JULY 2023, PROPERTY MARKET REVIEW
Welcome to our latest monthly review, which looks back on July, its key developments and some of the most noteworthy reports concerning the residential property sector.
In other words, some of the principal causes of caution and concern in today’s marketplace now look to be on the wane. What’s more, key commodities such as fuel and food are becoming less expensive, so cost-of-living pressures should gradually ease for millions of people, particularly given that employment rates have remained strong and average rates of wage growth have remained solid.
It will take time for these economic headwinds to die down but, in time, they must. And as they do, so the continuing shortfall in housing supply will tend to drive capital values back upwards. For the time being, then, investors only need to hold their nerve and hold their properties. Before very long, they should be delivering respectable, inflation-beating capital growth once again. And in the meantime, rental values are rising so fast that property is proving to be a rewarding asset on that measure alone. In the longer term, as inflation falls and market confidence grows, the real-terms returns from property will only improve.
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 -2.6% (down from + 1.0% in May)
Nationwide - 3.5% (down from - 3.4% in May)
ONS + 1.9% (May, down from + 3.5% in April)
Rightmove + 0.9% (June, down from + 1.1% in June)
Zoopla + 0.6% (down from + 1.2% in June)
Although Nationwide’s June House Price Index reports a - 3.5% annual fall in average values, it also notes that there had been a small (+ 0.1%) monthly upturn. The figure takes account of seasonal effects. In monetary terms, it represents an increase from £260,736 to £262,239 over the course of the month. On a non-seasonally adjusted basis, that marks a more significant monthly gain of + 0.57%.
Commenting on the figures, Robert Gardner, Nationwide's Chief Economist said:
“Annual house price growth was broadly stable at - 3.5% in June, little changed from the 3.4% decline recorded in May… Longer term borrowing costs have risen to levels similar to those prevailing in the wake of the mini-Budget last year, but this has yet to have the same negative impact on sentiment. The number of mortgage applications has not yet declined and indicators of consumer confidence have continued to improve, though they remain below long run averages.
“The sharp increase in borrowing costs is likely to exert a significant drag on housing market activity in the near term … (but) a relatively soft landing is still possible, providing the broader economy performs as we (and most other forecasters) expect. Labour market conditions are expected to remain relatively robust, with the unemployment rate remaining below 5%, while income growth is projected to remain solid. With Bank Rate likely to peak in the quarters ahead, longer term interest rates should also start to fall back.”
The June House Price Index from Halifax reports a year-on-year change of - 2.6% but over shorter timescales, the figures suggest a broadly static market. On a monthly basis, prices fell by - 0.1% (which equates to around £300 on an average value of £285,932) and on a quarterly basis, they rose by + 0.3%.
Kim Kinnaird, director of Halifax Mortgages, points out that the - 2.6% fall is essentially a mathematical effect of comparing today’s market with a period of rapid gains last year. In itself, it is not a sign of any dramatic fall:
“With very little movement in house prices over recent months, this rate of decline largely reflects the impact of historically high house prices last summer – annual growth peaked at + 12.5% in June 2022 – supported by the temporary Stamp Duty cut. To some extent the annual growth figure also masks the fluctuations we’ve seen in the market over the past 12 months. Average house prices are actually up by + 1.5% (£4,000) so far this year, with most of that growth coming in the first quarter, following the sharp fall in prices we saw at the end of last year in the aftermath of the mini-budget.
“These latest figures suggest a degree of stability in the face of economic uncertainty, and the volume of mortgage applications held up well throughout June, particularly from first-time buyers.”
Rightmove published its June House Price Index in the week commencing 17 July. It noted that a small monthly fall of - 0.2% was broadly in line with a flat (0%) average for the midsummer period. However, it notes that average values are now + 2.6 higher than they were in January and the UK-wide average of £371,907 is + 0.5% higher than it was at the same time last year. As ever, an imbalance between supply and demand is a key reason for this resilience. Rightmove spokesperson Tim Bannister said:
“Buyer demand remains resilient at + 3% above 2019’s more normal market levels, buoyed by a shortage of quality property for sale and ongoing housing needs… (However,) the number of available properties for sale is - 12% lower than at this time in 2019.”
