MARCH 2023, PROPERTY MARKET REVIEW

Our latest monthly review looks back on March, its key developments and some of the most noteworthy reports concerning the residential property sector. We also conclude with a short review of the Spring Budget, which was announced on 15 March.

House Price Indices

The following organisations produced house price indices in recent weeks. (Percentages refer to year-on-year capital growth.)

• Halifax +2.1% (up from +1.9% in January)

• Nationwide -1.1% (down from +1.1% in January)

• ONS +6.3% (January, down from +9.8% in December)

• Rightmove +3.09% (down from +3.9% in January)

• Zoopla Did not publish (+5.3% in January)

Nationwide’s February House Price Index reported another decline in average values. For the first time since June 2020, the year-on-year growth rate went into negative territory, ending the month -1.1% down against the same time last year. This compares to positive growth of +1.1% in January and marks a fall of -0.5% over the course of the month.

Commenting on the figures, Robert Gardner, Nationwide's Chief Economist said:

“The recent run of weak house price data began with the financial market turbulence in response to the mini-Budget at the end of September last year. While financial market conditions normalised some time ago, housing market activity has remained subdued… It will be hard for the market to regain much momentum in the near term since economic headwinds look set to remain relatively strong, with the labour market widely expected to weaken as the economy shrinks in the quarters ahead, while mortgage rates remain well above the lows prevailing in 2021.

“However, conditions should gradually improve if inflation moderates in the coming months as expected, easing pressure on household budgets.”

The Halifax House Price Index came out on 7th March. Its year-on-year growth figure of +2.1% was up slightly on January’s +1.9%, while the month-on-month change was an encouraging +1.1%. It takes the average UK house price to £285,476.

Kim Kinnaird, director of Halifax Mortgages, said:

“Overall prices are flat compared to three months ago. Recent reductions in mortgage rates, improving consumer confidence, and a continuing resilience in the labour market are arguably helping to stabilise prices following the falls seen in November and December.

“In cash terms, house prices are down around £8,500 (-2.9%) on the August 2022 peak but remain almost £9,000 above the average prices seen at the start of 2022 and are still above pre-pandemic levels, meaning most sellers will retain price gains made during the pandemic.”

Rightmove published its latest House Price Index in the week commencing 20 March. It finds that the annual rate of house price growth now stands at +3.0%. This figure compares prices in March 2023 with those in March 2022, and it compares against February’s rate of +3.9%. Nevertheless, despite the slowing annual pace, prices rose by +0.8% between February and March. In absolute terms, that equates to an average gain of +2,906 this month, bringing the typical house price to £365,357. This is a little lower than the usual seasonal rise seen in March but the company notes that buyers are treading carefully.

Rightmove’s accompanying notes explain that: “The data continues to point to a market on a much more stable footing than many anticipated and cautiously transitioning towards the activity levels of the more normal market of 2019… Typical first-time buyer-type properties (two bedrooms and fewer) are leading a cautious recovery, with sales agreed in this sector improving the fastest.”

Tim Bannister, Rightmove’s Director of Property Science, added: “The beginning of the spring season sees stability and confidence continuing to return to the market as it recovers from the turbulence at the end of 2022.”

On 22 March, ONS published its January House Price Index, which put the annual rate of price growth at +6.3%. In absolute terms, that means that the average UK house price stood at £290,000 in January 2023, which was +£17,000 higher than at the same time in 2022. For comparison, the growth rate was +9.8% in December and, on a monthly basis, average values fell by -1.1%.

The March Asking Price Index from Home.co.uk notes that year-on-year growth had turned negative (-0.5%) for the first time since December 2019. However, it also reports that the average ‘time on market’ has fallen and that housing stocks are still well below the 10-year average. It suggests that limited supply, together with rising demand and a greater “buyer appetite” should support price growth in the longer term. It adds that “UK home prices look set to consolidate over the coming months as demand and supply find a new equilibrium.”

RICS published its Residential Market Survey for February 2023 on 9th March. It notes that the general price trend continues to be ‘downbeat’ but adds that “there are several indicators demonstrating a more stable picture emerging through the course of 2023.” It reports that capital values have slipped slightly but that rental values have risen “due to continued significant supply and demand imbalance.”

