JANUARY 2023, PROPERTY MARKET REVIEW
2023 is likely to be an unusual and sometimes challenging year, but it won’t be without its opportunities. In this review, we’ll take a look at how the UK residential property market is evolving.
House Price Indices
The following organisations produced house price indices in recent weeks. (Percentages refer to year-on-year capital growth.)
• Halifax +2.0% (down from +4.7% in November)
• Nationwide +2.8% (down from +4.4% in November)
• ONS +10.3% (November, down from 12.6% in October)
• Rightmove +6.3% (up from +5.6% in December)
• Zoopla 6.5% (down from +7.2% in December)
Nationwide’s December House Price Index reported its fourth consecutive fall in values, with average prices falling by -0.1% compared to November. This brings the annual growth rate to just +2.8%. However, the company’s chief economist, Robert Gardner noted reasons to be optimistic, pointing out that December had produced “a much smaller decline than in the previous couple of months,” and that the drop could be part of a typical seasonal slowdown.
He added that affordability could improve gradually, given that wage growth is currently running at +7% and “longer-term interest rates, which underpin mortgage pricing, have returned towards the levels prevailing before the mini-Budget.” He also pointed out that employment forecasts remain strong by historical standards, and that “household balance sheets remain in good shape” due to the great majority of borrowers being on fixed interest rates. As a result, the lender appears to have revised its 2023 house price forecast from -8% to a rather more palatable -5%.
The Halifax House Price Index came out on 6th January. Like Nationwide, it recorded another drop in values, albeit a smaller one than in November. It reports that the year-on-year growth rate is now just +2.0% and that prices fell by an average of -1.5% in December.
Kim Kinnaird, director at Halifax Mortgages, said: “These trends need to be viewed in the context of historic prices. The cost of the average home remains high – greater than it was at the start of 2022 and over +11% more than house prices at the beginning of 2021.”
Halifax added that although it had not changed its forecast of a -8% fall in values this year, it was important to recognise that such a drop “would mean the cost of the average property returning to April 2021 prices, which still remain significantly above pre-pandemic levels.”
Rightmove’s January House Price Index came out on Monday 16th January, and therefore took account of more recent market activity. And the figures were somewhat surprising, showing an upturn in average values. Month-on-month, they rose by +0.9%, which the company notes is the biggest increase at this time of year since 2020. Noting that “this is a more encouraging start to the year than many anticipated," Rightmove also reports that:
• Buyer demand is below what it was in January 2022, but +4% higher than at the same time in 2019 – i.e. the last time that normal, pre-pandemic conditions prevailed.
• The number of prospective buyers making enquiries to estate agents rose by +55% in the two weeks after Christmas and New Year. Normally, the post-Christmas upturn in activity is closer to +45%.
• The asking price for the average British home is now £362,438.
Tim Bannister, Rightmove's director of property science, said: “The seasonal increase in new seller asking prices this January from December is particularly encouraging for movers who are looking for the reassurance of familiar trends and a calmer, more measured market after the rapidly changing – and at times chaotic – economic climate of the final few months of last year.”
Before issuing its price index, Rightmove had already remarked upon rising market activity in a blog post that pointed to a sharp rise in post-Christmas property listings. It wrote that “a record number of new sellers put their property up for sale on Rightmove on Boxing Day, a +46% jump on the previous year.” The agency interprets this as evidence of rising confidence and potential for renewed market activity. Company spokesperson Tim Bannister said: “while we expect a calmer market this year than we’ve had since the pandemic started, the record number of sellers who chose to come to market this Boxing Day indicates there is a group of motivated sellers ready to move, who perhaps held back and now feel more confident.”
New house price data from Home.co.uk tells a similar story to Rightmove’s latest index. The platform writes that asking prices rebounded +0.6% in December, following a -2.4% decline in November. It ascribes the increase to a shortage in supply – currently -17% below the 10-year average – and says that, unusually for this time of the year, prices rose in all areas of England, Scotland and Wales – i.e. all the regions covered by its data. Growth rates are still well below where they were in January 2022, but the figures are encouraging.
