Property Market Review and Forecast

In the final months of 2023, we’ve been seeing some encouraging signs from the UK economy and from the residential property market in particular. Now is therefore an obvious time to review how the housing market has fared over the last 12 months, and to consider what might lie ahead in 2024.

2023 – an Overview

At the national level, looking at the broadest of averages, it’s clear that the UK residential sector has performed far better than many pundits were forecasting at this same time in 2022. Then, in the wake of the disastrous ‘Mini Budget’ of September 2022, market sentiment was falling fast. Accordingly, many of the predictions made at the time reflected a distinct sense of pessimism.

Capital Economics, for example, said that average values would fall by around -12% over the course of 2023, Savills predicted a fall of -10% and Halifax estimated -8%. Many others expected values to decline by between -5% and -8%. Of all the major sources, only Rightmove predicted that prices would drop by less than -5%.

In the event, the market proved to be much more resilient. Figures differ by source, of course, but they suggest that only Rightmove’s -2% forecast came close. Rightmove’s latest House Price Index suggests that, UK-wide, average values fell by only -1.3% in the 12 months to November 2023, while Zoopla estimated a similarly modest decline: just -1.2% year-on-year.

Figures published by the Office for National Statistics are more definitive, but they generally take much longer to compile so it’s important to note that ONS’s quoted annual growth rate of -0.1% relates to prices in the year to September 2023 rather than the late autumn. Nevertheless, all sources indicate that the actual trajectory of the UK housing market has been decidedly more positive than the great majority of commentators had expected.

The Cost of Living

Key economic features of 2023 have included rapid inflation and higher rates of mortgage interest. These, together with an exceptionally high tax burden and extraordinary factors such as the war in Ukraine, have put household budgets under considerable strain this year. However, rather than prompting a sharp fall in property values, as many had predicted, the cost-of-living crisis has tended mainly to dampen sales activity. In most regions, prices have held relatively firm – a consequence of demand still greatly exceeding supply; it is market activity that has been distinctly subdued.

One possible interpretation of that is that many prospective house-buyers are opting to postpone their plans to move, rather than to rein in their ambitions and settle for cheaper properties. If that’s the case – i.e. if buyers are simply delaying purchases in the expectation of lower mortgage rates in 2024 – then it would mean that demand is slowly building behind the scenes.

We saw something similar during the early months of the Covid pandemic – i.e. demand becoming increasingly pent-up and then fuelling rapid price growth when the market eventually reopened. It’s no more than speculation, of course, but it’s possible that a return to lower interest rates could act in a similar way to the end of lockdown. This time, however, any return to growth would likely be more gradual. That’s because it would rely on people making their own individual judgements about improving affordability, rather than the government lifting market restrictions on a specific date, but the longer-term effects could be similar.

Improving Affordability

What is beyond doubt is that the affordability of property has been improving, particularly in the second half of 2023. What’s more, there are clear signs that the same trend will continue in 2024.

In recent months, successive economic reports have shown a marked fall in the rate of inflation. In its last announcement on 15 November, the Office for National Statistics reported that the Consumer Prices Index had fallen to 4.6%. This represented a sharper decline than the UK government had predicted and was due in part to the falling wholesale price of energy. It is good news for investors for a number of reasons.

First, it will help to ease the financial pressures to which ordinary households have recently been subject. Prices of everyday goods and services are now rising at a slower rate than average earnings so, in terms of real-world buying power, people are seeing their disposable incomes increasing. Historically, house prices have tended to move more or less in parallel with average real-terms earnings, so the current conditions augur well.

Second, the lower CPI figure has sparked a growing confidence that mortgage interest rates may well have peaked. The Bank of England uses interest rate-setting as a tool to try to control inflation so if CPI falls, the Bank should gradually feel less need to keep the base rate at its current level.

Mortgage Rates

Looking ahead, CPI inflation is expected to remain stubbornly high, ahead of the Bank’s target of 2%, so its Monetary Policy Committee is unlikely to want to reduce the official base rate too soon or too quickly. On the other hand, it does expect CPI to drop back to around 2% towards the end of 2025 and, since higher rates of interest also tend to stifle economic growth, the MPC will also be wary of keeping the rate any higher than it absolutely must.

No one can be certain when the first official rate-cut will be announced, though financial markets are expecting that it will occur some time towards the middle of 2024. In any event, lenders appear convinced that, ultimately, the costs of borrowing are going to go down rather than up. As a result, swap rates – which effectively determine the prices at which banks can borrow funds – are falling and, in response, lenders have been introducing increasingly competitive deals. Some fixed-rate products are already available at well under the official Bank rate, and more are likely to follow.

