MAY 2023, PROPERTY MARKET REVIEW
May 2023, Property Market Review
Our latest monthly review looks back on May, its key developments and some of the most noteworthy reports concerning the residential property sector.
HOUSE PRICE INDICES
The following organisations produced house price indices in recent weeks. (Percentages refer to year-on-year capital growth.)
Halifax +0.1% (down from +1.6% in March)
Nationwide -2.7% (up from -3.1% in March)
ONS +4.1% (March, down from +5.5% in February)
Rightmove +1.5% (May, down from +1.7% in April)
Zoopla +1.9% (down from +3.0% in April)
Nationwide’s April House Price Index reported a welcome monthly upturn in average values. It found that over the course of April, prices rose by +0.5%. That’s only a modest figure but the company had previously reported seven consecutive falls. Consequently, it believes that the numbers show “tentative signs of recovery.” It noted that numerous headwinds remain but, encouragingly, mortgage applications are picking up, consumer sentiment is improving and affordability is improving thanks to continued wage growth.
Commenting on the figures, Robert Gardner, Nationwide's Chief Economist said:
“Any upturn is likely to remain fairly pedestrian, as it will take time for household finances to recover, since average earnings have been failing to keep pace with inflation... Nevertheless, if gains in nominal incomes remain solid (wage growth has been running at above 7% in the private sector), this, together with weak or declining house prices, will help improve housing affordability over time, especially if mortgage rates continue to trend lower.”
However, as we’ll discuss later on, Nationwide also reports considerable variation in growth rates between the various regions.
Zoopla published its April House Price Index on 3 May. It reported a year-on-year capital growth rate of +3.0%, and noted that “the worst of the pricing adjustment in the housing market appears to be behind us.” It still expects capital growth rates to decline this year but it regards a marked increase in sales activity as a clear indication of the returning health of the market. It writes:
“Our leading indicators of housing market activity and pricing show a steady and sustained recovery in demand and continued growth in the number of new sales agreed. House price inflation continues to slow but a major price re-correction remains a very low probability.”
Zoopla then published its second index on 30 May, which cited a revised annual growth rate of +1.9%. Although this represented a six-month decline of -1.3% in the rate of growth, the agency noted that:
“The rate of monthly price falls has slowed as buyer confidence improves. Sales also increased in response to falling mortgage rates and a strong labour market… We expect prices to remain broadly static for the rest of the year.”
The April House Price Index from Halifax came out came out on 9th May. Featuring a small monthly change of -0.3% and a quarterly change of +1.3%, its figures show that average values are now virtually unchanged from the same time last year. It calculates the year-on-year growth-rate at +0.1%, but adds that at £286,896, a typical property now costs some +£28,000 more than two years ago.
Kim Kinnaird, director of Halifax Mortgages, said:
“House price movements over recent months have largely mirrored the short-term volatility seen in borrowing costs. The sharp fall in prices we saw at the end of last year after September’s ‘mini-budget’ preceded something of a rebound in the first quarter of this year as economic conditions improved. The economy has proven to be resilient, with a robust labour market, and consumer price inflation (is) predicted to decelerate sharply in the coming months. Mortgage rates are now stabilising, and though they remain well above the average of recent years, this gives important certainty to would-be buyers… Alongside a market-wide uptick in mortgage approvals, these latest figures may indicate a more steady environment.”
Rightmove published its May House Price Index in the week commencing 22 May and pointed out that at +1.8%, the “monthly increase is the biggest of the year so far, and is significantly higher than the historic average May rise of 1.0%.” Significantly, the company notes that “current market conditions are defying expectations" and that the price rise is a sign of increasing confidence from sellers. Tim Bannister, Rightmove’s Director of Property Science, said:
“One reason for this increased confidence may be that the gloomy start-of-the-year predictions for the market are looking increasingly unlikely. What is much more likely is that the market will continue to transition to a more normal activity level this year, following the exceptional activity of the pandemic years. Steadying mortgage rates and a generally more positive outlook for the economy are also contributing to more seller confidence.”
Rightmove notes that despite the rapid monthly gain, the annual rate of growth is now +1.5%, which is lower than the +1.7% it recorded last month. Nevertheless, it brings average values to a record high of £372,894. It also observes that the mortgage market is looking more stable, pointing out that despite recent increases in the official base rate of lending, “the average rate for a five-year fixed, 15% deposit mortgage is now 4.56%, down from 5.89% in October.”
On 24 May, ONS published its March House Price Index, which quotes a headline rate of +4.1% for annual house price growth. This is down from +5.5% last month and represents a small, seasonally-adjusted monthly fall of -0.9%. However, it represents a faster year-on-year growth rate than most other sources had quoted for March and, because the index is based on actual sales completions (rather than mortgage data), it tends to be regarded as the most accurate gauge or real-world prices.
On 12 May, Home.co.uk published its latest Asking Price Index, which begins by saying that “asking prices across England and Wales surged during April by +0.8% on a wave of optimism.” It adds that on a monthly basis, prices rose in Scotland, Wales and all English regions. Selling times have increased slightly but demand remains high and supply is still -6% below where stocks stood in April 2021.