National and Regional Patterns

According to ONS data, covering the 12 months to January 2023, the state-level pattern of annual price growth looked like this:

• Northern Ireland +10.2% / £175,234 (unchanged)

• England +6.9% / £310,159 (down from +10.3% / £315,000)

• Wales +5.8% / £216,871 (down from +10.3% / £222,000)

• Scotland +1.0% / £185,016 (down from +5.7% / £187,000

In order of annual growth-rate, ONS lists the English regions as follows:

• North East +10.0% (down from +11.7%)

• West Midlands +9.9% (down from +10.7%)

• East Midlands +8.6% (down from +12.3%)

• North West +7.2% (down from +12.2%)

• South West +7.1% (down from +8.9%)

• East of England +6.8% (down from +9.9%)

• Yorkshire & Humber +6.5% (down from +11.8%)

• South East +6.3% (down from +10.1%)

• London +3.2% (down from +6.7%)

As it did last month, Halifax failed to provide data for England or the English regions in February. Its House Price Index only included London (a monthly fall of -0.9%) and the North East (annual gains of +1.1%) together with the following state-level data:

• Wales: +1.2% (down from +2.0% in January)

• Northern Ireland +5.7% (down from +6.9%)

• Scotland +2.2% (down from +2.4%)

The Home.co.uk Asking Price Index reports that the highest rates of price growth occurred in:

• North West +4.1% (down from +5.2%)

• Scotland +4.0% (down from +5.9%)

• Yorkshire & Humber +3.8% (down from +5.3%)

• North East +3.2% (down from +4.9%)

The worst performer was the South East, which saw values drop by -2.7% year-on-year.

Rightmove’s leading regions for annual capital growth included:

• North East +4.7% (down from +5.9%)

• North West +4.7% (down from +5.0%)

• Yorkshire & Humber +4.5% (down from +5.0%)

• Wales +4.3% (down from +5.6%)

House Price Forecasts

In the second half of last year, Lloyds Bank, the UK’s largest mortgage lender, predicted that average residential property values would fall by around -9% over the course of 2023. More recently, however, in the context of falling inflation and a more optimistic economic forecast from the Bank of England, Lloyds has revised that to a fall of just -6.9%.

Another recent forecast came from the mortgage broker John Charcol, which suggested that rather than falling this year, average values would simply plateau at zero growth before starting to recover in 2024. Nicholas Mendes, the company’s mortgage technical manager, said:

“Only a few months ago, the market prediction was of a 10 to 20 per cent correction in property prices due to inflation, mortgage rates, and fear that there was a long recession around the corner… Lenders are now competing with each other again, with rates on a continual decrease since the start of 2023… HSBC and Virgin are offering fixed rate deals of sub 4.0 per cent, with other lenders expecting to follow. The last time fixed rates were below the Bank of England base rate was in 1991. Also, inflation looks to be on a downward trend, which will mean that by the end of the year the base rate will also decrease.

“I previously predicted the downturn isn’t going to be as severe as many had been forecasting… Overall, by the end of 2023, I would expect to see property prices remain flat, with 2024 arriving before we see the first signs of property price increases.”

Importantly, however, even if prices do fall, they are unlikely to offset the gains made since the start of 2020. Moreover, with a market recovery likely from 2024 onwards, this year could actually present a good opportunity to acquire new properties at a lower price than would otherwise have been possible, had values continued to rise in line with recent rates. This opportunity is highlighted in a recent press release from the House Buyer Bureau, which notes that as a result of the cooling market, landlords making cash purchases have been able to negotiate discounts of up to £88,000.

Rental Data

Homelet’s February Rental Index reports that “the average rental price for a new tenancy in the UK was £1,175 per calendar month (PCM), up +9.9% annually. In January, it had reported a small month-on-month drop, but February saw rental values tick up again, albeit by only a modest +0.3%.

Commenting on the latest figures, Andy Halstead, HomeLet and Let Alliance CEO, said:

“A small decline in rental prices at the start of 2023 has not continued, with the average rental property in the UK again seeing a price rise… The rental market continues to suffer from a lack of available properties to meet surging demand, with many landlords choosing to leave the market. If the number of properties available fails to increase in line with demand, then prices will inevitably remain high and climb even higher as the battle between tenants to secure a property intensifies.”

Goodlord published its February Rental index a few days later. The previous month, it had reported a year-on-year increase of +8.0% in average rents but, in February, that had risen to +12.5%. Month-on-month, values had also risen, by +1.0%, taking the mean to £1,089.04. The agency reports that “February’s figures are the highest rental averages recorded since October 2022.”

One of the most significant findings is the way in which high demand has driven down void periods. The company states:

“The latest data indicates renewed rental market momentum, after the traditionally quieter months of December and January… There was a significant reduction in the average void period for a rental property in England during February. The England average dropped by 26% - from 23 to 17 days – highlighting strong demand amongst tenants.

“The big drop in voids is a clear reminder that housing stock is low and tenants are moving quickly to secure properties - everything listed is getting snapped up extremely quickly.”

