The data so far this year shows that buyers and sellers are making plans, moving their chess pieces so to speak, in place for the rest of the year. And while those numbers show a strong seasonal rebound thanks to some pent up demand and the very welcome return of sub 5% mortgages, it’s worth noting that this upswing is relative to the past year’s struggles.
Richard Donnell, Zoopla’s Executive Director of research said in a recent property report that “It’s a positive start but this is a rebound off a low base. Sub-5% mortgage rates are encouraging but buyers remain price sensitive and focused on value for money. There is upside for sales volumes but prices still need to adjust to allow for reduced buying power.”
Across the UK, buyer demand is 12% higher than a year ago but remains 13% below the five-year average, which includes 2021 and 2022, which were dominated and heavily affected by the pandemic. But the data does reflect a return of pent-up demand following a weak second half of 2023, when many buyers delayed moving decisions in the face of rising mortgage rates.
However, the year started better with UK house prices showing their first monthly increase in January of 0.7% followed by (data fresh off the press at time of writing) for February showing the same increase, according to the Nationwide House Price Index. They are now around 3% below the all-time highs recorded in the summer of 2022. Whilst the average property price in the UK is now sitting at £260,420. While still down 0.2% compared to last year, this represents an improvement over the 1.8% decline seen at the end of last year. Experts attribute this positive shift to lower mortgage rates and expectations of further interest rate cuts.
"Buyer demand across the UK is 12% higher than a year ago, indicating a positive trend in market activity."
But Nationwide’s Chief Economist, Robert Gardner, warns against expecting a rapid market rebound, but is still cautiously optimistic. He cites signs of stabilising buyer demand and an increasing number of properties being listed for sale. However, he emphasises the importance of future mortgage rate trends.
Gardner highlights affordability as a key factor impacting the market. Currently, mortgage payments for typical first-time buyers are higher than average due to rising rates. This could improve if mortgage rates drop to 4%.
Clearly it seems seller expectations in general have waned since the negative news around mortgage rates last year reducing the burgeoning gap between buyers and sellers ideas on price. Though despite all this, many sellers themselves moving up the ladder, looking to borrow more than before, are of course in a similar situation. This deadlock in the market has started to thaw as both buyers and sellers get their heads around affordability, and the market becomes just a little more flexible. This process usually takes time and something many are hoping we can see the end of, leading to the market moving again.
A recent report from Savills points to a positive market for Prime Central London (PCL), driven largely by ultra high net worth individuals who still desire the luxury and status of central London living, while acknowledging the investment value of these purchases.
Average UK house prices are predicted to fall 3% in 2024, but Prime London prices are to hold steady. And by 2028, Prime London prices are expected to surge by 18.7%, compared to 17.9% for the rest of the UK. Again, this growth can be linked to cash-rich buyers fueling demand, with only 23% needing mortgages in Prime London. This despite many potential buyers considering letting over buying to save the punishing additional 2% surcharge on Stamp Duty Land Tax (SDLT) for overseas buyers.
To put that into perspective SDLT on a £5m home for an overseas buyer is £611,250.
That’s about 3-5 years worth of rent for the same property. Many consider this a better option allowing more flexibility in their lifestyle and capital.
It will be interesting to see how the upcoming election manifestos will impact this market especially considering the recent press around non-domiciled individulas. For example we are already seeing an influx of properties for sale in the upper housing market £2m+ in Fulham, creating a sort of mini bubble market at the top. Fulham is often referred to as a barometer for the London market as a whole, and agreed sales are also picking up, watch this space.
Meanwhile other trends in the Prime Central London market include a desire for properties with green credentials (this is something that is coming up more regularly when talking to buyers) like energy efficiency and access to green spaces which are attracting growing interest, potentially boosting their value to comparable properties.
While it’s better news in the centre of town, there’s also less doom and gloom in the rest of the capital and beyond as we continue to make our way through 2024. The Evening Standard recently ran with the headline ‘property in the capital is at its most affordable since 2014’ and the data from Zoopla’s report supports this, stating that low house price inflation since 2016 and rising earnings means housing affordability in London, measured on a house price to earnings ratio basis, is at its lowest since 2014. More approvals mean more movement.
Robert Gardener, Nationwide’s Chief Economist said in the Building Societies latest property index, “UK house prices rose by 0.7%, after taking account of seasonal effects. This resulted in an improvement in the annual rate of house price growth from -1.8% in December to -0.2% in January, the strongest outturn since January 2023.” This is positively compounded by the latest data from the same source in February suggesting further growth of 1.2% continuing the trend.
