2023 has been a year which, from the perspective of the housing market, has been dominated by the effect of elevated mortgage rates.

Last Christmas, when inflation was in double digits, the cost of a two-year fixed rate 75% LTV mortgage stood at 5.29%. In the summer of this year, the cost of that same mortgage product peaked at 6.34% in the face of stubbornly high inflation.

Now as we prepare to Step Into Christmas, inflation has fallen back to 4.6%, bank base rate has been held at 5.25% at two successive MPC meetings, and the cost of that same mortgage product is back under 5.0% (4.94% to be precise).

At the same time, the Nationwide has reported a tentative recovery in mainstream house prices, yet their 0.2% price rise in the month of November hardly puts us in Winter Wonderland territory.

Even if these figures have been reported against the context of relatively muted activity in the mortgage markets, the fact that September’s 0.9% increase wasn’t reversed does suggest we are past peak pain in the UK housing market.

Last week’s figures from the Bank of England gave us another reminder of how the balance between debt and equity in the housing market has shifted over the past 18 months. Approvals for house purchase stood at 47,400 in October, an 8% increase on September – but still well short of the average 66,000 per month seen in the three years prior to the pandemic, during more normal market conditions.

Not wanting to be Lonely This Christmas, HMRC reported that completed housing transactions in October were also subdued – around 16% below a normal market – though supported by more robust activity among cash buyers.

As our own analysis has shown, cash buyers have become somewhat more prevalent in the prime housing markets over the course of 2023, with prices holding up more strongly where these buyers are most dominant.

And at the top end of the market, data from TwentyCl tells us that 2,305 £1m+ sales were agreed in November, before peoples’ thoughts turned to Driving Home For Christmas. That figure was 26% above the same month last year, and, more pertinently, it was within 2% of November 2021 (when the market wasn’t having to contend with the financial turmoil we witnessed this time last year).

Those figures look to be representative of an encouraging pick-up in activity during November, with overall agreed sales coming in at 97% of 2017-2019 levels. We are however still seeing 26% more changes in asking prices than would normally be expected. This suggests the market will remain price sensitive as we enter 2024, even if some of the economic uncertainties that have hung over the market in this year ease.

As for the lettings market: we expect an affordability ceiling to become more of a constraint as wage growth starts to moderate. Though we expect rental growth to outpace earnings growth next year, we believe the gap will narrow substantially in 2025. Our recent article provides more detail on this, along with our expectation for rental growth at a regional level.

Lettings:

With the usual festive songs beginning to hit the airwaves, this is my final market update of 2023. If you’d like to listen to a festive playlist while reading this email, the Savills Research team have created one on Spotify for your listening pleasure.

From the rental market perspective there have been three key issues keeping landlords awake on a Cold December Night:

• the impact of the increased cost of debt on mortgaged landlords’ finances,
• the sustainability of rampant rental growth and
• the potential impact of the Renters Reform Bill, which, having been through committee stage examination in the House of Commons, continues its slow progress towards enactment.

As we prepare to Step into Christmas, inflation has fallen back to 4.6% and the bank base rate has been held at 5.25% at two successive MPC meetings. While lenders have therefore tempered mortgage rates, this continues to act as a major constraint on new buy-to-let lending.

It has also contributed to a 29% increase in buy-to-let mortgage arrears, although by the third quarter of 2023, only 450 buy-to-let properties had been taken into possession by lenders, according to UK Finance.

While many landlords remain able to Stay Another Day, Homelet report that annual rental growth eased back a little to +8.9% in the year to November, as the average rent-to-income ratio across the UK hit a new high of 33.2%. This figure was 30.1% two years previous. In London, that it’s now 39.3%, raising questions as to how much further in can go.

As wage growth starts to moderate, we expect an affordability ceiling to become more of a constraint. Though we expect rental growth to outpace earnings growth next year, we believe the gap will narrow substantially in 2025. Our recent article provides more detail on this, along with our expectation for rental growth at a regional level.

Across the wider housing market

Last week’s figures from the Bank of England gave us another reminder of how the balance between debt and equity in the housing market has shifted over the past 18 months. Approvals for house purchase stood at 47,400 in October, an 8% increase on September – but still well short of the average 66,000 per month seen in the three years prior to the pandemic, during more normal market conditions.

Not wanting to be Lonely This Christmas, HMRC reported that completed housing transactions in October were also subdued – around 16% below a normal market – though supported by more robust activity among cash buyers.

At the same time, the Nationwide has reported a tentative recovery in mainstream house prices, yet their 0.2% price rise in the month of November hardly puts us in Winter Wonderland territory.

Even if these figures have been reported against the context of relatively muted activity in the mortgage markets, the fact that September’s 0.9% increase wasn’t reversed does suggest we are past peak pain in the UK housing market.

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