SEPTEMBER 2023, PROPERTY MARKET REVIEW
Welcome to our latest monthly review, which looks back on September, its key developments and some of the most noteworthy reports concerning the residential property sector.
Perhaps the most notable events of the last month were the greater-than-expected fall in the rate of inflation and the subsequent decision by the Bank of England to keep the base rate of lending unchanged at 5.25%. This ended a series of 14 successive rises. It’s important because high mortgage rates have been the principal reason for enduring affordability concerns amongst would-be buyers and for the related slowdown in market activity.
Given the prospect of slowing inflation, banks can now finance their longer-term lending at cheaper rates and, in a competitive market, they have been passing on better interest rates to borrowers. The more confident the markets are feeling that inflation will continue to fall, the faster mortgage rates are likely to come down. And when that happens, we can expect a resumption of sales activity and, in time, a return to meaningful capital growth.
The big question there, of course, is ‘when?’ We can’t know for certain but there are strong indicators of returning stability and improving market sentiment, all of which bode well for longer-term capital appreciation. But in the meantime, with rental growth averaging over +10% per annum, well ahead of the rate of inflation, investors can still earn a respectable return, even at a time of slow capital growth.
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 - 4.6% (down from - 2.4% in August)
Nationwide - 5.3% (down from - 3.8% in August)
ONS + 0.6% (July, down from + 1.9% in June)
Rightmove - 0.4% (September, down from - 0.1% in August)
Zoopla - 0.5% (down from + 0.1% in August)
The August House Price Index from Halifax reports a year-on-year change of - 4.6%. It writes: “it’s fair to say that house prices have proven more resilient than expected so far this year, despite higher interest rates weighing on buyer demand.”
In the accompanying notes, it adds that lower market activity is likely the result of many prospective buyers deferring transactions in the hope of seeing greater stability and lower mortgage rates in the coming months. It reports that rates are falling and prices are at “the most affordable level since June 2020”. As affordability continues to improve, so sales activity is likely to return towards more usual levels.
Nationwide’s August House Price Index reports a - 5.3% annual fall in average values, but the agency notes that:
“While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time, especially if mortgage rates moderate once Bank Rate peaks.”
Nationwide, which bases its figures only on mix-adjusted lending data, has consistently reported the poorest rates of house price growth amongst the five major indices. However, as mortgage rates continue to moderate over the coming months, its figures should start to fall more in line with those from other sources.
On 13 September, Home.co.uk published its September Asking Price Index, which reports no change on last month’s year-on-year average of - 1.8%. It notes that despite the pressures imposed by higher mortgage costs, the market shows continuing signs of stability.
“Supply and demand are rebalancing in an orderly manner, with little or no panic-selling and no buyers’ strike... The market retains sufficient momentum to indicate that the Typical Time on Market for England and Wales is significantly shorter than in either 2018 or 2019.”
On 20 September, ONS published its July House Price Index, which reports that average values rose by + 0.6% year-on-year, and by + 0.7% over the course of the month. It states that “the average UK house price was £290,000 in July 2023, which is £2,000 higher than 12 months ago.”
Rightmove published its September House Price Index on 18 September. It noted that average values had slipped fractionally, by - 0.4% year-on-year, but that performance varied considerably by region. More generally, it stated:
“We’ve now seen seven consecutive weeks of falling mortgage rates… With house prices and mortgage rates falling, and average earnings increasing, we are continuing to take small steps towards improved buyer affordability.”
Zoopla published its latest House Price Index at the end of September. It suggested that prices had fallen by - 0.5 year-on-year, a figure not far removed from Rightmove’s own calculation. However, Zoopla also pointed to stark regional variations.
In its August Housing Insight Report, Propertymark notes that high interest rates have created demanding market conditions but that the UK is “reaching the peak of that curve (and) potentially starting to see very early signs of forward motion again. The average number of new prospective buyers registered per member branch is up to an average of 81 in August 2023 from 64 in July 2023.” That positive momentum is evident in the following results from its survey, which reflect average changes per member branch.