The current rates of interest will still appear high by the standards of recent years but it seems clear that they will continue on a downward trend. As they do, costs for many investors and homeowners will fall and that, in turn, should incentivise more sales activity.

Affordability concerns have been the chief cause of the market’s slow progress in 2023 but, with inflation and mortgage rates both falling, and with average earnings still rising strongly, it seems very likely that market conditions will improve in 2024. That doesn’t mean that average values will inevitably soar, but it should mean that sales activity returns to more normal patterns. The sooner those patterns reemerge, the sooner the market is likely to see a new phase of price growth.

Regional Differences in Capital Growth

At the national level, capital growth rates have been almost negligible in 2023. However, at a more regional level, results have been considerably more mixed. Every major house price index has shown evidence of a North-South divide, with asking prices staying more positive in the UK’s more affordable markets, and tending to lose value further south.

For example, Rightmove’s November House Price Index notes that prices have been rising fastest in the following regions:

· North West (+2.5%)

· Scotland (+1.9%)

· North East (+1.3%)

Properties have historically been more affordable in these areas and, consequently, higher mortgage interest rates have been less impactful than they have in more expensive regions further south. By contrast, prices fell by -2.6% year-on-year in the East of England, and by -2.8% in the South East.

Scotland, the North West and the North East also make the top three in the Home Asking Price Index (November 2023) and in the ONS Index (September 2023). Across all indices, the poorest-performing markets have invariably been found in the UK’s southern regions.

Looking ahead to 2024, the factors that gave rise to this regional imbalance could well persist. For so long as mortgage interest rates remain elevated, the UK’s more expensive markets and properties will be at a disadvantage and may therefore produce slower (or negative) growth. It will take time for the forces of supply, demand and affordability to find a new balance, and until they do, northern regions will almost certainly deliver stronger capital returns.

In its latest 5-year Residential Rental Forecast, Savills supports this view. Between 2023 and 2028, it predicts that the areas witnessing the strongest growth will include:

· North East (+21.4%)

· Wales (+21.4%)

· North West (+20.2%)

· Scotland (+20.2%)

· Yorkshire & Humber (+20.2%)

· West Midlands (+20.2%)

By contrast, it predicts that the poorest-performing regions for price growth will include the East of England (+16.7%), the South East (+16.7%) and London (+13.9%).

Rental Growth

Although capital growth rates have generally been unimpressive in 2023, the same cannot be said of rental growth. For the great majority of regions and over almost the entirety of 2023, asking rents have risen faster than the rate of inflation.

The latest Rental Index from Homelet reports that average rents rose by +9.56% in the 2 months to October 2023, while Zoopla’s most recent report suggests an annual rate of +10.1%. Rightmove has not yet published its Rental Trends Tracker for Q4 2023, but its Q3 report indicated a rate of +10.0%.

It’s worth noting that all of those figures are substantially above the rate of inflation, which means that, in real terms, investors have been seeing steady improvements in their gross rental returns.

Regional Variations - Rent

Just as asking prices have varied by region, so too have asking rents. However, the regional pattern is somewhat different for rental growth. That’s because London has been one of Britain’s better performers, according to some indices, at least. Otherwise, the more affordable markets continue to dominate.

According to Homelet’s latest data, asking rents have risen most sharply in the following regions:

Scotland (+12.0%)
Northern Ireland (+11.2%)
Yorkshire & Humber (+11.0%)
North West (+10.7%)

The figures show year-on-year growth. For comparison, Zoopla lists the regional leaders as:

Scotland (+12.8%)
North West (+11.7%)
Wales (+10.4%)
London (+10.3%)

Regional Variations - Yield

For many investors, an absolute pounds-and-pence increase in rents matters less than yield when it comes to measuring the returns produced by a given property. Once we factor in asking prices to calculate how hard investment money is working, then the same North-South divide becomes evident.

Rightmove’s Q3 Rental Tracker reports that over 2023, the strongest gross yields have been earned in:

· North East (8.5%)

· Scotland (8.2%)

· Wales (7.4%)

· North West (7.2%)

· Yorkshire & Humber (7.2%)

Greater London, by virtue of its much higher asking prices, has delivered average yields of only 5.6%. Nevertheless, even this bottom-ranked result still implies gross returns that have outpaced the worst effects of inflation.

Other Rental Markets

The results listed above relate mainly to assured shorthold tenancies (AST) but, of course, many investors choose other types of property.

One such example is the student market, which has performed well this year, despite the cost-of-living crisis. Across the UK, student numbers are at an all-time high and the resulting imbalance between supply and demand has tended to buoy up asking rents. Savills has reported that 622,000 undergraduate students began their university studies in the 2023/24 academic year, and that the number of “applicants could reach 1 million by 2030.” It adds that a fall in the supply of property is combining with a rise in student numbers, resulting in stronger rental growth.

