AUGUST 2023, PROPERTY MARKET REVIEW
Welcome to our latest monthly review, which looks back on August, its key developments and some of the most noteworthy reports concerning the residential property sector.
Affordability has been a big issue this month. Several sources have remarked upon the fact that it should gradually improve in the months ahead because mortgage interest rates are slowly falling and because average earnings are rising at well above the average rate of house price growth. In recent months, many borrowers and would-be buyers have been biding their time, awaiting more certainty on mortgage rates but, as affordability improves, growing numbers of them are likely to put their plans into action. That’s important because prices tend to rise when sales activity increases, so the sooner that happens, the sooner investors should start to see meaningful capital growth rates once again.
How soon that will happen is, of course, a matter for conjecture, but the outlook is certainly improving. And in the meantime, rental returns are still greatly outpacing the rate of inflation and yields are still very strong, especially in Britain’s more affordable markets.
This is all encouraging for investors. It suggests that within a relatively short timeframe, fixed-rate mortgage costs are almost certain to be lower, market activity should be stronger, and values should be moving firmly in the right direction again.
Darren Bennett
Managing Director
HOUSE PRICE INDICES
The following organisations produced house price indices in recent weeks. (Percentages refer to year-on-year capital growth.)
Halifax -2.4% (up from -2.6% in June)
Nationwide -3.8% (down from -3.5% in June)
ONS +1.7% (June, down from +1.8% in May)
Rightmove -0.1% (June, down from +0.9% in July)
Zoopla +0.1% (down from +0.6% in July)
Nationwide’s July House Price Index reports a -3.8% annual fall in average values, which is similar to the rate it quoted for June. It brings the UK average price to £260,828, which is close to the averages it last quoted between February and March 2022. However, the figure is still +6.8% higher than at the same time two years ago, in July 2021.
The July House Price Index from Halifax reports a year-on-year change of -2.4%, which is somewhat better than June’s figure and, overall, it represents the latest in a series of modest changes. In the accompanying notes, Kim Kinnaird, director of Halifax Mortgages said:
“Average UK house prices edged down slightly in July, with the monthly fall of -0.3% equivalent to a drop of around £1,000 in cash terms. While this was the fourth consecutive monthly decrease, all have been smaller than -0.5%. In reality, prices are little changed over the last six months... These figures add to the sense of a housing market which continues to display a degree of resilience in the face of tough economic headwinds.”
On 16 August, ONS published its June House Price Index, which reports that average values rose by +1.7% year-on-year, and by +0.3% over the course of the month. It states that “the average UK house price was £288,000 in June 2023, which is +£5,000 higher than 12 months ago.”
On the same day, Home.co.uk published its August Asking Price Index, which records an average annual price fall of -1.8% but with substantial regional variations. (See next section.) It regards the month-on-month change of -0.3% as a simple seasonal dip, and notes numerous signs of the market’s underlying strength. It states:
“The typical time-on-market for unsold property in England and Wales is a relatively healthy 80 days, which is considerably lower than at any point during pre-pandemic 2019. The UK property market continues to show remarkable resilience in the face of rising borrowing costs… Following the December 2022 drop, pricing remains relatively firm overall with no notable increase in price-cutting of on-market properties.”
Rightmove published its August House Price Index on 21 August. It noted that average values had fallen fractionally, by -0.1% year-on-year, but highlighted some grounds for optimism. Its accompanying commentary states:
“Lower asking prices, combined with increasing average earnings and the apparent downward trend of mortgage rates are tentative steps towards improved buyer affordability… The average five-year fixed mortgage rate is now 5.81%, falling from 6.08% this time just three weeks ago and currently showing signs of an improving trend.”
The agency also points to the continuing shortfall in housing supply; an economic force that has helped to maintain values in the face of difficult economic conditions. It states that there has been “no glut of homes for sale, as the number of available properties is still -10% lower than at this time in 2019.”
On 25 August, numerous media reported the publication the TwentyEA House Price Index, which provides details of both asking prices and exchange prices across the UK. It notes that at the national level, prices paid on exchange rose by an average of +3.8% year-on-year, but by considerably more in some regions. It adds that “every UK region saw gains of at least +3% except Wales and the West Midlands.”
