FEBRUARY 2023, PROPERTY MARKET REVIEW
A few months ago, in the wake of the ill-fated mini-budget, forecasts for the housing market were decidedly downbeat. Inflation and the cost of borrowing were soaring, and some commentators were quick to predict a crash. But in reality, something rather different has happened; another example of the property sector being surprisingly resilient. Yes, capital values have declined as the cost-of-living crisis has continued, but there has been no ‘cliff edge’. Instead, vendors have simply adopted more realistic pricing and buyers have been prepared to take more time over their decisions.
After more than two years of manic market activity, common sense and stability are now the dominant influences and, for investors, that’s a good thing. Fundamental market forces are still working in their favour. Demand has remained strong, supply continues to be very limited and with lenders competing hard for business, the cost of borrowing has been falling despite another increase in the base rate. These factors are all helping to lay the foundations for a period of more sustainable long-term market growth.
This sense of returning normality is reflected in many of this month’s market reports and statistics.
House Price Indices
The following organisations produced house price indices in recent weeks. (Percentages refer to year-on-year capital growth.)
• Halifax +1.9% (down from +2.0% in December)
• Nationwide +1.1% (down from +2.8% in December)
• ONS +9.8% (December, down from 10.6% in November)
• Rightmove +3.9% (down from +6.3% in January)
• Zoopla +5.3% (down from 6.5% in December)
Nationwide’s January House Price Index reported its fifth consecutive fall in values, and a year-on-year growth rate of just +1.1%. This compares to +2.8% in December and marks a fall of -0.6% over the course of the month.
Commenting on the figures, Robert Gardner, Nationwide's Chief Economist noted that seasonally adjusted prices were now -3.2% lower than their August peak but also sounded a cautiously positive note. He said: “there are some encouraging signs that mortgage rates are normalising, but it is too early to tell whether activity in the housing market has started to recover… Should recent reductions in mortgage rates continue, this should help improve the affordability position for potential buyers, albeit modestly, as will solid rates of income growth.”
The Halifax House Price Index came out on 7th February. Its year-on-year growth figure of +1.9% is very close to Nationwide’s, but it reports that on a monthly basis, values remained largely unchanged at £281,684. The data follow price falls in December (-1.3%) and November (-2.4%).
Kim Kinnaird, director of Halifax Mortgages, said:
“The start of 2023 has brought some stability to UK house prices… The pace of annual growth has continued to slow, to +1.9% (from +2.1% in December), which is the lowest level recorded over the last three years. The average house price is now around £12,500 (-4.2%) below its peak in August last year, though it still remains some +£5,000 higher than in January 2022 (£276,483).
“For those looking to get on or up the housing ladder, confidence may improve beyond the near-term. Lower house prices and the potential for interest rates to peak below the level being anticipated last year should lead to an improvement in home buying affordability over time.”
On 15 February, ONS published its December House Price Index, which puts the annual rate of price growth at +9.8%. This is a much higher figure than those quoted elsewhere, but it represents a small monthly fall (equivalent to around -£2,000 for an average property) and it’s down from November’s year-on-year figure of +10.6%. It adds that “These are preliminary, non-seasonally adjusted estimates and are subject to revision.”
Rightmove’s February House Price Index came out in the third week of the month, with a headline annual growth rate of +3.9%. That’s down from last month but the month-on-month figure is essentially unchanged – average values growing by a negligible £14 between January and February. Nevertheless, the numbers suggest a gradual readjustment on prices rather than any dramatic fall, and in the notes accompanying its index, the company highlights a number of promising signs.
• Buyer demand +11% higher than at the same time in 2019 – i.e. before the pandemic, when the market was operating more normally.
• The supply of property is down by -24% compared to 2019.
• Sales activity has continued to rebound after its -30% fall in the aftermath of the mini-budget.
• The first-time buyer market is showing the fastest rates of recovery.
• “The combination of sellers being more realistic on price and the number of sales being agreed suggests a softer landing for the market than many expected.”
• The asking price for the average British home is now £362,452.
Tim Bannister, Rightmove’s Director of Property Science said: “The frantic market of recent years was unsustainable in the long term, and our key indicators now point to a market which is transitioning towards a more normal level of activity.”
