APRIL 2023, PROPERTY MARKET REVIEW
Our latest monthly review looks back on April, 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 +1.6% (down from 2.1% in February)
• Nationwide -3.1% (down from -1.1% in February)
• ONS +5.5% (February, down from +6.3% in January)
• Rightmove +1.7% (down from +3.0% in March)
• Zoopla +4.1% (February, down from +5.3% in January)
Nationwide’s March House Price Index reported the seventh consecutive monthly decline in values, which took the year-on-year growth rate to -3.1%. In recent months Nationwide’s figures have been consistently lower than those published by other major sources and its newest dataset shows a continuation of that trend. The company wrote that this latest dip represents “the largest annual decline since July 2009,” and a fall of -0.8% month-on-month. It ascribes the change to poor consumer confidence, high inflation, the general affordability of housing and higher mortgage rates.
Commenting on the figures, Robert Gardner, Nationwide's Chief Economist said:
“The housing market reached a turning point last year as a result of the financial market turbulence which followed the mini-Budget. Since then, activity has remained subdued – the number of mortgages approved for house purchase remained weak at 43,500 cases in February, almost 40% below the level prevailing a year ago.”
However, as we’ll discuss later on, Nationwide also reports considerable variation in growth rates between the various regions.
Zoopla published its February House Price Index on 5 April. It reported year-on-year capital growth rate of +4.1%, but also noted that “market conditions at the end of Q1 are better than many had expected - buyers and sellers are striking deals at an increasing rate.” Like others, it has interpreted recent changes as evidence of “a soft repricing,” and said that with +65% more homes on sales than this time last year, transaction rates are very likely to pick up. It wrote: “we expect 500,000 sales completions in H1 2023, meaning we are on track for 1m sales, potentially even higher in 2023.”
The Halifax House Price Index came out came out on 6th April. Its year-on-year growth figure of +1.6% was down slightly from February’s +2.1%, but it found that on a monthly basis, values had risen by +0.8%. That followed another monthly gain last month. It stated that a “typical UK property now costs £287,880 (compared to £285,660 in February)” – an average monthly gain of £2,220.
Kim Kinnaird, director of Halifax Mortgages, said:
“The UK housing market continues to show resilience following the sharp downturn at the end of 2022, with average property prices rising again in March (+0.8%). The typical house price is now £287,880, around -2% below the peak reached last August…
“However, overall these latest figures continue to suggest relative stability in the housing market at the start of 2023 and align with many other recent industry surveys and data. This has been characterised by a partial recovery in activity and transactions, especially when compared to the significant drops seen at the end of last year, with latest Bank of England data showing mortgage approvals rising for the first time in six months. The principal factor behind this improved picture has been an easing of mortgage rates.”
Rightmove published its latest House Price Index in the week commencing 24 April. It finds that average values rose by +1.7% year-on-year, and by +0.2% over the course of the month, which is less than the seasonal average, but sees properties aimed at first-time-buyers hit a new record price of £224,963. Like many others, the company interprets the movements as signs of a gradual return to longer-term market patterns. Tim Bannister, Rightmove’s Director of Property Science, said:
“This unseasonal pricing restraint is a sign that many new sellers are taking note of the economic headwinds and the transitioning of the housing market to a slower pace and more normal activity levels… Whilst it’s been a rollercoaster journey so far, and there will no doubt be more twists and turns to come, the number of sales agreed is now on a par with the same period in 2019. Agreed sales volumes are now just -1% behind March 2019 with the strength of the improvement since the start of the year defying the expectations of many.”
On 19 April, ONS published its February House Price Index, which put the annual rate of price growth at +5.5%. This was down by -0.3% on a monthly basis and represents the third consecutive monthly fall in values. However, the declines have been very small and, in absolute terms, average values are now +£16,000 more than at the same time last year. According to ONS, the average UK house price now stands at £288,000.
The April Asking Price Index from Home.co.uk carries the headline “Firmly on the road to recovery.” It reports that asking prices across England and Wales rose for a second consecutive month in March, albeit only by a modest +0.2%. Its year-on-year figure is still very slightly negative (-0.3%) but it detects numerous positive signs. Asking prices were elevated last month in all regions except Greater London and the typical time-on-market plummeted by 18 days. Housing supply is still low compared to the 10-year mean (388,482 properties, compared against an average of 420,297) so taken together with high demand, all the ingredients are in place for a gradual return to stronger growth. The accompanying notes state:
“All the vital signs of the UK property market confirm a return to strength. The combination of cautiously rising prices, dramatically lower marketing times and a restrained supply of properties for sale confirms that the market has adapted to a rise in mortgage interest rates and buyer confidence has returned. Consequently, nominal price falls appear highly unlikely in the near term, contrary to the recent gloomy predictions in the property media.”