In its July House Price Index, published at the end of August, Zoopla also indicates a clear regional division in terms of capital growth rates. It’s headline figure for the whole of the UK is +0.1% year-on-year but, as we’ll examine later on, that belies significant local variations.
In its July Housing Insight Report, Propertymark sets out the results of its latest member survey. It finds that demand for homes continues to exceed supply by sizeable margin. Its average member branch has 64 newly-registered prospective buyers but total stocks of only 38 homes available for sale. More tellingly, the supply of new stock listed per branch is only around 10 per month, which is substantially below the sign-up rate of potential buyers.
NATIONAL AND REGIONAL PATTERNS
According to ONS data, covering the 12 months to June 2023, the state-level pattern of annual price growth was as follows:
England +1.9% / £306,000 (up from +1.7%)
Wales +0.6% / £213,000 (up from +1.8%)
Scotland +0.0% / £189,000 (down from +3.2%)
Northern Ireland +2.7% / 174,000 (Q2 2023 figures)
In order of annual growth-rate, ONS lists the English regions as follows:
North East +4.7% (up from +4.0%)
North West +3.5% (up from +2.7%)
West Midlands +3.2% (up from +2.2%)
Yorkshire & Humber +2.7% (up from +1.2%)
East Midlands +2.4% (down from +3.4%)
South East +1.3% (down from +1.5%)
East of England +1.1% (up from 0.0%)
South West +0.5% (down from +1.0%)
London -0.6% (down from +0.8%)
The Home.co.uk Asking Price Index reports that the highest rates of annual price growth occurred in:
Scotland +5.9% (up from +3.7%)
North West +1.9% (down from +2.1%)
North East +1.8% (up from +1.7%)
Yorkshire & Humber +1.5% (up from +1.1%)
The worst performers were Greater London (-3.6%) and the East of England, which saw values drop by -3.7% year-on-year. The company notes that:
“What is clear is that, thus far, sufficient demand remains in the north to support prices despite the rise in mortgage rates. Home values in the north are much lower than in the south and, for some time, landlords have refocused their acquisitions northwards due to the better yields available… This trend, driven by pricing disparity, is likely to continue for some time.”
Rightmove’s leading regions for annual capital growth included:
Scotland +4.6% (up from 3.6% in July)
North East +2.6% (up from 0.4%)
Yorkshire & Humber +1.2% (down from +2.1%)
North West +1.0% (down from +1.9%)
Elsewhere, Rightmove notes that average values fell most quickly in Wales (-1.5%), the East of England (-1.4%) and the South West (-1.3%).
Halifax does not offer comprehensive regional data but notes that, as ever, prices vary considerably by location. Last month, values fell most in the South East (-3.9%), Greater London (-3.5%) and Wales (-3.3%). More affordable regions typically saw better results, with prices dipping by only -0.3% in Northern Ireland and staying broadly flat in the West Midlands.
The TwentyEA house price index suggests a different picture, reporting that:
“Northern Ireland saw the highest growth of exchanged prices at +8.4% while the South West, Inner London, East of England, the North West, and Scotland all achieved more than +5%... Growth in instruction prices year on year was also highest in Northern Ireland (+7%) while the North West saw an increase of +5.7%, Scotland achieved +5.7% and Yorkshire and the Humber saw +5.1%.”
Zoopla notes that while the UK national growth rate is essentially flat, “annual change in house prices ranges from +1.7% in Scotland to -1% in London… There is a clear north-south divide in house price inflation. Every region in the South of England has seen house prices fall by up to -1% in the last year. But all other regions and countries of the UK are posting low single-digit house price growth.”
The reason for this, it suggests, is higher mortgage rates, which are exacerbating affordability pressures in the south. It adds: “This prices more buyers out of the market in the south, weakening demand and pushing prices down.”
