Property Market Update November 2023
After years of growth and in particular, 2022’s more pronounced rise in property prices, UK house prices have finally “softened” by 1.3% over the last 12 months. That said, the rate of depreciation has slowed as activity levels have recovered. Furthermore, stronger growth in new sales have brought more sellers into the market. Evidence demonstrates that there has been above average activity in the Northeast, Scotland, and London, whilst, despite weaker demand, sales levels have held up in The Midlands and southern England. Regional trends are likely explained by recent price inflation and affordability concerns; however, mortgage regulations have tempered the impact of higher mortgage rates on house prices. The prospect of higher mortgage rates in next year seems to have dissipated and any weakening of demand and activity is only likely were this not to be the case. Inflation/deflation expectations seem to be very much connected with how high or low interest rates move at this time. “Falling mortgage rates In H1 2023 have supported increased market activity. Expectations that interest rates would need to rise further this year in order to manage inflation to and would thus will push up mortgage rates, appear to have softened now that rising inflation appears to be in check. This resulted in weaker demand and levels of market activity in autumn 2023.” Darren Lawson, Managing Director of Lawson Estate Agents says “research suggests a fall of circa 2.5% in the last 12 months, but the pace of the fall has slowed. House prices and housing market activity continue to adjust to the impact of higher mortgage rates and rising living costs.” A UK price index has registered a 2.5% decline over the last twelve months. In recent months, the rate of monthly price falls has slowed as buyer confidence improves.
“In 1957, interest rates jumped significantly meaning mortgage rates were 7.5%. If you waited for interest rates to go down to what they were 18 months before, you wouldn’t have purchased a home until 2008!
You would have rented for 51 years instead, paying thousands of pounds in rent, for the privilege of “having a roof over your head”, whilst waiting for rates to go down, meanwhile the value of property increased by 9,351% (that is not a typo)!!
Don’t wait to buy property. Buy property and wait.”
Sales also increased in response to falling mortgage rates and a strong labour market. The annual rate of price inflation is 1.9%, down from 9.6% a year ago. At a regional level house price inflation ranges from -0.2% in London to 3.6% in Wales. Darren continued, “we expect prices to remain broadly static for the rest of the year.”
The biggest hit to housing activity in 2023 will be seen in the number of housing sales which are on track to be 20% lower than last year. There have been, however, more sellers in the marketplace as market confidence slowly improved. Despite weaker demand, the number of new sales agreed over the last 4 weeks is 11% higher than the 5-year average for the same period! As many buyers are also selling, more sales boost the flow of new homes for sale which is 16% up on the 5- year average. While there are more sales being agreed, sellers must remain realistic on pricing to attract buyer interest. Some 18% of homes currently listed for sale on property portals have had the asking price cut by 5% or more, compared to 28% in February. Price reductions typically come 8 weeks after the first listing as sellers try to boost interest from buyers. +1.9% Annual house price inflation to April 2023 May 2023 (according to the UK House Price Index) This is perhaps part-fuelled by “landlord sales” adding to the available supply, with some landlords looking to rationalise their portfolios in the face of higher mortgage rates and stiffer taxation, are also adding to supply. Some 1 in 10 (11%) of homes listed for sale were previously rented out, a level that peaked at 14% in 2020 and which has drifted lower over the last 3 years. Five years ago, around half of these homes returned to the rental market as unsold or bought by another investor. However, this proportion has dropped to a third more recently. These ex-rented homes have asking prices that are 25% lower than owned homes (£190,000 v £250,000) and will appeal to first-time buyers.
Market conditions vary across the country There are some distinct variations in market strength across Great Britain. Buyer demand and new sales continue to perform best in Scotland, the Northeast and London. Demand is above the national average in these regions and sales are more than 10% higher. Demand remains below average in English regions across the South and Midlands – areas where house prices posted some of the greatest gains over the last 3 years. Higher prices, together with the hit to buying power from higher mortgage rates and the increased cost of living, have taken more buyers out of the market in these areas. However, there are still active buyers in these markets, shown by above-average sales, albeit at a lower level. There appears to be no sign of any build-up in unsold inventory. While demand is weaker and supply is rising, research has shown no evidence of any material build-up in an unsold stock of homes. The number of homes listed for more than 90 days in most areas is in line with the 5- year average. It suggests that while new sellers will need to set asking prices carefully, there is no need for larger price falls to clear stock at this stage.
In May 2023 (according to the UK House Price Index) the proportion of homes for sale that were formerly rented out was a relatively significant, 11%. Once again, Darren affirms, “weaker demand is likely encouraged by prices have outpacing earnings, in 2022, whilst he believes that the variation in activity across regional markets is most likely explained by the varied, level of recent price growth region to region. I.e., above-average growth has impacted the affordability of homes. It has also increased the sensitivity of would-be home buyers to higher mortgage rates. House price growth over the last 7 years has ranged from just 12% in London to 47% in Wales. Average earnings increased by 30% over the same period. Areas with house price growth outpacing earnings align with those where demand is below average at present. In contrast, the regions, and counties with the lowest rate of price inflation since 2016 are recording stronger activity. London is not an affordable market with average house prices 2x the UK level. However, low price inflation has improved affordability. There is better value for would-be buyers, especially those looking to buy flats where prices are unchanged since 2016. Increased migration into the UK is likely to be supporting market activity in London.
Darren questions, “has the market avoided the risk a big price correction?” UK home buyers have seen a significant increase in borrowing costs in the last year, which would historically have led to house prices falling. The impact of higher rates has been less pronounced than it might have been in the past due to mortgage regulations introduced by the Bank of England in 2015. Anyone taking a mortgage since then has had to prove to their bank that they can afford a 6.5-7% mortgage ‘stress’ rate even though they were paying 1% or 2%. It is as if the housing market, and the ability to buy with a mortgage, has been operating at 6-7% rates already. This is one key reason we have seen less of an impact on pricing thus far, but values remain sensitive to mortgage rates rising above 5%. Most lenders are currently testing affordability at 8% mortgage rates, hence below-average demand, and fewer sales over 2023. The May 2023 UK House Price Index reports, “house price growth in London of 32% over last 7 years versus an average 12% across the wider UK.
So, what is the risk from mortgage rates edging higher? The increase in housing market activity this year is down to average mortgage rates falling back towards 4% in line with the underlying cost of finance. The latest inflation related data has lessened the likelihood that interest rates may need to rise further. Improving levels of housing activity over the last few months prove that 4% to 4.5% mortgage rates are generally manageable for new homebuyers. This is despite them being more than double the lows of late 2021. However, higher living costs continue to erode spending power at the same time. Several think tanks’ assessments remain that mortgage rates of 4-5% are consistent with house price growth of +2% to -2% and circa 1 million sales a year, so long as we continue to see a strong labour market. Banks increasing their affordability tests further than the current levels for new borrowers will compound this pressure