29% monthly increase in the number of new properties for sale
45 properties available in August, up from 38 in July
9% monthly increase in the number of sales agreed
81 registered buyers in August, up from 64 in July
13 new homes placed for sale in August, up from 10 in July
25 market appraisals in August, up from 21 in July
NATIONAL AND REGIONAL PATTERNS
According to ONS data, covering the 12 months to July 2023, the state-level pattern of annual price growth was as follows:
England + 0.6% / £309,000 (down from + 1.9%)
Scotland + 0.1% / £192,000 (up from 0.0%)
Wales - 0.1% / £216,000 (down from + 0.6%)
Northern Ireland + 2.7% / 174,000 (Q2 2023 figures)
In order of annual growth-rate, ONS lists the English regions as follows:
North East + 2.7% (down from + 4.7%)
Yorkshire & Humber + 2.5% (down from + 2.7%)
East Midlands + 1.9% (down from + 2.4%)
North West + 1.0% (down from + 3.5%)
West Midlands + 0.4% (down from + 3.2%)
South East + 0.4% (down from + 1.3%)
East of England + 0.2% (down from + 1.1%)
London - 0.8% (down from - 0.6%)
South West - 1.0% (down from + 0.5%)
The Home.co.uk Asking Price Index reports that the highest rates of annual price growth occurred in:
Scotland + 5.7% (down from + 5.9%)
Yorkshire & Humber + 1.3% (down from + 1.5%)
North West + 1.2% (down from + 1.9%)
Wales + 0.6% (up from + 0.0%)
According to Home’s data, the worst performers were Greater London (- 3.3%) and the East of England, which saw values drop by - 3.4% year-on-year. The company says that “a persistent north-south divide in home price growth remains apparent,” and adds that:
“Prices did not fall in all regions last month. The North East and Yorkshire both posted modest rises while Scotland added a whopping + 1.4% to the mix-adjusted average. The northern regions, Wales and Scotland all continue to show the best price performance and elevated momentum.”
Rightmove’s leading regions for annual capital growth included:
Scotland + 2.6% (down from 4.6% in August)
Yorkshire & Humber + 1.8% (up from + 1.2%)
North East + 0.6% (down from + 2.6%)
North West + 0.3% (down from + 1.0%)
Halifax does not offer comprehensive regional data but it continues to report clear regional disparities. It finds that “northern locations are generally proving to be more resilient than areas in the south. Buyers faced with the need to find larger deposits and fund bigger monthly repayments means the South East is experiencing the biggest drop.”
Zoopla notes that while average values have fallen by - 0.5% across the UK, “house price falls are concentrated in southern England where higher mortgage rates have had a bigger impact on pricing.” It lists the top regions for capital growth as follows:
Scotland + 1.6% (down from + 1.7%)
Yorkshire & Humber + 0.5% (down from + 0.9%)
West Midlands + 0.4% (down from + 0.8%)
North East + 0.3% (down from + 0.6%)
North West + 0.2% (down from + 1.2%)
As of the end of September, Zoopla’s top cities for growth included Edinburgh (+ 1.7%), Glasgow (+ 0.7%), Newcastle (+ 0.6%), Birmingham (+ 0.6%), Nottingham (+ 0.5%), and Leeds (+ 0.4%).
Manchester and Liverpool also saw annual gains, both averaging + 0.3%.
HOUSE PRICE FORECAST
In its August House Price Index, Halifax writes that:
“The market will continue to rebalance until it finds an equilibrium where buyers are comfortable with mortgage costs in a higher range than seen over the previous 15 years. We do expect further downward pressure on property prices through to the end of this year and into next, in line with previous forecasts.”
In its September house price index, Rightmove reports that it is sticking by its long-standing prediction of a - 2% fall by year-end.
Zoopla had previously forecast an annual fall of -5% but it has since revised that to an estimate of between - 2% and - 3% by year-end.
