: every investment decision demands detailed local research.

From the outset, HS2 was presented as a ‘grand scheme’; a high-profile national project. Consequently, its effects at a very local level were always going to be hard to predict. Yes, it’s clear that properties set close to HS2 stations would see stronger price growth than comparable homes elsewhere, but the likely impacts further out – in suburbs, surrounding villages or neighbouring towns – were much more difficult to assess.

Now, in the wake of the Prime Minister’s announcement, investors are faced with a different but more familiar prospect: many small infrastructure schemes creating a wider variety of opportunities in more tightly defined local markets. It’s a situation that might look considerably less dramatic but it could generate more widespread benefits than HS2, with fewer risks and in a shorter timeframe.

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HS2 Cancellation: How It Affects Investors