It lists the top regions for capital growth as follows:
Scotland +1.7% (down from +1.9%)
North West +1.2% (down from +1.5%)
Yorkshire & Humber +0.9% (down from +1.4%)
West Midlands +0.8% (down from +1.6%)
North East +0.6% (down from +1.0%)
As of the end of August, Zoopla’s top cities for growth included Edinburgh (+2.0%), Nottingham (+1.2%), Birmingham (+1.2%), and Leeds, Manchester and Sheffield, all on +0.9%. In terms of local authority areas, the UK frontrunner has been Calderdale, Yorkshire and the Humber, where average values have risen by +4.3% year-on-year.
HOUSE PRICE FORECAST
In its July House Price Index, Halifax writes that:
“The continued affordability squeeze will mean constrained market activity persists, and we expect house prices to continue to fall into next year. Based on our current economic assumptions, we anticipate that being a gradual rather than a precipitous decline. And one that is unlikely to fully reverse the house price growth recorded over recent years, with average property prices still some £45,000 (+19%) above pre-Covid levels.”
Zoopla notes that with mortgage rates falling and average earnings now outpacing house price growth, affordability is improving steadily. Accordingly, it states:
“Looking ahead, we expect the number of property sales to recover well in the coming 2-3 years. More flexible working, demographic trends from an ageing population, the strong labour market and high immigration will all encourage people to move house. In terms of mortgage rates, they’re starting to drift lower and we expect them to fall below 5% later this year. (But) any falls to mortgage rates are unlikely to impact the market and improve affordability further until at least the first half of 2024.”
As a result, Zoopla says its expects house price growth to stay “within the +2% to -2% range for the foreseeable future,” with price growth varying by region and local affordability.
Rental Data
Goodlord’s July Rental Index reports some truly exceptional results for investors over the last few weeks. The platform notes that annual rental growth now stands at +10.4%, and explains:
“July was a record-breaking month for the Goodlord Rental Index. The Index, which analyses tens of thousands of completed tenancies each month, saw the highest average rental costs since the Index’s launch in January 2019. As rents soared, void periods also dropped dramatically. This set another record: the shortest void periods ever recorded by the Index.”
More specifically, average rents rose, month-on-month, by an astonishing +19%, reaching a new high of £1,367 per calendar month. Goodlord reports that this is +9.4% higher than the previous record, set in September 2022. Meanwhile*, “voids headed in the other direction: dropping by -44% to hit an average of just 9 days in July. This is down from 16 days in June and is the lowest ever void rate recorded by the Index.”*
It concludes with a statement from its CEO, William Reeve, who said: “Traditionally, rental costs continue to increase until September before cooling off in the autumn, which could mean these aren’t the last records we’ll see broken before the year is out.”
Homelet’s July Rental Index reports that values continue to rise at well above the rate of inflation. In July, they rose by +10.3% year-on-year, taking the UK average to £1,243 per calendar month. This, the company observes, is the country’s highest average yet. On a monthly basis, values rose by +1.1%, with gains seen in every region. However, while inflation-beating increases will obviously be welcomed by landlords, Homelet warns that tenant affordability is being increasingly stretched. It writes:
“Affordability for renters is weakening. In July, renters spent, on average, 32.1% of their income on their rent, up from 30.2% a year ago. Only in the North East and Scotland are renters spending less of their income on rent than they did a year ago.”
The August Asking Price Index from Home.co.uk reports an even higher rate of annual rental growth. It states: “Rents across the UK continue to rise overall (+11.9% annualised).”
In its July Housing Insight Report, Propertymark notes that the gap between supply and demand for rental property showed another “sizeable jump.” It states that its average member branch now has 187 new prospective tenants competing for just 14 rental properties. It reports that demand in July 2023 was “up almost +38% year-on-on year, a continued trend that is predicted to show no signs of slowing.”
That equates to a ratio of over 13 would-be tenants per home and although supply has improved slightly, Propertymark notes that it is “still below what is needed to keep up with current demand.” It is hardly surprising, then, that “70% of responding agents reported rents increasing month-on-month.”
In the commentary to its July Residential Market Survey, RICS makes a similar point. It writes:
“Tenant demand rose firmly over the three months to July, evidenced by a net balance of +54% of respondents citing an increase. In fact, this points to the strongest quarterly pick-up in rental demand since the start of 2022. Set against this, landlord instructions declined once again, with the latest net balance falling to -30% from -24% beforehand. On the back of this enduring mismatch between rising demand and dwindling supply, a net balance of +63% of respondents expect rental prices to increase over the coming three months. This is up from a figure of +55% in the previous quarter and marks a fresh record high.”