On 19 July, ONS published its latest House Price Index, which stated that “average UK house prices increased by + 1.9% in the 12 months to May 2023… The average UK house price was £286,000 in May 2023, which is + £6,000 higher than 12 months ago.”
On 12 July, Home.co.uk published its latest Asking Price Index, which notes no change in prices over the course of the preceding month, which it says is in line with seasonal patterns. Its year-on-year figure shows a fall of - 1.5% but certain regions continue to display positive annual growth.
In its July House Price Index, published at the end of the month, Zoopla notes that the annual growth rate stands at + 0.6%, although “affordable markets in economically active areas are still registering annual house price inflation of over + 3.5%.” Striking a somewhat positive note, the agency also states that “the rise in mortgage rates appears close to peaking – likely to return to the 4% to 5% window this autumn.”
In its June Housing Insight Report, Propertymark highlights the results of its latest member survey. It finds that demand for homes is currently outstripping supply by a factor of over two to one. Its average member branch has 69 newly-registered prospective buyers but stocks of only 32 homes available for sale. Over the course of June, the average number of viewings per available property average at 2.6, highlighting the fierce competition that still persists between house-hunters.
NATIONAL AND REGIONAL PATTERNS
According to ONS data, covering the 12 months to May 2023, the state-level pattern of annual price growth was as follows:
Scotland + 3.2% / £193,000 (up from + 2.0%)
Wales + 1.8% / £213,000 (down from +2.0%)
England +1.7% / £304,000 (down from +3.7%)
Northern Ireland + 5.0% / £172,005 (Q1 2023 figures)
In order of annual growth-rate, ONS lists the English regions as follows:
North East + 4.0% (down from + 5.5%)
East Midlands + 3.4% (down from + 4.6%)
North West + 2.7% (down from + 4.8%)
West Midlands + 2.2% (down from + 3.1%)
South East + 1.5% (down from +3.5%)
Yorkshire & Humber + 1.2% (down from + 4.0%)
South West + 1.0% (down from + 4.0%)
London + 0.8% (down from + 2.4%)
East of England 0.0% (down from + 3.1%)
Zoopla gives particular emphasis to regional differences in its latest index. It observes that while the UK national growth rate is still positive, “modest annual price falls of up to - 2.2% are concentrated in southern England and markets with an average price over £300,000.” It lists the top regions for capital growth as follows:
Scotland + 1.9% (down from + 2.1%)
Wales + 1.5% (down from + 2.5%)
West Midlands + 1.6% (down from + 2.4%)
North West + 1.5% (down from + 2.3%)
Yorkshire & Humber + 1.4% (down from + 2.2%)
As of the end of July, Zoopla’s top cities for growth included Edinburgh (+ 2.1%), Nottingham (+ 2.1%), Birmingham (+ 2.0%), Manchester (+ 1.6%), Leeds (+ 1.6%) and Sheffield (+ 1.6%). However, some towns in regions with active, growing economies areas produced even better results, led by Halifax (+ 4.3%) and Wolverhampton (+ 3.7%).
The Home.co.uk Asking Price Index reports that the highest rates of annual price growth occurred in:
Scotland + 3.7% (down from + 5.5%)
North West + 2.0% (down from + 2.9%)
North East + 1.7% (down from + 4.1%)
Yorkshire & Humber +1.1% (down from + 3.3%)
The worst performer was Greater London, which saw values drop by - 3.5% year-on-year.
Rightmove’s leading regions for annual capital growth included:
Scotland + 3.6% (unchanged from June%)
Yorkshire & Humber +2.1% (down from + 2.4%)
North West + 1.9% (down from + 3.6%)
Wales + 1.9% (up from + 0.3%)
Rightmove notes that average values fell, year-on-year, in the South East (- 0.4%), the East of England (- 0.6%) and London (- 0.6%).
HOUSE PRICE FORECAST
Zoopla has kept its year-end forecast unchanged at - 5.0% but now believes that there could be substantial regional differences beneath that national average. It reports that modest price falls are expected in the second half of 2023, but that these drops will be “concentrated across southern England in response to higher mortgage rates… We expect the divergence in house price growth between the south of England and the rest of the country to widen over the second half of 2023… Higher mortgage rates have hit home buyer demand, but the impact is not uniform across the country. Southern England is set to experience above average price falls while some areas may not post any price falls at all."