RICS published its April 2023 Residential Market Survey on 8 May. It notes that while higher mortgage costs continue to weigh on market confidence, most of the key market indicators have begun to improve. It adds that twelve-month expectations point to more stable conditions ahead.
In its April Housing Insight Report, Propertymark reproduces the findings of a survey of 112 member branches, and notes that demand for homes still greatly exceeds supply. It notes that there are an average of 70 prospective buyers per branch but only 10 new properties typically coming up for sale. Although supply is improving, the mismatch between supply and demand is 35% larger than it was in April 2022, and this should continue to exert upward pressure on prices.
NATIONAL AND REGIONAL PATTERNS
According to ONS data, covering the 12 months to March 2023, the state-level pattern of annual price growth was as follows:
Northern Ireland +5.0% / £172,005 (down from 10% – reported quarterly)
Wales +4.8% / £214,174 (down from +6.4%)
England +4.1% / £304,193 (down from +6.2%)
Scotland +3.0% / £184,877 (up from +2.8%)
In order of annual growth-rate, ONS lists the English regions as follows:
South West +5.4% (down from +5.8%)
North West +5.2% (down from +7.0%)
East Midlands +4.9% (down from +7.4%)
South East +4.6% (down from +5.8%)
Yorkshire & Humber +4.1% (down from +5.5%)
North East +4.0% (down from +7.6%)
East of England +3.9% (down from +5.6%)
West Midlands +3.4% (down from +8.6%)
London +1.5% (down from +2.9%)
Zoopla lists the top regions for capital growth as follows:
Wales +4.8% April +3.6% May
West Midlands +4.3% April +3.5% May
North West +4.0% April +2.7% May
Yorkshire & Humber +3.9% April +3.0% May
East Midlands +3.9% April +2.5% May
As of the end of May, its top cities included Nottingham (+3.9%), Birmingham (+3.8%), Manchester (+3.6%) Leeds (+3.4%), and Sheffield (+3.4%).
Halifax reported price growth in Northern Ireland (+2.7%, £186,846), Scotland (+2.2%, £201,489) and Wales (+1.0%, £216,559), but found that the southern regions of England had dragged down the national average. It writes:
“There’s an increasingly mixed picture emerging for house prices across the UK. The four regions of southern England have seen average house prices fall over the last year, with the South East registering the largest dip (-0.6%) … Elsewhere all other regions and nations across the UK saw the rate of annual property price inflation remain in positive territory during April. The West Midlands posted the strongest annual growth of +3.1%.”
The Home.co.uk Asking Price Index reports that “rising asking prices across all English regions, Scotland and Wales indicate a renewed level of confidence among vendors and a further bold step along the road to recovery.” The platform notes that the highest rates of annual price growth occurred in:
Scotland +5.5% (down from +6.8%)
North East +4.1% (down from +4.4%)
Yorkshire & Humber +3.3% (down from +3.8%)
North West +2.9% (down from +3.8%)
The worst performer was Greater London, which saw values drop by -3.0% year-on-year. (Last month, it was -2.6%).
Rightmove’s leading regions for annual capital growth included:
Scotland +4.9% (up from +3.3%)
Yorkshire & Humber +3.9% (unchanged)
North West +2.6% (down from +3.5%)
West Midlands +2.2% (down from +3.5%)
According to Rightmove, all regions saw month-on-month price gains – the strongest being in London (+2.8%), followed by the North East and South East, which both saw average increases of +2.3%.
HOUSE PRICE FORECASTS
Rightmove has not yet published a revised forecast although, in its latest house price index, it does concede that downbeat predictions made earlier in the year and in the aftermath of the September mini-budget are now looking increasingly unlikely. Like others, it will probably upgrade its forecasts within the next few months, although it is careful to point out that there could be more “twists and turns” to come.
Rental Data
Goodlord’s April Rental Index shows a promising uptick in values. Last month, it quoted a year-on-year growth rate of +8.0% but it has now revised that to +8.98%. It writes:
“The average cost of rent across England this month was £1,103 – a +1.16% increase on March’s average… After a steady start to the year - with barely any significant change at all between February-March - we’re seeing movements in the rental sector. Rents continue to slowly and steadily rise, which is a pattern we would typically expect to see during this time of year as more contracts come up for renewal.”
Homelet’s April Rental Index came out at the start of May and reported a UK-wide average annual growth rate of +9.9%. That is very slightly up on the +9.8% it reported the previous month and on a par with its figure for February. The average rent in the UK has risen +1.3% since March to £1,199 PCM. In short, it shows a very stable rate of growth, which now comfortably exceeding the CPI measure of inflation.
On a monthly basis, average rents in the UK have risen +1.3% since March, to £1,199 per calendar month. Rents in every region in the UK have risen both monthly and annually and, in London, rents have risen by +2.1% month-on-month, and by +11% year-on-year.
Commenting on the latest figures, Andy Halstead, HomeLet and Let Alliance CEO, said:
“Rental prices continue to rise across the board, with every region showcasing a monthly and annual rise. The situation we’re hearing about daily is one where tenants struggle to find available rental properties. Offers for rental properties are often rising above the asking price, with many landlords receiving multiple offers for their properties… The quantity of rental properties on the market is showing no signs of a sudden rise, so prices are likely to continue to rise, with prospective tenants left with a battle on their hands to secure a suitable property.”