A 2023 report by PWC notes that there were 2.27 million full-time students at UK universities during the last academic year, of which around 1.42 million required student accommodation. As time progresses, the gap between student numbers and property stocks appears to be widening. PWC writes that in many cities, student accommodation is almost completely unavailable by the October preceding the start of each academic year; shortages have often meant that students have had to be housed “in hotels or other cities up to an hour away from campus.” That sort of imbalance invariably tends to drive capital and rental values higher.

Property stocks could gradually increase in the coming years, thanks to the ongoing creation of purpose-built student accommodation (PBSA). However, the shortfall is not going to disappear any time soon. Consequently, as undergraduate numbers swell, student accommodation should continue to be an option worth considering for investors. However, it comes with one important caveat: many student flats are too small to be eligible for buy-to-let mortgage funding, so such investments may only be feasible for those who have the wherewithal to buy without the aid of finance.

Another interesting contender is short-stay tourist property. The Covid pandemic may feel long-gone by now but it has continued to support the popularity of UK staycations. Conventional tourist lets have delivered excellent returns in many of the UK’s most popular destinations, producing strong growth in peak-season rents and holding their capital values in many instances, too.

Serviced apartments are another variation on the theme and, again, they have been a reliable performer this year. Offering more privacy and flexibility than hotel accommodation and often at better prices, such units continue to gain ground in popular tourist and university cities.

The Autumn Statement

On Wednesday 22 November 2023, the Chancellor presented the government’s Autumn Statement to Parliament. Although many headline writers focused upon changes to National Insurance and tax cuts for business investment, it contained relatively few measures that are likely to drive dramatic change in the property market. However, certain measures merit a brief mention.

Local housing allowance (LHA) rates will be raised to cover the lowest 30% of market rents. This will be welcome news to investors whose tenants include those on benefits; tenants who should see affordability improvements as a result.

A change to planning rules will give landlords new permitted development rights that will make it easier to convert a single house into two apartments, subject to certain conditions. This could help investors to expand their portfolios more cheaply and, in so doing, to increase the total supply of UK rental stock.

The Chancellor confirmed that the Treasury would support the extension of the 95% mortgage guarantee for 18 months. This should support greater mobility on the part of first-time buyers and that, in turn, could free up more activity within the sector throughout 2024.

Another set of announcements concerned regional investment. These measures included the creation of new Investment Zones in Greater Manchester, West Yorkshire, and both the East and West Midlands, as well as targeted support for particular industries and towns. Amongst the named locations were Bolsover, Warrington, Wrexham and Flintshire. Beneficiary industries will include future-focused sectors such as AI and quantum computing, life sciences and low-carbon technologies.

These announcements could be of considerable, albeit indirect, importance to investors because they could help to boost employment and economic growth in specific local markets and city regions. That, in turn, could help to increase average earnings and boost demand for homes. The potential effects across the various locations are too numerous to itemise in an article such as this. However, investors would be well advised to consider the likely impacts of new funding and Investment Zones when making any decision about expanding or restructuring their portfolios.

Summary

In 2023, the property market has been dampened by affordability pressures: high inflation, high mortgage rates, high taxation and international factors such as Russia’s invasion of Ukraine. The resulting constraints on household budgets have prompted slow or negative capital growth but values have not fallen at anything like the rates that most sources predicted 12 months ago.

Instead of sharp price-drops, the biggest effect on the market has arguably been a reduction in sales volumes. This suggests that many would-be buyers are playing ‘wait and see.’ As inflation and interest rates continue to fall next year, affordability pressures should ease and any pent-up demand could then help to boost market activity.

In the meantime, investors can be confident that rental values will continue to grow at a good pace and that yields in many regions will also improve.

Regional differences in performance should still be very evident and, until cost-of-living pressures finally abate, the UK’s most affordable markets should continue to offer the best prospects for both capital and rental growth.

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There are many important variables to consider when making investment decisions, so this article is intended only as an overview; a summary of some of the major themes in the residential property market this year.

To help clients to make sound, evidence-based decisions for 2024 and beyond, we offer expert advice and access to market research that covers many of the UK’s most promising markets. Make sure you watch our Podcast in which our property experts discuss the below, and much more:

Review the state of the market
Identify important trends and opportunities for 2024
Highlight promising new markets
Answer questions from the audience

Please Click Here to watch our podcast, Pulse on Property.

Alternatively, for a one-to-one discussion, please call our advisory team on 01244 343 355.

2023: Property Market Review