The RICS report also features a graph showing the changing patterns of rental demand in recent years. It shows that, aside from a sharp dip during the Covid pandemic, demand has clearly been following a rising trend over the last six years at least.
REGIONAL VARIATIONS IN RENTS
Homelet’s July Rental Index includes a breakdown of price growth by region. Its top five locations for rental growth include.
Scotland +15.8% (unchanged from June)
Greater London +12.9% (up from +12.5%)
West Midlands +11.0% (up from +10.8%)
South East +9.8% (up from +9.7%)
North West +9.7% (up from +9.5%)
Month-on-month, the strongest gains were seen in Scotland (+3.5%), Northern Ireland (+2.0%), the North East (+1.8%) and Greater London (+1.5%). Those figures compare to a national monthly average of +1.1%.
Goodlord’s regional analysis lists the following regions as England’s strongest markets for annual rental growth. (The platform does not cover Scotland, Northern Ireland or Wales.)
East Midlands +14.6%
South West +12.1%
North West +11.9%
Greater London +10.5%
Goodlord also reports on void periods by region. It states that:
“The North East and the South West saw the lowest voids - recording void periods of just 6 days on average. This, respectively, represented a -60% and -45% reduction compared to June’s void figures for those regions… The highest voids were recorded in the West Midlands at 14 days, a decrease of -22% compared to June. Greater London saw the smallest month-on-month change: a -21% reduction in voids, from 14 days to 11 days.”
INFLATION & THE BASE RATE
On 16th August, the Office for National Statistics (ONS) published its June inflation figures. They showed that the Consumer Prices Index had fallen from 7.9% in May to 6.8% in June. This marked another sharp fall in the rate of inflation, taking it to a 15-month low. This offers some hope that the economy is on its way back towards more usual conditions. The Bank of England has said that it expects to hit its CPI target of 2% towards the end of 2024 or early 2025, and two sizeable reductions in consecutive months suggest that this might indeed be possible.
Before then, another rise in the official base rate of lending might be more likely than not, but in view of recent anti-inflationary progress and the need to nurture some level of economic growth, the Bank’s Monetary Policy Committee is not expected to hike the rate too aggressively. Moreover, as the CPI falls, so the MPC will feel increasingly able to ease the base rate down again. This is certainly what the major lenders are indicating in their longer-term forecasts and, accordingly, many of them have already begun lowering the rates on their fixed-rate mortgage deals.
There are risks, of course. Growth in average earnings is unusually high and the government is concerned that this could fuel wage-driven inflation. In addition, the cost of services is still rising quickly, and the Russian blockade of Ukrainian exports could prompt rising prices for grain, vegetable oils and other foodstuffs. However, the costs of transport and many staple foods have been falling, and ONS estimates that around 75% of the recent drop in inflation is attributable to falling energy prices. Overall, inflation looks to be set on a downward trend.
SUMMARY
Average house prices have remained broadly static, despite the affordability pressures exerted by higher mortgage rates. However, many lenders have started to cut the costs of their fixed-rate mortgage deals, in anticipation of lower inflation and, over time, a lower base rate of lending. In the UK’s more affordable regions, house price growth remains positive year-on-year. There are growing signs of a north-south divide, with values falling in the south but rising in most other UK regions. The UK’s more northerly and more affordable markets are also continuing to produce the strongest yields. Rental returns across the whole of the UK continue to rise substantially faster than the rate of inflation. In fact, average rental gains have been rising while the CPI rate has been falling. The gap has widened even further over the last month, which means that the real-terms returns for investors have been improving. Demand for property to buy or rent remains well ahead of supply. This imbalance will continue to exert upward pressure on average values. Affordability should gradually improve as a result of lower mortgage rates and because average earnings are rising faster than both the rate of inflation and the average rate of house price growth. As affordability improves, so sales activity should increase and a gradual upturn in prices is likely to follow.
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