Last week we launched our latest report which looks at how different parts of the prime sales and lettings markets in the UK are faring in a higher interest rate environment. In addition to the usual written articles and array of charts, you can also watch two short videos where property journalist Tom Knowles puts Frances McDonald, Jess Tomlinson and myself through our paces.

Bank Base Rates: The Hold Steady

We have published our report against the backdrop of the Bank of England’s decision to hold the base rate at 5.25% following 14 successive rate rises; with increasing evidence that we have hit the top of the interest rate cycle, even if the prospect of rate cuts look some way off.

In response, costs of 5-year fixed rate mortgages have fallen below 5%, having exceeded 6% in the Summer, taking a bit of the sting out of affordability pressures. Last week also saw the Nationwide report no movement in the average UK house price in September, meaning annual price falls remained at -5.3%. That said, we do not think we have seen the end of house price falls quite yet.

Buying power remains constrained

The buying power of those reliant on mortgages remains constrained, with the Bank of England reporting that mortgage approvals fell by 10% in August; even on a seasonally adjusted basis. While data from TwentyCi suggests market activity picked up a little in September, it remained 14% below the pre-pandemic norm.

On Thursday this week the RICS will release their latest Residential Market Survey, which will give further indication of the strength of buyer demand in the early Autumn after 16 months of suppressed new buyer enquiries.

Latest price movements at the top end of the market

Turning back to the top end of the market, our prime indices showed that

• Prime London house prices fell by 0.8% in the third quarter of the year, meaning that average annual house price growth stands at -2.1%, albeit with something of a distinction between the market for flats and houses. 
• Prime regional house prices fell by -1.5% between June and September leaving average annual house price growth at -5.2%. While prices in the prime market of Scotland have proved most resilient, the biggest price adjustments have been seen in the suburban and commuter markets of the home counties. You can get more detail on different submarkets here. 

Lettings 

A changing backdrop
We have published our report against the backdrop of:

• The decision to drop proposals to require Landlords across England & Wales to meet higher minimum energy efficiency standards (though we still await the outcome of the consultation on setting lenders targets for the EPC profile of their loan books).
• The slow progress of the Renters (Reform) Bill, which will see the Assured Shorthold Tenancy consigned to history, which is yet to have its second reading in the Houses of Parliament.
• The Bank of England’s decision to hold the base rate at 5.25% following 14 successive rate rises; with increasing evidence that we have hit the top of the interest rate cycle, even if the prospect of rate cuts look some way off.

Rents keep rising in the mainstream market

While some of the pressures on landlords will have eased a little as a result, all of the evidence suggests the imbalance between demand and supply in the mainstream rental market remains. That dynamic, combined with wage growth which is running at 8.5%, continues to underpin double digit growth in asking rents according to both Zoopla  and Rightmove.

More nuance in the prime markets

Meanwhile at the top end of the rental market, our prime rental indices show that:

• Annual rental growth in the prime markets of London stands at +5.4%, with rental values of flats (+2.0%) outstripping that for houses (+1.3%) in the third quarter of the year. This reflects a distinction between markets dominated by needs-based renters and those where renting is more of a lifestyle choice.
• Slightly lower rental growth of -4.7% in the year to September outside of the capital, where the distinction between flats and houses has been more pronounced.

In these prime markets we have seen a rebalancing between demand and supply, partly given that some stock has moved across from the sales market. Applicant to property levels are lower than they have been in the past two years but remain someway above September 2020 levels.  

You can read more about the drivers in the prime rental markets here.

Though the rate of growth has slowed for larger properties in particular, rents continue to rise in the prime markets. This is in response to sustained imbalance between demand and supply and continued strong wage growth; a dynamic that continues to underpin double digit growth in asking rents in the mainstream market according to both Zoopla  and Rightmove.

Read more

Prime UK Residential Autumn / Winter 2023

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