On 18 January, ONS published its November House Price Index, which put the annual rate of price growth at +10.3%. However, it notes that “recent annual percentage changes in house prices have been volatile because of volatility in prices in 2021.” In other words, measuring annual changes from an artificially low base (resulting from the end of the stamp duty holiday last year) tends to produce unusually high growth rates. Nevertheless, the figures suggest that investors should still have fared well. ONS records that “the average UK house price was £295,000 in November 2022, which is +£28,000 higher than this time last year but a slight decrease from last month's record high of £296,000.”
Zoopla’s November House Price Index came out too late for our end-of-year review but it reported an annual growth rate of +7.2%, which compared against +7.8% the previous month.
At the end of January, it published a new price index and a new growth-rate of +6.5%. Both indices found evidence that the ‘race for space’ that characterised much of 2021 and 2022 might finally be reversing, with more people looking for property in the centres of towns and cities, rather than coast and countryside. The December index, published on 30 January, noted that “demand has rebounded to pre-pandemic levels, in line with 2018 and +10% higher than in 2019.” It also reported that demand in Q1 2023 seems to be focusing on flats due to recent hits on buying power, but added that “we expect demand to improve further in the coming months as mortgage rates continue to fall and would-be movers realise that large price falls are unlikely to materialise.”
Looking ahead, Zoopla writes:
“It’s early days to get a clear read on the market outlook for 2023. The economic outlook has improved slightly in recent weeks but the squeeze on household disposable incomes is very real… In the short term we expect further, low single-digit price falls in H1 2023 but the housing market is in better shape to deal with the headwinds than in previous economic cycles.”
National and Regional Patterns
According to ONS data, covering the 12 months to November 2022, the state-level pattern of annual price growth looked like this:
• England +10.9% / £315,000 (down from 13.2% / £316,000)
• Wales +10.7% / £220,000 (down from +11.8% / £220,000)
• Northern Ireland +10.7% / £176,000 (unchanged)
• Scotland +5.5% / £191,000 (down from +8.5% / £195,000)
In order of annual growth-rate, ONS lists the English regions as follows:
• North West +13.5%
• West Midlands +12.3%
• East Midlands +12.2%
• South West +11.8%
• North East +11.6%
• Yorkshire & Humber +11.4%
• East of England +10.2%
• South East +10.0%
• London +6.3%
Like ONS, Nationwide’s Q4 data for 2022 showed that average price growth slowed in all regions. The company reports that “this was most pronounced in the South West, the strongest performing region last quarter, which saw annual house price growth slow from +12.5% to +4.3%.” Its top three regions for annual growth included:
• East Anglia +6.6%
• West Midlands +6.1%
• North West +6.0%
• Northern England +5.9%
(Note that the figures above are averages for the final three months of 2022, so they are higher than Nationwide’s average annual figures in December alone.)
Halifax did not provide detailed regional data for December. However, it does record that “all nations and regions saw annual house price inflation, although the rate of growth has slowed.” It states that the North East saw the greatest slowdown in growth, followed by Scotland. Prices fell the least in Eastern England, the West Midlands and Wales.
The Home.co.uk Asking Price Index reports that the highest rates of price growth occurred in:
• North West +5.8%
• Scotland +5.6%
• Yorkshire & Humber +5.3%
• Wales +5.1%
The worst performer was central London, which saw values drop by -0.8% year-on-year.
Rightmove’s leading regions for annual capital growth included:
• Yorkshire & Humber +9.5% (up from +7.3% in December)
• Wales +9.0% (up from +6.6%)
• North West +8.7% (up from +5.7%)
• North East +8.7% (down from +10.3%)
Rental Data
January saw the publication of the December Rental Index from Homelet, which indicated that “the average rent in the UK had dropped for the first time in over a year - down -0.1 since November to £1,174 per calendar month.” The change brings the annual growth rate to +10.8%, which compares against the November figure of +11.1%.
Goodlord also published its own rental index in January. Its findings for December show that “2022 ended with average rents up by +8.7% across England, compared to 2021.” That’s slightly down on its growth rate for November. It states that six of the seven regions that it monitors saw a downturn in rental values, falling “from £1,087 in November to £1,071 in December, a reduction of -1.47%.”