Rental Data
Goodlord’s June Rental Index reports a substantial monthly increase of + 3.3%. It states that “the average cost of rent per property in England is now £1,148, up from £1,111 in May. The latest monthly rise marks the sixth in a row and it means that the year-on-year change is + 9.3%. For comparison, last month’s annual growth figure was + 8.9%.
Homelet’s June Rental Index reports another strong monthly gain in average rentals, which it says have risen by + 1.3% since May. That marks another increase in the annual figure, too, which now stands at + 10.4%. It brings the new UK average rental value to £1,229 per calendar month. Excluding London, the national average is £1,027.
The July Asking Price Index from Home.co.uk notes that rental returns are still rising strongly. It states: “Rents across the UK continue to rise overall (+ 11.8% annualised).” This compares to + 11.4% last month.
In its June Housing Insight Report, Propertymark notes that the gap between supply and demand for rental property is still widening. It states that its average member branch now has 118 new prospective tenants competing for just 9 rental properties.
That equates to a ratio of over 13 would-be tenants per home, and highlights a mismatch between supply and demand that is now + 57% higher than it was in June 2022. That can only mean continued upward pressure on rental values. Propertymark notes that 62% of its members reported that average rents had increased month-on-month, and the organisation is forecasting more increases to come.
In its June Residential Market Survey, RICS expresses a similar view, noting that:
“A headline net balance of + 40% of respondents saw an increase in tenant demand during June… At the same time, the net balance for landlord instructions sank to - 36% (the most negative reading for this metric since May 2020). With rising demand still being met with weakening supply, a net balance of + 53% of contributors anticipate rental prices being driven higher over the near-term.”
Rightmove’s UK Rental Price Tracker for the second quarter of 2023 notes that asking rents rose by an average of + 9.3% year-on-year. It adds that “national average asking rents outside London hit a new record of £1,231 per calendar month. The average asking rent for a typical home outside of London is now a third (+ 33%) higher than at this time in pre-pandemic 2019, increasing by more than £300 from £923 per calendar month.”
Rightmove also notes that “tenant demand continues to exceed even last year’s frenetic levels and is currently + 3% higher than at this time in 2022 and + 42% higher than June 2019.”
SpareRoom reports on individual room rents rather than the cost of renting a whole property, so its annual growth figures look a little different from those published by the other major indices. In its Rental Index for Q2 2023, it quotes a national average growth rate of + 17% year-on-year. However, as we explore in the next section, this national average masks considerable regional variation.
REGIONAL VARIATIONS IN RENTS
Homelet’s June Rental Index includes a breakdown of price growth by region. Its top five locations for rental growth include.
Scotland + 15.8% (up from + 13.4% in May)
Greater London + 12.5% (up from + 11.3%)
West Midlands + 10.8% (up from + 9.6%)
Wales + 10.1% (down from + 10.9%)
South East + 9.7% (down from + 9.6%)
Month-on-month, the strongest gains were seen in Scotland (+ 5.5%), the West Midlands (+ 1.9%) and Greater London (+ 1.9%). Those figures compare to a national monthly average of + 1.3%. The company adds that: “There seems to be no sign of a slowdown in the continued growth of rents across the UK.”
Goodlord’s regional analysis shows a similar pattern to other recent months, with London again seeing the highest rates of annual rental growth.
Greater London + 12.6%
North East + 9.4%
South East + 8.4%
West Midlands + 8.5%
East Midlands + 7.3%
North West + 9.4%
South West + 5.4%
Goodlord reports a strong monthly gain of + 3.3%, and notes that “the biggest rise in prices was recorded in the South West, where rents rose by a huge + 9% during June - rising from £1,092 to £1,191.” The same region also saw a very striking - 45% fall in average void periods, the number of vacant days dropping from 20 days to just 11 for the average rental property.
Rightmove notes that the top UK regions for annual rental growth included Scotland (+ 13.7%), London (also + 13.7%), the North West (+ 11.6%), Wales (+ 9.9%) and the East Midlands (+ 9.8%).