Rental Data
The latest figures in Goodlord’s August Rental Index show that returns continue to look very favourable for investors. Despite a small monthly dip, average rents have risen by + 10% year-on-year and void periods are at near-record lows. The platform notes:
“Despite not beating July’s Index setting record of £1,367, August 2023 prices are up 10% compared to the same time last year. Average rental costs are also 15% higher than the 2023 year-to-date average. Prices across the summer are typically driven up by an influx of student lets. This year, this has combined with historic pressures on the rental market; driving up prices to record-breaking highs… September often brings with it the annual peak in prices, so it’s likely that we’ll see another month of high rents and short voids before any seasonal shift in pace kicks in.”
Homelet’s August Rental Index reports that values continue to rise at well above the rate of inflation. It states that in August, they rose by + 10.3% year-on-year, the same rate as it quoted for July. This took the UK average rent to £1,261 per calendar month. On a monthly basis, values rose by + 1.4%, which is faster than July’s figure of + 1.1%, and every UK region saw gains.
The September Asking Price Index from Home.co.uk reports an even higher rate of rental growth. It states: “Rents across the UK continue to rise overall (+ 11.0% annualised).”
Zoopla’s September Rental Market Report indicates that “rents for new lets are up + 10.5% over the year,” and that “rental inflation has been in double digits for 18 months.” It ascribes this growth to the gulf between high demand and low supply, writing:
“Demand for rented homes is slowing off a very high base but rental supply remains low, keeping an upward pressure on rents. Demand for rented homes is - 20% lower than a year ago but still + 51% above the 5-year average. The number of homes for rent is + 20% higher than a year ago but remains - 30% below average for this time of year.”
RENTAL SUPPLY & DEMAND
In its August Housing Insight Report, Propertymark reports that:
“Demand continues to out strip supply. The number of new prospective tenants registered per member branch showed a further climb. August 2023 had an average of 197 prospective tenants registering compared to 149 in July 2022. Figures in August 2023 were
up almost 32% year on year and demonstrate a trend that continues to spiral.
“(Meanwhile), the number of properties available to rent per member branch dipped in August to an average of 11 (from 14 last month). This number remains drastically below what is needed to keep up with current market demand.”
This imbalance means that, on average, there are 17 prospective tenants for every available rental property and, consequently, demand between tenants remains intense. This, in turn, is driving up rental values. Propertymark writes that “69% of responding agents reported rents increasing month-on-month.”
In the commentary to its August Residential Market Survey, RICS comments on the same phenomenon:
“In the lettings market, … tenant demand continues to rise firmly according to a net balance of + 47% of survey participants. What’s more, all UK regions/countries have seen a sustained uplift in the demand for rented accommodation in recent months. Set against this, new landlord instructions continue to fall – a net balance of - 20% in August. Given this enduring mismatch between demand and supply, a net balance of + 60% of contributors foresee rental prices being driven higher over the coming three months.”
REGIONAL VARIATIONS IN RENTS
Homelet’s August Rental Index lists the top five locations for annual rental growth as follows.
Scotland + 14.4% (down from 15.8% in July)
Greater London + 13.0% (up from + 12.9%)
West Midlands + 10.9% (down from + 11.0%)
North East + 10.1% (up from + 9.8%)
North West + 9.7% (unchanged)
Month-on-month, the strongest gains were seen in the North East (+ 3.0%), the East of England (+ 1.8%) and London (+ 1.7%). Those figures compare to a UK monthly average of + 1.4%.
Goodlord’s regional analysis lists the following regions as England’s strongest markets for annual rental growth.
London + 11.5%
West Midlands + 11.3%
East Midlands + 11.0%
South West + 10.6%
Zoopla’s UK Rental Market Report lists the regional frontrunners as:
Scotland + 12.7%
London + 12.4%
North West + 11.0%
West Midlands + 10.0%
At the city level, Zoopla suggests that the strongest performers over the last 12 months have been:
Edinburgh + 15.6%
Glasgow + 13.7%
Manchester + 13.1%
Newcastle + 10.8%
Cardiff + 10.7%
Looking ahead, Zoopla writes:
“Rental growth is on track to end the year at over + 9%, higher than earnings growth, which is expected to be + 6.3%. Rental growth is higher than we anticipated due to faster earnings growth and the impact of higher mortgage rates keeping more people renting.”