The May Asking Price Index from Home.co.uk mentions rents only briefly but suggests that they are rising strongly. It notes that “rents across the UK continue to rise (+12.4% annualised) … Supply remains very tight in the lettings sector.”
In its April Residential Market Survey, RICS expresses a similar view, noting that “national tenant demand increased in the three months to April according to a net balance of +40% of respondents… With demand continuing to outstrip supply, rental prices are expected to be driven higher over the near-term, with the latest net balance coming in at +56%.”
In its April Housing Insight Report, Propertymark notes that the gap between supply and demand is especially pronounced in the lettings market. It states that its average member branch now has 118 new prospective tenants competing for just 9 rental properties.
REGIONAL VARIATIONS IN RENTS
Homelet’s April Rental Index includes a breakdown of price growth by region. Its top five locations for rental growth include.
Scotland +12.1% (up from +10.4% in March)
Greater London +11.0% (down from +11.8%)
Northern Ireland +10.8% (up from +10.7%)
Wales +10.5% (down from +11.0%)
South East +9.7% (up from +9.0%)
Month-on-month, the strongest gains were seen in Scotland (+2.1%) and the South East (+2.1%). Those figures compare to a national monthly average of +1.3%.
Goodlord’s regional analysis shows a very similar pattern to last month, with London again seeing the highest rates of annual rental growth.
Greater London +9.9%
North East +9.4%
South East +8.2%
West Midlands +8.0%
East Midlands (no data)
North West +7.1%
South West +6.7%
Goodlord reports that the strongest monthly gains were seen in the East Midlands, London and the North East, where average rents rose by +3.51%. +2.28% and +2.27% respectively.
INFLATION & THE BASE RATE
On 11th May, the Bank of England’s Monetary Policy Committee opted to raise the base rate of lending by +0.25 percentage points to a 15-year high of 4.5%. Its decision reflects a continuing resolve to get inflation under control, and its belief that the UK economy is strong enough to withstand the effects of higher interest rates for a time.
In the immediate term, this will mean a further hike in the cost of new and variable rate mortgages, but the MPC’s accompanying summary included welcome news for investors, stating that:
“CPI inflation is expected to fall sharply from April, in part as large rises in the price level one year ago drop out of the annual comparison. In addition, the extension in the Spring Budget of the Energy Price Guarantee and declines in wholesale energy prices will both lower the contribution from household energy bills to CPI inflation.”
On 24th May, the ONS released its latest (April) inflation figures, and they showed that the Consumer Prices Index – the most widely recognised measure of inflation – had indeed begin to decline. It reported that the CPI rate had fallen from 10.1% in March to 8.7% in April, partly as a result of falling fuel and energy prices. In its accompanying release, it points to a distinct slowing in price-growth, noting that on a monthly basis, the CPI rate “rose by 1.2% in April 2023, compared with a rise of 2.5% in April 2022.”
This is clearly good news and it should give the Bank of England greater confidence in its recent forecast that inflation will drop to 5.1% later this year and then hit its 2% target in the medium term. Thereafter, it expects CPI to fall well below 2% over the following years. In its May summary, it wrote:
“In the MPC’s latest modal projection conditioned on market interest rates, CPI inflation declines to a little above 1% at the two and three-year horizons, materially below the 2% target.”
For comparison, it is worth noting that the Office for Budget Responsibility (OBR) predicts that inflation will fall even more quickly. It is forecasting a rate of 2.9% by the end of 2023.
Both forecasts provide good grounds for believing that the Bank will seek to reduce the base rate of lending relatively quickly. It will already be very conscious that higher borrowing costs tend to stifle economic regrowth, so when such measures are no longer needed to control inflation, it’s unlikely to want to keep them unnecessarily high. In other words, interest rates might be close to reaching their peak, and lower borrowing costs can be expected in 2024 and beyond.
UK lenders certainly seem convinced that conditions will gradually improve and, consequently, despite successive rises in the Bank Rate, interest rates on their longer-term fixed-rate products have already begun come down. As Rightmove wrote in its latest house price index on 22 May, “the
average rate for a five-year fixed, 15% deposit mortgage is now 4.56%, down from 5.89% in October.” In some respects at least, competition between lenders seems to be having a stronger influence than the Bank of England’s rate-setting policy.
Summary
We said last month that “resilience and stability” seemed to be the main themes to emerge from recent reports, and that appears to have held true in May, too. Prices are continuing to moderate, according to most indices, but they’re moving only slowly, back towards seasonal norms; not towards the big crash that some had forecast last autumn.
We’re also seeing some encouraging signs of recovery: an above-average monthly upturn in capital values, and rental price growth that remains extremely strong. If we take an average of all the recent monthly and quarterly rental indices, it appears that values are now rising significantly faster than the CPI rate of inflation (currently 8.7%). Moreover, if inflation continues to fall in line with forecasts, the collective real-terms returns from residential property investment should grow steadily better.
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