DECEMBER 2023, PROPERTY MARKET REVIEW
Welcome to our latest monthly review, which looks back on December, its key developments and some of the most noteworthy reports concerning the residential property sector.
The latest house price indices confirm our prediction last month – that despite many gloomy forecasts at the start of the year, average values would remain resilient. Most indices report small year-on-year falls in asking prices but it’s also worth noting that some sources – notably the mortgage lenders Nationwide and Halifax – have reported a return to month-on-month price growth.
In the rental market, the gulf between supply and demand has begun to narrow, but only by a little, and a substantial gap is likely to persist throughout 2024. Accordingly, rents continue to rise. Meanwhile, CPI inflation has fallen dramatically to 3.9% and looks set to decline further over the coming months. This will boost the real-terms rewards from investment and should encourage lenders to keep lowering mortgage interest rates.
Darren Bennett
Managing Director
HOUSE PRICE INDICES
The following organisations produced house price indices in recent weeks. (Percentages refer to capital growth rates.)
On 1st December, Nationwide published its November House Price Index, which reported the country’s third consecutive monthly rise in asking prices. Its chief economist Robert Gardner, said: “UK house prices rose by +0.2% in November, after taking account of seasonal effects. This … is the strongest outturn for nine months.”
The November House Price Index from Halifax also reports another monthly upturn. Average values increased by +0.5% over the course of the month, taking the UK mean to £283,615. The year-on-year figure has also improved – from -4.7% in September to -1.0% in November – suggesting that market conditions are slowly becoming more favourable.
Rightmove’s December Price Index reports a pre-Christmas dip in asking prices but highlights stark regional differences. In the North West, it finds that values have risen by an average of +1.5% over the course of this year, whereas they have fallen by -3.7% in the South East. An underperformance in southern markets has taken the UK average figure to -1.1% year-on-year. Overall, however, it notes that values have risen in 7 out of the 11 regions.
Published on 20 December, the latest ONS House Price Index relates to October. Its monthly and annual figures show poorer growth than the lenders’ data, but they include an element of lag. Home.co.uk, in its December Asking Price Index also indicates a small (-0.7%) pre-Christmas slowdown in its monthly figures, but year-on-year growth of +0.1%.
NATIONAL AND REGIONAL PATTERNS
According to ONS data, covering the 12 months to December 2023, the state-level pattern of annual price growth was as follows:
Scotland + 0.2% / £191,000 (£195,000 in September)
England - 1.4% / £306,000 (£310,000 in September)
Wales - 3.0% / £214,000 (£215,000 in September)
Northern Ireland + 2.1% / 180,000 (Q3 2023 figures)
In order of annual growth-rate, ONS lists the English regions as follows:
North East + 0.2% (down from + 3.6%)
Yorkshire & Humber - 1.2% (down from 0.0%)
North West - 0.4% (down from + 0.6%)
West Midlands - 0.3% (down from + 0.5%)
East Midlands - 1.7% (up from - 2.3%)
South West - 0.6% (up from - 1.6%)
East of England - 2.3% (down from - 1.4%)
South East - 2.0% (down from - 1.4%)
London - 3.6% (down from - 2.0%)
Note that these ONS figures lag behind other indices by at least a month and they will therefore be slower to register any upturn in values.
HOUSE PRICE FORECAST
On 4th December, Rightmove wrote that: “we predict a modest average fall of - 1% in new seller asking prices next year. This will be felt more keenly in some areas of Great Britain than others.” The agency expects prices to fall most sharply in areas where sellers struggle to attract “affordability-stretched buyers” but added that in other regions, prices could hold steady or improve slightly.
On 8th December, Property Industry Eye reported a more upbeat prediction from GoCompare’s finance editor Harvey Jones. He suggested that average house prices could rise by + 5.9% by September 2024, and perhaps by considerably more if mortgage interest rates continue to decline.
Rental Data
Shown below are the average rates of annual rental growth according to the UK’s best-known rental indices.
Goodlord, November Rental Index + 7.3%
Homelet, November Rental Index+ 8.9%
Home, December Asking Price Index + 5.3%
Rightmove, Q3 Rental Price Tracker + 10.0%
Zoopla, December Rental Market Report + 9.7%
RENTAL SUPPLY & DEMAND
On 1st December, Propertymark published its Housing Insight Report for October. It reported that there were, on average, 86 tenants registered per member branch, as against a supply of 10 lettable properties. This means that the gap between supply and demand is narrower than in the summer, but there remains a sizeable imbalance.
On the same day, the National Residential Landlords Association published findings from its latest landlord survey. It noted that “the proportion of private landlords reporting increased demand for rental properties has more than tripled compared with demand seen before the COVID pandemic.”
Zoopla’s Rental Report notes that “while UK rental demand is - 11% lower year-on-year, it remains + 32% above the 5-year average… The supply-demand imbalance in rented housing is not going to disappear in 2024. However, the market is set to move more into balance than it has been over the last 3 years.”
