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Stubbornly high inflation and the prospect of further increases in interest rates set the context for a slightly more cautious update on the UK housing market this month.

Steady improvement…

In recent months, data coming out of TwentyCi has suggested a progressive improvement in market conditions. This culminated in the number of market-wide agreed sales getting to within 2% of the pre-pandemic norm in the month of May. In further signs of greater market stability, the number of deals falling through declined as did the number of cuts in the asking price for properties.

Meanwhile the Nationwide recorded a very marginal fall in the average value of homes across the UK in May (-0.1% month on month). That meant ‘three-month on three-month’ house price growth - which gives a good indication of recent market trends without the volatility of monthly house price movements - continued to moderate, even though annual house price falls stood at -3.4%. 

However, data from the Bank of England showed that the recovery in mortgage approvals stalled in April, reminding us of the challenges facing mortgaged buyers and the pressures on their budgets. 

…but headwinds pick up

Despite a fall in the headline rate of inflation in April, evidence of persistent upward price pressures across a range of goods and services resulted in a marked increase in market expectations for future Bank base rate on the release of these figures. Though less extreme, economists have also increased their base rate forecasts, with Oxford Economics for example now expecting Bank base rate to hit 5% by the end of August.

As a consequence, lenders increased the cost of fixed rate mortgages immediately prior to the last May bank holiday. Moneyfacts now reports that the ‘average’ effective mortgage rate for a 5-year fixed rate deal stands at just under 5.2%, while that for a 2-year fix is closer to 5.5%.

That is likely to put renewed pressure on the amount buyers that are willing or able to borrow over the coming months. Consequently it looks like the housing market will remain price sensitive over the remainder of 2023 and into 2024, meaning prospective sellers will need to remain realistic about the price at which they market their property.

This said, we remain of the opinion that any further downward pressure on prices will be mitigated by demand from cash buyers and measures taken by lenders to help people facing a sharp increase in mortgage costs as they come to the end of their fixed rate mortgage.

Prime expectations

The top end of the market, though less reliant on mortgage debt and more insulated from rate rises than the mainstream market, is unlikely to be entirely immune to these financial pressures. 

TwentyCi data indicates that in May activity levels in the housing market between £1m and £2m, while 19% below the first nine months of 2022, were in line with April on a seasonally adjusted basis.  In the market over £2m, they were within 5% of the average levels seen in the first three quarters of last year.

Meanwhile the Capgemini World Wealth Report 2023 indicates that the wealth of UK high net worth individuals contracted by -1.1% in 2022. According to their calculations, the number of mid-tier millionaires and ultra-HNWIs across the globe fell by -3.8% and -4.6% respectively.
 

And from the lettings market…

Biggest regulatory reform for over 30 years

The Renters Reform Bill represents the biggest change in the regulation of the private rented sector since the introduction of the Assured Shorthold Tenancy Agreement via the Housing Act 1988.   Since then, we have seen the size of the private rented sector and the demands put upon it increase substantially.

The abolition of Section 21 will see the demise of the Assured Shorthold Tenancy, marking the end of so called ‘no fault evictions’. At the same time, the power for landlords to recover possession of property on breach of tenancy terms will be strengthened, while further grounds to obtain vacant possession on two months’ notice will be introduced where a landlord intends to sell a property or where either they or a close family member wishes to move into it.

New rent review procedures

Ultimately these new grounds for possession will protect the liquidity of the landlord’s investment, however it will require a new approach to be taken towards rent reviews. As the bill is currently drafted, rent reviews will be initiated by the landlord serving notice of a rent increase in a specified form, with the tenant having the power to refer the matter to the First Tier Tribunal where they think the landlord’s proposal is above the market rate.

Practically this is likely to put a greater onus on landlords to justify any proposed rental increases through market evidence. Useful guidance on how all of this will operate can be found on the government website.  

Increased cost of debt widens the gaps between different types of landlords

This comes at a time when financial pressures faced by mortgaged and unmortgaged landlords has widened substantially, as costs of mortgage debt rise and the potential impact of restricted tax relief in a higher interest rate environment begins to emerge.

Prospects of continued under-supply

Modelling undertaken by Capital Economics on behalf of the National Residential Landlords Association has produced some headline grabbing statistics regarding the number of private rented properties that could be taken out of the sector in a higher interest rate environment.  

However, the impact for individual landlords will depend on the legal structure in which the property is held, the level of equity which they have accumulated in their assets, and the ability to diversify some of the property specific risks across their portfolio.

While smaller more indebted landlords are likely to be at the sharp end of these pressures, some larger, equity-rich landlords will be eyeing an opportunity to expand their portfolio, particularly if they hold their property in a corporate structure. Those landlords will have a keen eye on the state of the wider UK housing market.

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