New house price data from Home.co.uk makes much the same points. It records that asking prices rose by +1.3% year-on-year, but fell slightly over the course of January by -0.2%. Nevertheless, it also notes that “asking prices rose in six English regions and Scotland during January.” It adds:
“The vital signs of the market are reassuring… Real mortgage rates are still highly negative and this provides an unprecedented tailwind for the sales market. Moreover, the chronic housing shortage (both rental and sales) has not gone away.”
“(We) look set to enjoy negative real mortgage rates for the rest of this year (perhaps longer) and this unprecedented situation will serve to support prices strongly. Home prices, therefore, look set to fall in real terms but not in terms of pounds and pence.”
Zoopla’s January House Price Index came out on February 28th. It notes that buyer demand is lower than a year ago but still ahead of normal pre-pandemic levels. Importantly, it believes that the “the market is still on track for a soft landing, with modest price falls of up to -5% and one million sales” expected in 2023.
The company notes that the market can either be measured in comparison to last year (the year-on-year figure) or by comparison to pre-pandemic years. It argues that 2021 and 2022 were highly unusual years and any comparison with them would show an apparent decline. It therefore favours the longer-term comparison, stating:
“The reality is that current market conditions are more aligned with the pre-pandemic years with demand +8% higher and sales agreed up +1%. This is the more useful benchmark for businesses as they plan strategies and investment decisions now the frothy market conditions of the pandemic years are well and truly behind us.”
National and Regional Patterns
According to ONS data, covering the 12 months to December 2022, the state-level pattern of annual price growth looked like this:
• England +10.3% / £315,000 (down from 10.9%)
• Wales +10.3% / £222,000 (down from +10.7%)
• Northern Ireland +10.2% / £175,000 (down from +10.7%)
• Scotland +5.7% / £187,000 (up from +5.5%)
In order of annual growth-rate, ONS lists the English regions as follows:
• East Midlands +12.3% (up from +12.2%)
• North West +12.2% (down from +13.5%)
• Yorkshire & Humber +11.8% (up from +11.4%)
• North East +11.7% (up from +11.6%)
• West Midlands +10.7% (down from +12.3%)
• South East +10.1% (up from +10.0%)
• East of England +9.9% (down from +10.2%)
• South West +8.9% (down from +11.8%)
• London +6.7% (up from +6.3%)
Halifax did not provide data for England or the English regions in January. Its House Price Index only included London (annual growth of 0.0%) and the South West (+2.7%), together with the following state-level data:
• Wales: +2.0% (down from +6.0% in December)
• Northern Ireland +6.9% (down from +7.1%)
• Scotland +2.4% (down from +3.3%)
The Home.co.uk Asking Price Index reports that the highest rates of price growth occurred in:
• Scotland +5.9% (up from +5.6%)
• Yorkshire & Humber +5.3% (unchanged)
• North West +5.2% (down from +5.8%)
• North East +4.9% (up from +4.7%)
The worst performer was Greater London, which saw values drop by -1.6% year-on-year.
Zoopla lists the top regions for capital growth as:
• Wales +7.1%
• West Midlands +6.6%
• East Midlands +6.5%
• North West +6.3%
The top cities include Nottingham (+7.8%), Birmingham (+7.4%), Leicester (+7.3%), Manchester (+6.9%) and both Cardiff and Liverpool (+6.5%).
Zoopla also makes an interesting point about price growth and affordability. It writes: “Our index continues to show above-average house price growth in affordable regional towns next to larger employment centres covering postal areas such as Oldham, Dudley, Wolverhampton and Worcester, where price inflation remains over 8%.”
Rightmove’s leading regions for annual capital growth included:
• North East +5.9% (down from +8.7%)
• Wales +5.6% (down from +9.0%)
• Yorkshire & Humber +5.0% (down from +9.5% in December)
• North West +5.0% (down from +8.7%)
House Price Forecast
Zoopla writes: “We expect our UK index to continue to show small month-on-month price reductions over the next 2-4 months as a soft reset in house prices continues. By the summer, we anticipate our index to be recording modest annual price reductions of up to -2 or -3%.”
Rental Data
Homelet published its January Rental Index in the first week of February. It reported the second consecutive monthly fall in rental values but, at -0.2%, the drop was very slight. Moreover, the annual growth figure remains in double-digits at +10.2%. The company also observed that in all regions except London (where returns dipped by -0.9%), rental values had remained unchanged month-on-month.
