Clear Signs of a Property Market Revival
Back in January, we posted an article that highlighted an emerging sense of optimism within the property investment market. Surveys at the time were showing growing confidence among experienced landlords, and an appreciable rise in both sales and buyer demand.
We’re now well into the second quarter of 2024, so this is an opportune time to review whether that optimism was well founded, and to consider how market conditions might change over the rest of the year.
Buyer Demand and Sales Activity
When it comes to market activity, all sources seem to agree that the sector is regaining its former vitality. In its April House Price Index, Rightmove writes that:
“The number of new sellers coming to the market is up by +12% compared to this time a year ago, and the number of sales being agreed is up by +13% as both seller and buyer activity rebound from last year’s much more subdued spring… Overall, it continues to be a much-improved first four months of the year compared to 2023.”
Similarly, the Home Asking Price Index for April states that:
“Market momentum is really taking off, as indicated by the Typical Time-on-Market for unsold property in England and Wales dropping 21 days since last month… The market is brimming with renewed optimism. Returning confidence has rekindled demand and this in turn has resulted in an uptick in momentum.”
These are by no means isolated comments. In their own price indices, Halifax refers to “recent rises in mortgage approvals across the industry,” Nationwide notes that “activity has picked up from the weak levels prevailing in 2023,” and the Royal Institution of Chartered Surveyors reports that “new buyer enquiries continue to rise at a gentle pace, with new listings activity also picking up.”
House Price Movement
As so often happens, this increase in market activity appears to be driving an upturn in capital growth. Aside from ONS – whose latest figures only pertain to February – all the major sources of price data show that average values are rising again.
Year-on-Year Growth Rate:
Halifax (March) - +0.3
Nationwide (March) - +1.6
Rightmove (April) - +1.7%
Zoopla (April) - -0.3%
On 22 April, Rightmove wrote that:
“The average asking price of property coming to the market rose by +1.1% (+£4,207) this month to £372,324, just £570 short of the record in May 2023, while the annual rate of price growth is now +1.7%, the highest level for 12 months.”
Affordability Pressures
One important reason for declining house prices in 2022 and 2023 was the simple matter of affordability. A host of negative factors conspired to put enormous strains on household budgets. One was rampant inflation, which reached 11.1% in October 2022, and another was a steadily rising base rate of lending.
The Bank of England introduced a succession of rate hikes in an attempt to wrestle inflation down, ultimately raising the official Bank rate to 5.25% in August 2023. Lenders responded by raising their mortgage interest rates. Although the Consumer Prices Index has now fallen – as it has in many developed countries – the Bank’s Monetary Policy Committee has not yet reduced the official Bank rate from its 16-year high.
High inflation, high mortgage costs and the highest levels of personal taxation in more than a generation were an obvious recipe for financial strain on homebuyers. Consequently, it came as no surprise that people tightened their belts and saved their home-moving aspirations for a later date. Market activity dwindled and price growth slowed, ultimately turning negative as the market became ever more price-conscious.
More recently, however, those pressures have been abating.
Inflation has fallen from 11.1% peak to just 3.2% and, in a recent statement, the Bank of England expressed confidence that the Consumer Prices Index would fall to its 2% target some time within this quarter (Q2 2024). The Bank’s deputy governor Dave Ramsden also suggested that inflation could stay “close to the 2% target over the whole forecast period” – i.e. for the next three years.
This improving outlook has fuelled expectations that the Bank of England will cut the base rate before the end of summer, with many predicting a -0.25% fall, followed by perhaps two further cuts before the end of the year. If that proves to be the case, investors can expect lenders to follow suit by introducing more affordable interest rates on their various mortgage products.
High interest rates have acted as a powerful deterrent to home-buyers so the prospect of lower mortgage costs is almost certainly a key reason for the market’s recent revival. However, another important driver is the strength of average earnings across the UK.
Although economic growth has been negligible over recent years, employment levels have held strong and average earnings have risen at a healthy rate – often by more than the rate of inflation. That means that real-terms incomes have been improving and, over time, that will help to alleviate affordability pressures.
In April, ONS published its latest report into UK earnings. It notes that:
“Annual growth in employees' average regular earnings (excluding bonuses) in Great Britain was +6.0% in December 2023 to February 2024, and annual growth in total earnings (including bonuses) was +5.6%.”
It adds that over the same period, annual growth in real terms (i.e. adjusted for inflation) was +1.9% for regular pay and +1.6% for total pay.