Before releasing its Rental Tracker data for Q4 2022, Rightmove published a blog noting that demand for rental property had risen sharply; a trend it ascribed to people “putting their plans on hold in the hope that mortgage rates will drop in the new year.” Its research indicates a +23% year-on-year increase in the number of people enquiring about homes to rent. Explaining this, the company writes:
“First-time buyers have been hardest hit by mortgage rate rises, and some of this group are now looking at the rental market as a short-term alternative. However, the number of smaller rental homes on the market is -4% lower than last year so choice is limited… The shift is putting further pressure on an already stock-strained rental market, with agents saying they are managing 36 enquiries per property on average, as competition between tenants hit record levels this year.”
In its subsequently-published rental report, Rightmove recorded a year-on-year increase of +9.7% for newly-listed properties, taking mean rents to a new high of £1,172 per calendar month. Its findings show that competition between tenants has eased slightly from its peak in 2021, but it is still extremely high: twice the level seen in 2019.
Lettings platform SpareRoom issued its own rental data in January, reporting that average values had risen by +13% year-on-year. The reason: demand is at an all-time high while supply is at a 9-year low. The company reports that, last quarter, there were 245,351 prospective tenants chasing a supply of just 34,085 available rooms.
Matt Hutchinson, Director at SpareRoom, said: “The last 12 months has seen rents across the UK hit record highs and, unless new supply comes into the market over the coming months, it’s hard to see those rents come down meaningfully in 2023.”
The latest Buy-to-Let Rental Barometer from Fleet Mortgages makes a similar point. Its data shows rental yields improving in six of the ten English and Welsh regions in which the company operates, and two more staying unchanged. Across the two countries, the average yield now stands at 6.2%. Steve Cox, the lender’s Chief Commercial Officer said:
“For the first time in well over a year we can see the vast majority of regions in England and Wales returning a significant annual and quarterly increase in rental yield levels, set against the backdrop of a PRS which is woefully short of the supply required to meet tenant demand. Yields are strong right across the board with those in the North continuing to lead the way. We have even seen increases in Greater London, which has tended to move in the other direction in the last few years.”
Looking at an even longer timeframe, Propertymark’s Annual Review of 2022 notes that:
“Demand for rental property has grown every year since 2018, when Propertymark records began.” It reports that “2022 saw peak numbers of prospective tenants registering and that a new monthly record was set in September at 147 new prospective tenants per member branch… At the same time, there has been no growth in the size of the private rented sector (PRS) to house these tenants.”
Regional Variations in Rents
Homelet’s December Rental Index showed sizeable variations in annual rental growth across the regions. Its table-leaders included:
• Greater London +14.6% (up slightly from +14.5% in November)
• Scotland +13.8% (up from +13.6%)
• North West +11.1% (down from +11.3%)
• West Midlands +10.9% (down from 11.0%)
The lowest annual increases were seen in the North East and Northern Ireland, which delivered rental gains of +6.9% and 6.9% respectively.
By Rightmove’s calculations, the regional leaders for year-on-year rental growth were:
• London +15.7%
• Scotland +13.6%
• Yorkshire & Humber +11.2%
Goodlord reported that “the only region to see an increase in the average cost of rent was the North East, which saw a +1.36% increase - with prices moving up from £789 to £800.” Otherwise, all English regions saw a decline. In the North West and the West Midlands, rents fell by less than -1% but there were larger drops elsewhere. The poorest performer was the South West, where rental values fall by -2.68%.
For annual rental growth, the top performers in SpareRoom’s market survey were:
• London +22%
• Wales +18%
• North East +16%
The North West, Northern Ireland, East Anglia and the South East all delivered annual rental growth of +15%. At the city level, the best results were achieved in Sunderland (+37%), Swansea (+21%), York (+20%) and Manchester (+20%). The platform also notes that “Luton saw the highest increase in demand vs supply (up +140%) out of the 50 largest towns and cities, followed by Slough (up +128%) and Reading (up +126%).”