PRIME CENTRAL LONDON
As many of the foregoing reports and indices show, the Prime Central London (PCL) market has been performing extremely well this year – in terms of rental growth at least. The outward migration of tenants and homeowners during the Covid pandemic now seems to have gone firmly into reverse, and demand for property in and around the capital has risen dramatically.
In its September house price index, Zoopla writes that “demand has improved … noticeably in southern England, where enquiries for homes have been weakest in 2023. Demand is up + 19% in the South East over the last 3 weeks and + 16% higher in London.”
We’ll publish a more detailed analysis of the Prime Central London market in our Q3 Quarterly Market Report but below is a summary of some key statistics published by Rightmove and LonRes.com.
Rental growth (year-on-year) + 13.9% (PCL)
Rental growth (year-on-year) + 12.8% (Greater London)
Rental growth this quarter + 6.6%
Rental growth over 5 years + 31%
Ratio of tenants to available properties 23:1
Yields (average for PCL) 3.53%
Yields (average for PCL fringe) 4.73%
Price growth (highest, year-on-year) + 1.8% (Camden)
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.
The ONS figures for August then showed another fall, albeit only small, taking the year-on-year figure to 6.7%. Nevertheless, this was another encouraging result, particularly given that fuel prices had risen over the course of the month. It suggested that core inflation was still falling steadily – a good sign that will boost confidence amongst mortgage-lenders, who have been reducing their fixed-term rates for many weeks now in the expectation of lower inflation and a lower base rate of lending.
In an article for Property Reporter magazine, a spokesperson for The Guild of Property Professionals said:
“Despite gloomy predictions, house price growth is still positive, and good news on inflation means that the market can be optimistic about the autumn… Continuing buyer demand is helping hold up the market and keeping property prices buoyant in the face of challenging conditions. (The latest) inflation figures will add to downward pressure on mortgage rates, offering a welcome respite to first-time buyers and those nearing the end of fixed deals. Autumn is typically a busy season for estate agents, and there are a few glimmers of hope that the end of the year will see the market turn.”
On 21 September, the Bank of England’s Monetary Policy Committee (MPC) held its latest meeting to discuss the official Bank Rate. Its members voted to keep the base rate unchanged at 5.25%, thereby ending a sequence of 14 consecutive rate-rises.
This prompted many commentators to speculate that the official rate of lending might now have peaked, though the Bank itself has warned that “there is no room for complacency. We need to be sure inflation returns to normal and we continue to take the decisions necessary to do just that.” The vote was passed by a narrow margin (5 for and 4 against), so the MPC obviously hasn’t yet reached a firm consensus. Nevertheless, investors will still be feeling reassured that the future is looking brighter. That’s certainly the verdict of the major lenders and so more mortgage rate cuts can be expected in the coming months.
SUMMARY
Average house prices have not fallen as sharply as many economists predicted in the early part of the year and, in some regions, prices have continued to rise.
The UK’s more affordable regions have tended to show the strongest capital growth.
Affordability pressures are easing. Average earnings have been rising faster than both the rate of inflation and the average rate of house price growth.
Moreover, lenders have been introducing increasingly competitive rates on fixed rate deals. With inflation looking set on a downward course, further mortgage rate reductions appear likely.
As affordability improves, so sales activity should increase and a gradual upturn in prices is likely to follow.
Rental returns have been strong in almost all parts of the UK, rising at well above the rate of inflation.
The UK’s more affordable markets are continuing to produce the strongest yields.
In most northern regions, average yields have been exceeding the rate of inflation. Here, the real-terms returns from property have been improving in terms of both yield and monthly rental incomes.
As we saw last quarter, demand for property to buy or rent remains well ahead of supply. This imbalance should continue to exert upward pressure on average values.
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