This is welcome news but it would be an over-simplification to suggest that this means that ordinary people are necessarily becoming materially better off. Consider that many borrowers who are coming to the end of fixed-rate mortgage deals will now be facing the prospect of much higher rates than they previously enjoyed. That means higher costs, even if the new rates are slowly declining. In other words, despite real-terms growth in earnings, many people will see the effects eroded by higher mortgage costs, frozen tax thresholds and additional taxes.
Nevertheless, things are undoubtedly moving in the right direction and buyers and sellers alike seem to be picking up on this. RICS and others have reported evidence of improving market sentiment, and there is no disguising the upward trends in sales, buyer enquiries and asking prices.
Commenting in Nationwide’s latest House Price Index, the company’s chief economist Robert Gardner said:
“With cost-of-living pressures easing as inflation moves back towards target, consumer sentiment is improving. Indeed, surveyors report a pickup in new buyer enquiries and new instructions to sell in recent months. Moreover, with income growth continuing to outpace house price growth by a healthy margin, housing affordability is improving, albeit gradually.”
Downside Risks
This is not to say that 2024 will be plain sailing for investors. Russia’s invasion of Ukraine continues to cause global concern and instability. So too does the relatively recent disruption to shipping moving through the Red Sea, and of course the conflict in the Middle East, which is already having an inflationary effect on oil prices.
These and other factors could help to drive inflation upward again, in Britain and across the world. That, in turn, would exert new affordability pressures on households, and could persuade the Bank of England to delay any reduction in the base rate.
That said, the Bank of England is aware of these risks but it still appears to believe that inflation will continue to trend downward. So too do many other central banks and economists, all of which suggests that while the risks are real, they won’t be sufficient to stifle the property market’s ongoing recovery.
Market Fundamentals
Over the long-term, by which we mean the entire period since the end of the second world war, UK residential property has shown considerable strength as an investment asset. Capital values have risen markedly, at well above the rate of inflation, and properties in well-chosen locations have also tended to deliver very impressive yields.
The chief reason for this robust performance has been a long-standing discrepancy between supply and demand. Housing stocks are limited and, historically, new homes have not been built at a sufficient rate to keep pace with demand. As a result, people have been forced to compete for homes, either in terms of asking prices or asking rents. That competition has tended to drive up average values, even at times such as now, when household budgets are tightly stretched.
The gulf between supply and demand has closed marginally over recent months but it remains very wide. In April, for example, Propertymark published its latest Housing Insight Report, which showed that there were, on average, more than 70 prospective buyers registered per member branch, and that they outnumbered available properties for sale by a ratio of approximately two to one.
Now, with market activity resurging, demand is only likely to grow. The Royal Institution of Chartered Surveyors began its latest UK Residential Survey with the following upbeat summary:
“The March 2024 RICS UK Residential Survey results remain indicative of a steady improvement in overall sales market conditions. Indeed, buyer demand continues to edge higher, while near-term expectations point to activity gaining further traction over the coming months.”
The Rental Market
Thus far, we have talked mainly about capital values and the house-buying market. However, rental returns are an equally important consideration and, here, the same supply-demand imbalance is working in investors’ favour.
In its latest Housing Insight Report, Propertymark comments that each of its member branches had an average of 89 prospective tenants on its books. Putting that in context, it writes that: “on average, there were around 10 new applicants registered per member branch for each available property in February 2024.”
The latest RICS survey broadly agrees, stating:
“The aggregate gauge of tenant demand remains modestly positive at a net balance of +19% - marginally up on a reading of +16% last month… The supply of rental properties becoming available remains restricted, as the landlord instructions indicator once again exhibits a weak net balance reading of -19%. Consequently, a net balance of +34% of contributors expect rental prices to rise in the coming three months.”
We noted earlier that inflation was easing and that average earnings were increasing in real terms. Those trends will certainly help to instil new vigour in the house-buying market but, equally, they should allow more room for continuing growth in rental returns for investors. With more money in their pockets, many tenants will be better able to pay higher rents and to afford a move to improve their living arrangements.
Rental Growth Data
The UK’s leading rental indices report strong, inflation-beating growth in rental values. Their year-on-year figures are shown below:
Goodlord Rental Index - +6.0%
Homelet, March Rental Index - +7.5%
ONS, Private Rent & House Prices - +9.2%
Of these indices, perhaps the most interesting (and the most definitive) is the new-look report from ONS. Covering the 12 months to March 2024, it reports impressive rental growth in all regions:
Scotland - +10.4%
West Midlands - +8.7%
North West - +8.6%
East of England - +8.4%
Yorkshire & Humberside - +8.2%
South West - +7.8%
South East - +7.7%
Wales - +7.5%
East Midlands - +7.3%
North East - +7.2%
Greater London - +6.3%
There is no sign that the massive undersupply of rented property will be corrected in the near future – indeed, it has been a feature of the UK market for decades. Consequently, excess demand should continue to drive up values in 2024 and beyond – a trend that should only accelerate as affordability pressures ease.