REGIONAL VARIATIONS IN RENTS
Different sources show different regional variations on the measure of average annual rental growth. following table lists the three best-performing regions by source. Figures in brackets refer to year-on-year growth rates.
RENTAL YIELDS
The Q3 Rental Barometer from Fleet Mortgages notes that, on an annual basis, average yields have improved in all regions of England and Wales. The top regions for yields include the North East (9.1%), the North West (7.6%), the West Midlands (7.5%) and Yorkshire & Humber (7.2%). Greater London produced the lowest yields at 5.6% but even this marked a year-on-year improvement of +0.7 percentage points. Fleet calculates that the average yield across England and Wales now stands at a respectable, inflation-beating 6.9%.
PRIME CENTRAL LONDON
Rightmove’s latest house price index includes a feature on prime central London. It notes that, on a monthly basis, prices grew most strongly in Westminster (+ 2.4%), followed by Camden, Lambeth and Wandsworth (all + 1.8%). Kensington and Chelsea also delivered positive monthly growth (+ 1.2%). For annual growth, the top performers in Greater London were Wandsworth (+ 4.4%), Westminster (+ 3.7%), Lambeth (+ 3.1%) and Hammersmith & Fulham (+ 2.5%).
Homelet’s November Rental Index includes a ‘London Focus’ section. It reports that, across all districts, the average rent now stands at £2,174, which is + 8.1% higher than at the same time in 2022. It states that the strongest local market for growth continued to be Barking, Dagenham and Havering, which saw rental gains of + 17.1%. Next came Lambeth with + 15.7%, and in third place came the PCL markets of Hammersmith, Fulham, Kensington and Chelsea, which delivered growth of + 13.1%. Homelet adds that the strongest 5-year growth was achieved in Westminster, which has seen rents rise by a total of + 58.1%.
We’ll publish a more detailed analysis of the Prime Central London market in our Q4 Quarterly Market Report but below is a summary of some key statistics published by LonRes.com.
PCL rental index (year-on-year change) + 5.7%
Rental index for London fringe (y-o-y) + 7.9%
Yields (average for PCL) 3.81%
Yields (average for London fringe) 5.05%
Strongest PCL yields (Chelsea) 4.07%
INFLATION & THE BASE RATE
On Thursday 14th December, the Bank of England’s Monetary Policy Committee (MPC) voted, by a majority of 6 votes to 3, to keep the official Bank Rate at 5.25%. Once again, however, the Bank’s Governor Andrew Bailey reiterated that discussions of any rate cut were decidedly premature, and that the MPC would do whatever it takes to bring CPI inflation down to its 2% annual target.
Nevertheless, the decision will reinforce a general consensus that rates have peaked and that, henceforth, they are only likely to come down. The speed of that decline is far from certain but with CPI inflation now at 3.9%, substantially less than half of what it was at the start of 2023, confidence is rising. The Bank estimates that CPI will fall to 3.1% by the end of 2024, while the Office for Budget Responsibility Inflation predicts that it will stand at 2.8% by year-end. That has prompted lenders to expect a rate-cut towards the middle of the year.
In its November House Price Index, Nationwide noted:
“There has been a significant change in market expectations for the future path of Bank Rate in recent months which, if sustained, could provide much needed support for housing market activity. In mid-August, investors had expected the Bank of England to raise rates to a peak of around 6% and lower them only modestly (to c.4%) over the next five years. By the end of November, this had shifted to a view that rates have now peaked (at 5.25%) and that they will be lowered to around 3.5% in the years ahead.”
On 13th December, the ONS reported a surprise fall in economic activity in the three months to October. The - 0.3% fall in GDP is a reminder that the UK economy is still fragile and struggling to recover from the successive shocks of Brexit, Covid and the war in Ukraine. The MPC will be very conscious that high borrowing costs act as a disincentive to business investment and will inevitably act to dampen any economic recovery. Consequently, while its first concern will continue to be inflation, it will not want to keep the base rate any higher than is absolutely necessary.
This is one reason why lenders believe that the base rate will inevitably fall over time and why swap rates have been falling. This in turn has prompted them to introduce more competitive mortgage deals over most of the second half of the year. That trends is likely to continue into 2024, which should see sales activity and market confidence improving.
SUMMARY
The fundamentals of the UK property market have not changed dramatically since last month. The same key forces are still at work, and they should continue to support improving conditions for investors.
House prices have surprisingly resilient in 2023, defying most market predictions.
This has been especially pronounced in the UK’s more affordable regions.
CPI Inflation now stands at 3.9% – considerably better than the government’s 5% target for 2023. It compares with 10.1% at the start of the year.
The latest inflation figures have raised hopes that interest rates could begin to come down again in 2024, though the Bank of England remains cautious.
ONS reports that average earnings are rising by + 7.3% year-on-year.
Affordability continues to improve slowly as inflation falls, wages rise and mortgage lenders introduce more competitive deals.
Rental returns have risen in all regions, at well above the rate of inflation.
Rental yields have also risen in all regions and, again, at a rate that exceeds CPI inflation.
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