RICS published its March 2023 Residential Market Survey on 13 April. It notes that although the numbers of buyer enquiries, agreed sales, new instructions and average values have all declined this month, “twelve-month sales expectations point to a more stable trend emerging… (and) the negativity in near-term sales expectations has diminished to some degree in each of the past three reports.” It adds:
“Going forward, near-term price expectations remain downbeat, returning a net balance reading of -49% compared to -53% last month… Interestingly, twelve-month price expectations are now broadly flat in London, while contributors based in Northern Ireland, Scotland and Wales envisage a rise in house prices over this timeframe.”
Simon Rubinsohn, RICS Chief Economist, commented:
“The overall tone of the feedback received from respondents to the latest RICS Residential Market Survey is still one of caution towards the sales market... Significantly, there is a sense that the medium-term outlook is looking a little more settled, helped by the perception that the interest rate cycle may be near the peak.”
The latest indices seem to show what many had predicted: that the UK is returning gradually to more usual market conditions after more than two years of frenetic growth. Commenting on recent figures, Nathan Emerson, CEO of Propertymark, said: “Our member agents are reporting transaction levels year-on-year to be stable and listings of new properties coming to the market also being steady.”
Iain McKenzie, CEO of The Guild of Property Professionals, said:
“Unlike the financial crisis, we haven’t seen an aggressive drop-off in transactions, so the slowdown in prices has hardly been the crash that was expected… Confidence is returning to the property market following the fallout of the mini-Budget last September and we should expect further improvements, so long as inflation is brought under control this year.”
In its March Housing Insight Report, Propertymark expresses a similar sentiment, noting that:
“The average number of new prospective buyers registered per member branch remained strong at 93 in March. Strong demand since the start of the year suggests buyers have not been put off looking for a new home by rising interest rates… The continued rise (in the number of appraisals) since December implies the nation is looking to get moving once again and is not deterred by current economic conditions.”
National and Regional Patterns
According to ONS data, covering the 12 months to February 2023, the state-level pattern of annual price growth was as follows:
• Northern Ireland +10.2% / £175,234 (unchanged – reported quarterly)
• Wales +6.4% / £216,871 (up from +5.8%)
• England +6.0% / £308,000 (down from +6.9%)
• Scotland +1.0% / £180,000 (unchanged)
In order of annual growth-rate, ONS lists the English regions as follows:
• West Midlands +8.6% (down from +9.9%)
• North East +7.6% (down from +10.0%)
• East Midlands +7.4% (down from +8.6%)
• North West +7.0% (down from +7.2%)
• South West +5.8% (down from +7.1%)
• South East +5.8% (down from +6.3%)
• East of England +5.6% (down from +6.8%)
• Yorkshire & Humber +5.5% (down from +6.5%)
• London +2.9% (down from +3.2%)
Nationwide’s figures have been consistently more downbeat. This month, they showed average negative annual growth in all states except Northern Ireland.
• Northern Ireland +1.3% (average price £173,393)
• Wales -0.7% (average price £200,173)
• England -0.7% (average price £295,801)
• Scotland -3.1% (average price £172,676)
At a more localised level, Nationwide finds that three English regions produced annual growth: the West Midlands (+1.4%), the South West (+0.5%) and the East Midlands (+0.5%). East Anglia saw the largest drop: -1.8% year-on-year.
However, Zoopla paints a more positive picture. It lists the top regions for capital growth as:
• Wales +5.9%
• North West +5.4%
• West Midlands +5.4%
• East Midlands +5.3%
Its top cities include Nottingham (+6.6%), Birmingham (+6.1%), Manchester (+5.8%) Leicester (+5.7%), and Cardiff (+5.5%).
Halifax noted simply that: “the average house price edged up in all the UK nations and regions during March. However, with the exceptions of Greater London and the North East, all areas of the country experienced a slowdown in the rate of annual house price inflation.”
The Home.co.uk Asking Price Index reports that the highest rates of annual price growth occurred in:
• Scotland +6.8% (up from +4.0%)
• North East +4.4% (up from +3.2%)
• Yorkshire & Humber +3.8% (unchanged)
• North West +3.8% (down from +4.1%)
It suggests that the worst performer was the South East, which saw values drop by -2.6% year-on-year. (Last month, its year-on-year figure was -2.7%).
Rightmove’s leading regions for annual capital growth included:
• Yorkshire & Humber +3.9% (down from +4.5%)
• North West +3.5% (down from +4.7%)
• West Midlands +3.5% (up from +3.3%)
• Scotland +3.3% (up from +2.3%)
According to Rightmove, all regions except the North East and London saw month-on-month price gains.