Rightmove also reports on average rental yields. By this measure, the top-performing regions included:
North East 8.3% gross yield
Scotland 7.9%
North West 7.0%
Yorkshire & Humber 7.0%
Wales 7.0%
With house price growth slowing but rental values rising at well above the rate of inflation, average yields (i.e. annual rental value as a proportion of capital value) look to be rising steadily. Rightmove’s estimate of a UK-wide average yield of 6.0% is similar to another calculation by Fleet Mortgages, which notes that yields have risen from 5.6% to 6.3% over the course of the last 12 months.
Fleet also identifies regional differences. It doesn’t keep data for Scotland but otherwise, its list of the strongest-yielding regions is similar to Rightmove’s, albeit with slightly differing figures:
North East 8.6%
Wales 7.5%
North West 7.5%
Yorkshire & Humber 7.1%
SpareRoom notes that “average room rents rose by + 10% or more in every UK region, every London region and in almost every one of the UK’s 50 biggest towns and cities, compared to Q2 2022.” At the regional level, it finds that landlords saw the fastest growth in room rents in:
Northern Ireland + 20%
London + 19%
Scotland + 19%
North West + 17%
North East + 17%
At the city level, the table-leaders included Edinburgh (+ 25%), Middlesborough (+ 21%) and Manchester (+ 20%).
INFLATION & THE BASE RATE
On 19th June, the Office for National Statistics (ONS) published its June inflation figures. They showed that the Consumer Prices Index had fallen from 8.7% in May to 7.9% in June. This was better than the 8.2% that many commentators had predicted and it may prompt the Bank of England to raise the official base rate of lending more slowly than it has been doing.
To be clear, a lower rate of inflation does not mean that prices are falling – only that they aren’t rising as quickly as before. The UK still has the highest rate of inflation in the G7 group of developed economies and 7.9% is still a long way above the Bank of England’s 2% target. Consequently, the Bank’s Monetary Policy Committee (MPC) will still feel compelled to demonstrate its commitment to wrestle that rate down, which means that a further rise in the Bank Rate is still more likely than not. However, with the costs of energy, fuel and some foods actually falling, the MPC may now opt for a smaller rate hike than it might otherwise have been considering.
That, of course, would be of some consolation to hard-pressed mortgage holders. However, a more important question, perhaps, is when interest rates will actually start to fall again. High inflation has become entrenched in the UK economy so few economists expect the MPC to reduce the base rate quickly. However, if the Consumer Prices Index does indeed drop back to 2% towards the end of next year, as the Bank predicts, then borrowers can probably expect to see a slow and gradual reduction in their interest payments.
In its accompanying CPI analysis, the ONS writes that the CPI rate in June 2023 was the lowest since March 2022. It adds:
“The easing in the CPI annual rate between May and June 2023 was a result of prices rising by - 0.1% on the month compared with a rise of + 0.8% a year earlier… There were notable downward effects from food and non-alcoholic beverages, furniture and household goods, and restaurants and hotels.”
The MPC notes “that there were no large offsetting upward effects.” However, it is worth noting that in the week commencing 17 July, Russia refused to renew the Black Sea grain deal, under which it had previously agreed not to attack merchant shipping carrying wheat and other grains from Ukraine to other countries. It also commenced missile attacks on civilian ports in Ukraine where grain is typically stored and handled. Food trade media are now speculating that this action could drive global shortages and renewed food price inflation. The effects of this remain to be seen but, while the longer-term trend will be downward, inflation looks set to remain a challenging problem for many months to come.
In the meantime, however, there is what Property Reporter magazine describes as “a glimmer of hope for borrowers.” Amid renewed expectations that the base rate will peak at below the levels recently suggested, many lenders have already begun to offer lower rates on their longer-term, fixed-rate products. Citing research by the specialist lender Octane Capital, the magazine writes: “there are signs that the market could be starting to stabilise and, before long, homebuyers and re-mortgagers could see the cost of borrowing start to fall.”
SUMMARY
At the national level, average house prices continue to moderate but the process has been slow and far from dramatic.
In the UK’s more affordable regions, house price growth remains positive year-on-year.
Rental returns are rising substantially faster than the rate of inflation.
The UK’s more northerly and more affordable markets are also producing the strongest yields.
Demand for property to buy or rent remains well ahead of supply.
Looking ahead, inflation looks set to continue to decline and, as it does, the imbalance between demand and supply should drive average values higher again.
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