Commenting on the latest figures, Andy Halstead, HomeLet and Let Alliance CEO, said: “Despite the small decline, factors across the rental market and wider economy suggest prices will continue to rise overall throughout 2023. Rents are historically high, and the dip in average rents in recent months has only been a drop out of the ocean.”
Goodlord published its own rental index in the same week. It noted that: “The cost of rent for a property in England rose fractionally between December and January - inching up by half a percentage point from £1,071 to £1,076 on average. This is +8% higher than the same time as last year.”
Tom Mundy, COO of Goodlord, said:
“This was certainly an interesting month for the market. There’s clearly a huge amount of demand for available properties and costs are remaining consistently high, but we do seem to have firmly come down from the price peaks seen last Autumn…The tenant salary numbers are also noteworthy, hitting a new high this month, with year on year increases to pay continuing to outstrip the average rise in rental prices.”
Regional Variations in Rents
Homelet’s January Rental Index includes a breakdown of price growth by region. This shows some significant variations across the UK.
• Greater London +13.0% (down from +14.6% in December)
• Scotland +12.3% (down from +13.8%)
• Wales +10.6% (up from +9.2%)
• North West +10.1% (down from +11.1%)
Month-on-month, the strongest gains were seen in the North East the East Midlands, which both produced increases of +0.8%. Average returns in London fell by 0.9% over the course of January.
Goodlord reported that “During January, prices in most regions held steady compared to the previous month. The biggest shifts were seen in the East Midlands, where costs rose from £894 to £924 per property, and the North East, where costs dropped from £800 to £778.”
Yields
According to a recent news article in Property Reporter, the strongest yields are currently being achieved in the North of England, followed by the Midlands and then Wales. Featuring survey data from a specialist debt broker, the magazine describes a high degree of regional variation, but points to some clear frontrunners. The top-ranked postcodes for yields included:
• Bradford BD1 11.06%
• Leeds LS2 10.05%
• Manchester M14 9.41%
• Leeds LS4 9.18%
• Nottingham NG7 8.96%
• Birmingham B29 8.57%
Other areas producing good yields include Rhondda Cynon Taff, Swansea, Middlesbrough and Sunderland.
Inflation
Last month, the Office for National Statistics reported that the Consumer Prices Index (CPI) had fallen from +10.7% to +10.3%. This month, it fell further, to +10.1%. This marks the third consecutive monthly fall and lends weight to the Bank of England’s forecast that inflation will trend slowly back towards its +2% target. Given that the Bank has been raising interest rates in an effort to control inflation, the sooner it returns towards target, the sooner we can expect the base rate to fall and mortgage costs to begin falling again.
Summary
The overriding impression this month has been of a slow adjustment in the market. Prices have not crashed; rather, they have slowly declined, supporting many pundits’ predictions of a ‘soft landing’ for property investors.
Strong demand was always going to help drive market values higher, and limited supply will have had a very similar effect. Upward prices pressures should therefore persist because, despite all the economic turmoil, neither of those key market drivers has changed. What has changed over the last 12 months has been the cost of living. For the next few months at least, this will undoubtedly reduce people’s spending power and, all else being equal, tend to push prices in the other direction.
The big question is where these opposing forces will find a balance, and what February 2023 seems to have shown us is that reaching that new balance-point will be a slow and measured process rather than a dramatic one.
In the meantime, rental values look set to remain relatively strong and there are clearly going to be many local UK markets where investors can still expect to earn excellent yields. For those considering new acquisitions, a short-term dip in values could make even better yields achievable in the longer term – i.e. by enabling landlords to buy more cheaply for a limited period. In that sense, 2023 could present a narrow window of opportunity.
The news on inflation and interest rates is also mildly encouraging. Though the CPI rate of inflation isn’t falling as quickly as many would like, it is slowly declining and the Bank of England seems confident that it will fall inexorably towards its 2% target. If that proves true, then we can expect the base rate to fall as well. In time, that could drive down the cost of borrowing in what is already a competitive market and make new acquisitions more affordable.
In short, the current economic climate is far from ideal, but there are good reasons to expect that conditions for investors will improve over the course of the year.
If you have any questions about any aspect of property investment, please call us today