There is clearly a significant degree of variation between the various indices. That’s because they use different data and different criteria in their calculations, some are seasonally adjusted and they don’t all cover the same periods. It is therefore perhaps more useful to consider what they imply about general trends in the sector. Broadly, they indicate a modest monthly decline in values but enduring resilience in many regional markets.
Rental Data
Goodlord’s March Rental Index calculated the annual rate of rental growth at a respectable +8.0%, which was virtually unchanged from February. The platform reported that the month-on-month growth-rate of +0.14% took the average cost of a rental property in England to £1,090.57, which was the highest rate recorded since October 2022. Tom Mundy, COO at Goodlord, said:
“March was a remarkably steady month for the market, matching February prices and voids very closely. In the coming months, however, we predict rents to creep back up towards levels seen last summer. The void picture in major urban areas… offers another strong indication that demand remains high and shows no sign of abating."
Homelet’s March Rental Index came out a few days later and reported a UK-wide average annual growth rate of +9.8%, which was very similar to the +9.9% rate it had previously quoted for February. It adds that average rental values have risen by +0.8% since February to £1,184 per calendar month. Values rose in all regions on both an annual and monthly basis.
Commenting on the latest figures, Andy Halstead, HomeLet and Let Alliance CEO, said: "With every region of the country reporting a month-on-month rental price rise, it’s fair to say that demand for rental properties remains exceptionally high.”
In its March survey, RICS writes that:
“In the lettings market, the survey’s tenant demand growth indicator reached a five-month high, posting a net balance of +46%... Strong demand is being seen pretty much across the country. At the same time, the landlord instructions metric remains mired in negative territory, returning a net balance of -21% in March.
“In keeping with this demand/supply imbalance, respondents continue to anticipate rents being squeezed higher, with the net balance for near-term rent expectations rising to +59% from +45%. This is back towards the highs seen in the early part of last year. For the year ahead, contributors are pencilling in roughly 4% growth in rental prices at the national level. Moreover, all parts of the UK are expected to see an increase in rents during the coming twelve months.”
Rightmove’s Rental Tracker for Q1 2023 notes that the average annual rate of rental growth is +9.4%. It reports that national average asking rents outside London reached a new record of £1,190 per calendar month, adding that supply remains “very constrained,” albeit there are signs of slow improvement. Even so, the number of available properties to rent is still -46% below 2019’s level and competition between tenants is still more than double (+173%) the level it was back in 2019. It reports that tenant demand is +4% higher than this time last year, and +48% higher than 2019.
The March Housing Insight Report from Propertymark notes that:
“The issue of undersupply remains, with no movement seen in the number of properties available to rent. This translates to an average of 10 prospective tenants registering per available property… The number of new prospective tenants registering per member branch held at 106 in March. This figure is up from the December low of 64.
“58 per cent of responding agents reported rents increasing month-on-month on average at their branch in March. Pressure on rents appears to be on the rise again as wage increases restore some relative affordability.”
Regional Variations in Rents
Homelet’s March Rental Index includes a breakdown of price growth by region. Its top five locations for rental growth include.
• Greater London +11.8% (down from +12.4% in February)
• Wales +11.0% (up from +10.0%)
• Northern Ireland +10.7% (up from +9.5%)
• Scotland +10.4% (unchanged)
• North West +9.8% (down from +10.6%)
Month-on-month, the strongest gains were seen in the North East (+1.6%), the South East (+1.5%), Yorkshire & Humber (+1.3%), Scotland (+1.3%), and the East of England (+1.2%).
Goodlord’s regional analysis also shows high rates of rental growth in London. The following figures are rounded to one decimal place.
• Greater London +9.9%
• North East +9.4%
• South East +8.2%
• East Midlands +8.1%
• West Midlands +8.0%
• North West +7.0%
• South West +6.6%
Rightmove’s figures indicate that the strongest regions for annual rental growth were:
• London +14.0%
• Scotland +12.3%
• Wales +11.9%
• Yorkshire & Humber +10.8%
The company also reports on average yields by region, and lists the top performers as follows:
• North East 7.9%
• Scotland 7.8%
• Wales 6.9%
• North West 6.7%
• Yorkshire & Humber 6.7%
SpareRoom focuses on room rents rather than whole-property rents but its figures for Q1 2023 suggest that rental growth is outpacing inflation. Overall, it states that “UK room rents rose by +15% in the first quarter of 2023, compared to Q1 2022,” but they rose more in London (+20%), the North West (+16%) and the North East (+16%). Many individual cities produced even better growth-rates. Top performers included:
• Sunderland +27%
• Dundee +26%
• Middlesbrough +21%
• Warrington +21%
• Wolverhampton +21%
• Manchester +20%
The latest Buy-to-Let Rental Barometer from Fleet Mortgages considers yields rather than rental growth and declares that:
“Residential rental yields across England & Wales reached record levels of 6.5% in Q1 2023 (and) gross rental income in excess of £1,000 per calendar month are now being achieved in 7 out of 10 regions… Across England and Wales the Barometer shows both an annual and quarterly increase in rental yields, up from 6% a year ago, and 6.4% in the last quarter of 2022 to 6.5% now. This is the highest on record since the Rental Barometer was first published… Yields across all regions reflected rental stock continuing to be in short supply, very high tenant demand and house price levels easing over the last six months particularly.”