Regional Differences
The rental data from ONS illustrate how returns can vary from region to region. Since the onset of the COVID pandemic, clear regional variations have been apparent by all measures but most obviously with respect to capital growth rates.
Generally, the UK’s more affordable markets have shown the greatest resistance to price falls. More recently, they have also shown the fastest rates of price growth, as the following (April) figures from Rightmove show:
Scotland - +3.8%
North East - +3.4%
Yorkshire & Humberside - +3.1%
North West - +2.9%
Greater London - +2.8%
East Midlands - +2.3%
·Wales - +2.1%
South West - +1.6%
South East - +0.7%
West Midlands - +0.1%
East of England - 0.8%
The obvious exception in these figures is Greater London, with annual price growth of +2.8%. However, other sources still place London towards the foot of the UK performance table: the Land Registry, for example, indicates that London saw prices fall by -4.8% in the 12 months to February, while Home’s April index suggests that values in the city fell by -0.7%.
Another key metric for investors is gross yield and here again, there are clear geographic patterns. The latest findings from Fleet Mortgages’ Q1 Rental Barometer points to better returns in those same, more affordable markets:
Wales - 8.2%
North East - 8.2%
North West - 7.9%
Yorkshire & Humberside - 7.8%
West Midlands - 7.0%
East Midlands - 6.1%
East of England - 6.1%
South West - 6.0%
South East - 5.7%
Greater London - 5.6%
History is, of course, no reliable indicator of future performance. However, we can at least examine some possible reasons why there remains a north-south divide when it comes to investor returns, and then consider whether those same factors are likely to apply in the coming year.
More affordable markets have delivered stronger capital growth for several reasons, but partly because in those regions, the ratio of asking prices to average earnings will be lower. Partly, too, the trend could be the result of interest rates – i.e. because those borrowing smaller sums will tend to be less hard-hit by higher mortgage rates. In both cases, the same regional differences are likely to persist throughout 2024, which may be why more northern markets are tipped to produce the greatest capital growth over the next five years.
On the question of rental growth, similar considerations apply: demand is very strong in virtually all UK towns and cities, but money goes further in more affordable markets. Increasingly, therefore, ambitious young workers are looking outside of London to further their careers, build their futures and enjoy a better overall standard of living.
Major cities such as Birmingham, Manchester, Liverpool, Sheffield, Leeds and Glasgow are currently seeing steady growth in the numbers of inbound graduates and other skilled workers. As their populations expand, so demand for rented accommodation is likely to increase and, consequently, rental values could grow steadily in the coming years.
The rationale for higher yields requires no great stretch of the imagination. Yields are an expression of annual rental income as a percentage of the initial asking price, so it follows that regions offering cheaper properties will also tend to deliver the highest yields. Again, the market fundamentals show no real signs of changing. First, rental demand looks set to keep outstripping supply, so rental values should stay on an upward trajectory across all regions. Second, asking prices in markets further north may be growing faster than in the south but, overall, they are still cheaper and will remain so for years to come. Simple maths therefore dictates that, now and for the foreseeable future, yields will tend to be better in the country’s more affordable regions.
Summary
Broad social and economic trends now seem to be working in favour of rising capital values, stronger demand for housing and better rental returns. Most price indices show a return to price growth, particularly in the country’s less expensive regions, and rental indices continue to show average gross returns that are well above the rate of inflation. By all those measures, and on the question of yields, the outlook seems to be improving so market optimism at the start of the year seems to have been well founded.
Where the market goes from here is uncertain, of course, but there are good grounds for continued optimism, albeit with some caveats. The majority of sources are talking in terms of “cautious optimism” and “realistic pricing.” Few, if any commentators are predicting a return to rapid growth in capital values – but steady, modest growth does seem considerably more likely.
The Home Asking Price Index summarises the state of the UK residential market as follows:
“Positive trends in all the key indicators underline the fact that the UK property sales market has recovered from the interest rate shocks and is proceeding apace. Properties are moving through the market more rapidly overall than was observed in pre-COVID years. Confidence has risen significantly... Demand is also increasing as previously hesitant homebuyers return, comforted by price stability and the probable end to rising interest rates.”
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