Yields
According to Fleet Mortgages, the regions delivering the strongest yields in England and Wales include:
• North East 8.0%
• North West 7.2%
• Yorkshire & Humber 7.1%
• East Midlands 6.7%
Greater London remains at the bottom of the table but, even here, yields are averaging around 5.2% and, encouragingly, the figure is +0.7 percentage points higher than at the same time the previous year.
Rental Forecasts
In its December Rental Index, Homelet notes that with the cost-of-living crisis “continuing to bite… our prediction for 2023 is that rental prices will likely continue to rise, despite spiralling costs for tenants in other areas of their lives.”
Andy Halstead, HomeLet and Let Alliance CEO, added that more tenants struggling to pay rent “could lead to some landlords vacating an already struggling market.” However, he noted that this could further constrain the supply of rental property and this could ultimately drive values even higher.
SpareRoom doesn’t offer a specific forecast but does note that “The rental market continues to thrive. High demand and persistently falling supply will continue to push up monthly rents in most regions in 2023.”
As previously reported, Savills Five-Year Forecast includes a prediction that rental values will rise by +6.5% in 2023 and by smaller margins over the three following years.
Knight Frank reports that the stock of rental properties is finally beginning to rise, which would normally have a slowing effect on rental price growth. However, as many other sources have described, rental demand still appears to be close to an all-time record, so there is little indication that price growth will slow any time soon.
Rightmove predicts that “national average asking rents for newly available properties will rise a further 5% in 2023 unless there is a significant addition of available homes to rent.”
Student Accommodation
On 12 January, Property Reporter magazine published an article that examined the continuing growth of the student accommodation market. Using data from the Higher Education Statistics Agency, it noted that student numbers increased by almost +10% over the ten years between 2011 and 2021.
The article also reports that “According to StuRents, the UK is on track to face a shortfall of around 450,000 student beds by 2025, based on the firm’s analysis of the number of new beds likely to be delivered by that time, compared to growing student numbers.”
One reason for the scarcity of student property is that landlords are tending to abandon the HMO model, which many are finding increasingly problematic. Purpose-built student accommodation is a more popular choice but construction rates have not yet caught up with still-rising demand. On 24 January, for example, Property Reporter and other trade media ran articles noting that just a few days before the UCAS deadline for university course applications “as much as 75% of all purpose-built student accommodation at the nation’s top universities has already been taken.”
As in any market, the combination of high demand and limited supply should drive continuing price growth. In this case, that would mean relatively strong performance in terms of capital values and improving rental returns.
Inflation
On 18 January, the Office for National Statistics updated its inflation data, reporting a modest slowing in the Consumer Prices Index (CPI). It now stands at +10.3%, which is down slightly from +10.7% last month, and which marks the second consecutive monthly fall.
This is in line with forecasts from the Bank of England, which suggest that the UK will see an accelerating trend back towards low levels of inflation, close to the Bank’s +2.0% annual target. For now, prices are still rising far too quickly for comfort, but the ONS figures could at least be offering signs of slowly improving market conditions. If inflation begins to fall markedly, interest rates should also begin to wane.
Summary
With respect to capital values, we’re seeing very different figures from different agencies. The most recent indices suggest a return to modest growth but it’s too early to tell whether that growth will be sustainable or whether it just marks a temporary post-Christmas spike; the short-term result of pent-up demand.
More generally, most price reports seem to be pointing to a slow decline in price growth, which would be understandable in light of a high rate of inflation, higher than usual borrowing costs and broader cost-of-living pressures.
However, there are other encouraging signs. ONS reported a surprise return to economic growth in November, (albeit the 0.1% growth was only very small) and wages are reportedly rising at their fastest rates for over 20 years. Those rates still lag behind the rate of inflation, so they don’t mean a real-terms increase in living standards, but they should help to bolster market resilience.
Recent reports also support the Bank of England’s prediction of slowly falling inflation, and they lend weight to the idea that the base rate won’t stay as high, nor for so long, as many had feared just a few months ago. In any event, with some confidence returning to the market, many lenders have already begun reducing interest rates on their various mortgage products, which suggests that property investors could benefit from an increasingly competitive market in 2023.
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