Gardner also had cautiously positive words about how decreasing mortgage rates will inject further activity in the market, including, crucially, more stock.
“While a rapid rebound in activity or house prices in 2024 appears unlikely, the outlook is looking a little more positive.
The most recent RICS survey suggests the decline in new buyer enquiries has halted, while there are tentative signs of a pickup in the number of properties coming onto the market. How mortgage rates evolve will be crucial, as affordability pressures were the key factor holding back housing market activity in 2023. Indeed, at the end of 2023, a borrower earning the average UK income and buying a typical first-time buyer property with a 20% deposit had a monthly mortgage payment equivalent to 38% of take-home pay – well above the long run average of 30%. If average mortgage rates were to trend down to 4%, this would ease the mortgage payments burden to 34% of take-home pay (assuming house prices and earnings are unchanged).
However, other things equal, mortgage rates of 3% (still well above the lows previously seen) would be needed to bring this measure of affordability back towards its long run average.” Something many agree may not happen for a while, if at all.
The push and pull of earnings versus house prices is perhaps unsurprisingly most acute in the first time buyers market, with Nationwide reporting that:
...a 20% deposit on a typical first-time buyer home equates to c.105% of average annual gross income – down from the all-time high of 116% recorded in 2022, but still close to the pre-financial crisis level of 108%.
Which has resulted in half of first-time buyers needing financial help from friends and family, or using inheritance to help step onto the ladder, up 27% since the mid-1990s. House prices in London boroughs have seen a general decrease, with all boroughs except Barking and Dagenham experiencing reductions. Wandsworth saw the biggest decline, with prices falling 3.5% to £661,400.
Meanwhile, in the green and pleasant lands surrounding the capital, the pandemic demand that saw many families leave the capital in search of more space hasn’t slowed (despite some highly publicised reports of people moving out of London and then returning), but there are signs of it evolving. Many workplaces have shifted from fully remote to hybrid models, meaning a few days in the office. So pricey commuter towns are very much back on the table, whereas previously the option to move to a less connected location was an option for many.
Of course since the pandemic there has been more pressure to return to work, though this hasn’t impacted those at higher pay brackets as much, those who are likely older with a family who see the benefit of ‘moving out’ even more desirable.
One interesting trend is increased interest in commutable and non-commutable coastal towns. Parts of Kent, Essex and Suffolk are seeing some of the biggest house price falls in the country, with Canterbury seeing and annual house price change of -4.1%, Colchester -3.8% and Waveney -3.6% for example.
Meanwhile, in the rental market, it’s a more difficult story. The latest HomeLet Rental Index found that the UK rental market continues to be tricky. The latest figures reveal a decline in rental prices, dropping by 0.6% nationally. This follows a similar decrease of 0.9% in December 2023, marking the steepest two-month decline since October 2020.
London isn’t spared from this trend, experiencing a drop of 2.2% in rental prices.
This represents the sharpest month-on-month decline in the London market since October 2020. The average rent in London is now £2,081, and the annual rate of growth is far slower than the double-digit rates of growth seen over much of 2022 and 2023.
Andy Halstead, CEO of HomeLet & Let Alliance, says of the report’s finding, “landlords and tenants are still under immense pressure amid tough economic conditions, and short-term gains do not reflect the long-term struggles faced by the housing industry.” Supply remains challenging for renters, while many landlords or potential landlords will be closely monitoring buy-to-let mortgage costs as they make decisions about whether to stay in the market or exit.
Increasingly the private rental sector has become less and less appealing to landlords, who despite benefitting from recent increases in rents, see less value in holding a portfolio of property returning low single digit returns of 4% on average in London. Especially as house prices flat line. Compare this to easy returns on, for example, the S&P 500 index which has seen an annualised average return of 10.26% a year since its inception in 1957. It’s likely that we will see more landlords exit the market buoying rental prices, and subsequently impacting first time buyers.
So all in all, a mixed bag. But there are plenty of slowly emerging green shoots and possibilities for the market further into 2024. After a three-year price surge ending in 2022, rising mortgage rates put the brakes on what buyers can afford, leading to a modest decline in 2023 house prices. Faced with higher borrowing costs, buyers have certainly become more picky on finding the ‘perfect’ property.
However, some economists predict interest rate cuts around mid-2024, potentially lowering borrowing costs and reigniting market activity as the year closes. Of course the looming election could put a spanner in the works. But as affordability constraints persist, 2024 shows signs of cautious improvement and whilst the giant may be stirring, we don’t expect it to go on the rampage anytime soon.
For expert advice on your local market dynamics please contact one of our Moveli brokers who on average have over 16 years experience.
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