At the regional level, when comparing Q1 2023 against the same quarter last year, Fleet reports that the highest yields have been achieved in:
• The North 8.8%
• Yorkshire & Humber 7.7%
• Wales 7.6%
• North West 7.4%
Inflation & the Base Rate
The latest inflation data from ONS showed that the CPI rate had remained surprisingly high at +10.1%. This was less than the +10.4% recorded last month but more than the markets had expected. The stubbornness of inflation in the UK – now the highest in Western Europe – is largely due to persistently high food costs but as many media have since reported, a rate of above +10% makes another increase in the base rate a near certainty.
The good news is that such levels should be short-lived. One reason for this is that, globally, wholesale food prices have started to fall. The effects are not immediate; major retailers have asserted that falls in wholesale prices take between 3 and 9 months to filter through to retail prices. However, they will eventually have a positive effect on ordinary people’s household budgets and, of course, on the ONS’s inflation data.
CPI inflation also reflects the high cost of energy and, again, the same thing is happening: wholesale prices are falling across the world. Elsewhere, these forces have already had a marked effect; in the European Union, inflation is averaging at +6.9% and at around +5% in the United States. They are taking longer to affect the UK for a number of reasons, including the country’s heavy reliance on natural gas and the ways in which government subsidies and prices in the energy market are set. Nevertheless, they must eventually have a braking effect on UK inflation, even if they do take longer than they are doing overseas. In the meantime, the Bank of England is now much more likely to raise the base rate again; markets are expecting a +0.25 percentage point rise in May.
In the longer term, however, the outlook is better. On 10 April, the International Monetary Fund (IMF) published a blog article that considered the likely direction of interest rates over the course of this decade and beyond. Its findings should come as welcome news to investors who have seen their margins eroded by rising mortgage interest payments. The IMF sees good evidence that rates should fall steadily.
The organisation believes that the current high rates of inflation – caused by the after-effects of the pandemic and by Russia’s invasion of Ukraine – are only temporary. Once they start to ease, then central banks are very likely to reduce their base rates and a longer-term trend towards low interest rates should resume. It states:
“Since the mid-1980s, real interest rates at all maturities and across most advanced economies have been steadily declining. Such long-run changes in real rates likely reflect a decline in the natural rate, which is the real interest rate that would keep inflation at target and the economy operating at full employment–neither expansionary nor contractionary.”
In Chapter 2 of its World Economic Outlook, the IMF examines some of the factors that are driving down this ‘natural rate’ of interest. Amongst others, they include demographic changes (e.g. fertility rates and ageing populations) and productivity slowdown. It concludes that: “Overall, the analysis suggests that once the current inflationary episode has passed, interest rates are likely to revert toward pre-pandemic levels in advanced economies.”
The article looks at the global picture but, in a section focusing on rate projections, it indicates that the UK’s natural rate should fall slightly over the next 25 or 30 years – from 0.4% in 2020 to between 0.25% and 0.3% in 2050. Lenders are likely to follow suit, which should mean that mortgage rates will gradually return towards the low (sub 1%) levels that were common in recent years.
This expectation is consistent with a recent forecast by Capital Economics, which expects the Bank of England to cut the base rate to 3% by the end of 2024, and to 2.5% in 2025.
Summary
Resilience and stability seem to be the main themes to emerge from most reports over the course of the month. The general trends in terms of sales and asking prices seem to be moving back to the slower but more predictable rates that prevailed before the pandemic and it’s remarkable how many industry surveys are making comparisons with the state of the market in 2019.
That bodes well because although investors will have benefited from record asking prices and exceptionally fast capital growth in 2022, such rates could never have endured over the longer term. What we are seeing now looks to be a return to a more sustainable market; to the sort of conditions that have delivered steady and respectable capital growth for many decades. That growth won’t come immediately but investment is a long-term enterprise and a short dip now won’t matter very much if values rise in line with wider market expectations over the next 3, 5 and 10 years.
As a bonus, rental values are still rising incredibly quickly – ahead of the rate of inflation by many counts – and as the rate of inflation falls over the course of 2023, the real terms returns from rental revenues are only likely to improve.
If you have any questions about any aspect of property investment, please call us today.