As summer holidays commence, it is worth reflecting on what’s shaping the property market right now.

Inflation continues to put pressure on the cost of borrowing, meaning that realistic pricing remains key to achieving a sale in current market conditions. The imbalance of demand and supply in the rental market has underpinned annual growth in asking rents. Read on for further detail behind the headlines.

To keep up to date with the latest property information, subscribe to our monthly residential research emails and we’ll send them direct to your inbox. Registering is quick and easy using this form, and should take less than a minute to complete.

The sales market – a shift in sentiment with all eyes on inflation

With lenders having increased the cost of mortgage finance through June and the first half of July, the reported fall in the annual rate of inflation in the middle of last month came as welcome news, given the shift in market sentiment that we have seen over the past two months.

Those in the process of borrowing have remained relatively keen to lock into existing mortgage offers, but “real-time” data coming out of TwentyCi suggests that market conditions now more closely resemble those we experienced at the beginning of the year than during the spring and early summer.

In July, net agreed sales (after deducting fall-throughs) slipped back to -20% below the pre-pandemic average for the month across the housing market as a whole. Meanwhile, revisions to asking prices were 28% above the same benchmark, highlighting that realistic pricing remains key to achieving a sale in current market conditions.

Prime markets

When compared to last year, the market over £1 million has been similarly affected, despite being less exposed to increased costs of mortgage debt.

You can read more on the factors driving the top end of the market by following links to our review of the prime housing markets of London, the rest of the country, and Scotland.

To put this into the perspective of other global markets and as a clear reminder that the UK is not alone in the challenges it faces, read our latest overview of prime housing markets across different world cities.

Back to the mainstream

For the mainstream UK housing market, where the cost of debt has a more direct impact, the average UK house price fell by -3.8% over the year to July, down from -3.5% in the year to June according to Nationwide.

And, as importantly, data from the Bank of England shows that mortgage approvals for house purchase came in at 54,662 on a seasonally adjusted basis in June: that figure was 6.9% above May. However, over the first six months of the year, these approvals were -29% lower than the same period in 2022, as the market becomes increasingly driven by cash and equity-rich buyers.

Inflation and mortgage rates

Against this backdrop, the reported fall in the rate of inflation in the middle of last month came as something of a relief, giving hope that inflation may follow the same path as in the US.

The annual increase in the Consumer Price Index fell from 8.7% in May to 7.9% in June. And with demand-led “core” inflation also falling, this has raised hopes that the Bank of England will not need to raise base rates as aggressively as previously feared.

This is yet to have a meaningful impact on mortgage rates, even though it looks like the spate of increases in fixed rates has, at least, been put on hold. Whether we see a cut in fixed rate mortgage costs over the late summer and early autumn will be heavily influenced by the actions of the Bank of England on Thursday this week. It seems unlikely that Bank base rate will be kept at 5.00%, with an increase to 5.25% – rather than 5.50% – now looking much more likely.

On this basis, we have held off providing revised housing market forecasts, but we have provided an insight into our current thinking for those who revel in the detail of housing affordability, lender forbearance and mortgage regulation. This thinking covers the mainstream, prime and rental markets.

The rental market: Level 42 (per cent)

Rightmove recently reported that rental demand in June this year was 42% above where it was in the same month of 2019, pre-pandemic. At the same time, available rental supply was 42% below the four years previous. Such a disconnect has underpinned annual growth in asking rents of 13.7% across London and 9.3% across the rest of Great Britain.

Mainstream rental growth picked up in the second quarter of the year, in common with our prime rental index. In just the three months to the end of June alone, Rightmove reported that asking rents rose by 2.6% in the capital and 3.5% elsewhere; not so long ago, these figures would have been considered healthy across an entire year.

The three degrees (of disruption in the rental market)

Despite this rental growth, landlords have had to consider the implications of three main factors over the course of 2023:

1. The impact of higher interest rates on profitability, which has become increasingly constrained as mortgage costs have risen over the course of the year
2. The prospect of having to upgrade properties to higher minimum energy efficiency standards (the deadlines for which now look as though they will be pushed back)
3. Increased tenants’ rights that have been embodied in a Renters (Reform) Bill, bringing an end to the Assured Shorthold Tenancy (however, its progress through Parliament may be impeded by party conference season, having only had its first reading in the House of Commons prior to the summer recess).

You can read more on our view of the likely impact of these issues in our recent Prime Rental Spotlight.

Having reached 30 years at Savills, I’ll be travelling through Europe on loyalty leave for the next five weeks. Keep an eye out for an update from my colleague Frances McDonald in the meantime, and I’ll look forward to picking up again on my return.

READ MORE

Prime UK house prices

Prime residential rents – Q2 2023