In its Asking Price Index, Home.co.uk reports that: “Rents are up significantly in all regions and most notably in Greater London and Scotland. The lettings market continues to be overwhelmed by demand and this has driven the mix-adjusted average rent up just over +17% overall.”

Zoopla published its UK Rental Market Report on 29 March. It found that rental growth has been outpacing inflation, with an average annual increase of 11.1% nationwide. This, it explains, is driven by a continuing shortfall in supply, which has risen by only +1% since 2016, coupled with strong rental demand, which is current 51% ahead of the 5-year norm. It writes:

“Demand for rented homes remains 10% higher than this time last year. Rents will continue to rise ahead of incomes unless we see a sustained increase in rental supply or a material weakening in demand, both of which appears unlikely at this stage.”

The company reports that two of the drivers of high tenant demand have been the inward migration of skilled foreign workers and an increase in the number of overseas students (which has risen by 122,000 in two years).

Regional Variations in Rents

Homelet’s February Rental Index includes a breakdown of price growth by region. This shows some significant variations across the UK.

• Greater London +12.4% (down from +13.0% in January)

• North West +10.6% (up from +10.1%)

• Scotland +10.4% (down from +12.3%)

• Wales +10.0% (down from +10.6%)

Month-on-month, the strongest gains were seen in Northern Ireland (+1.8%), the North West (+1.1%) and the East of England (+1.1%), followed by the North East (+1.0%). Only Wales and Greater London saw monthly declines, of -0.5% and -0.7% respectively.

Homelet CEO said:

“Something interesting is happening in the capital… The average rent in Greater London has decreased for the third month in a row, having briefly climbed above the £2,000 PCM mark in November for the first time ever. It is still a little early to predict whether this will be a sustained pattern or whether London will follow the pattern of the wider country and see prices rise again in the coming months.”

Goodlord’s regional analysis focused on voids and affordability. Describing shortening void periods, it reported that:

“The biggest change came in the North West, where voids went from 27 days in January to just 18 days in February - a steep drop of a third (-33%). The East Midlands also recorded a decrease of more than -30% - with void periods in the region going from 29 days to just 20, a -31% reduction.”

Some further good news for investors is that average earnings have been broadly keeping pace with rental growth, so affordability has not been too greatly strained. In two regions, in fact, tenants’ average earnings have actually exceeded the rate of rental inflation.

“The average salary of a renter in England was £32,168 in February - up +11.7% year on year. This means wage increases are only slightly behind the increases seen in the cost of rent. In the North West and the South West, the rise in salaries over the last year has outstripped the rise in the cost of rent.”

According to Zoopla’s UK rental Index, the strongest rental growth has been seen in the following cities:

• Manchester +14.4% (£978pcm)

• Edinburgh +12.7% (£1,133)

• Glasgow +12.2% (£844)

Nottingham, Birmingham, Aberdeen and Cardiff all saw annual rental gains of +10.9%.

The Short-Stay Rental Market

A new report from Sykes Holiday Cottages shows that the short-stay holiday let market is performing extremely well. Demand is up, average rental values are up and surveys suggest that Britons have every intention of maintaining the staycation boom this year and beyond. According to the company’s Holiday Letting Outlook Report 2023:

• The holiday-let market remains highly active, with increasing numbers choosing to holiday in the UK.

• Bookings for UK holiday lets were up +48% in 2022 versus 2019.

• Bookings made year to date for 2023 are up a further +9% versus the same point in 2022.

• The average annual turnover of a UK holiday let was £24,000 in 2022, which is up 59% versus 2019.

• The most popular locations for new owners were North Wales, Cornwall and Cumbria & The Lake District.

• 84% of owners say bookings are stronger than ever and expect this trend to continue over the next five years.

• 63% of owners plan to extend their holiday let portfolio in the next five years.

• 24% of owners used to run their property as a long-term let but decided to switch to holiday letting.

• 28% are seeing more bookings for shorter breaks.

• 50% witnessed an increased demand for UK holidays since the pandemic.

• 27% say holidaymakers are now more likely to rebook properties.

• The top locations for earnings include Cumbria & The Lake District - £28,000 per year, the Cotswolds - £28,000 per year, and the Peak District - £27,500 per year.

Inflation & the Base Rate

In the Spring Budget (see below) the Chancellor Jeremy Hunt quoted a forecast by the Office for Budgetary Responsibility (OBR) which suggests that CPI inflation could fall to 2.9% by the end of this year. This would be a considerably better result than the government’s original target, which was simply to “halve” the year’s starting figure of just over 10%. A rate of less than 3% would undoubtedly give the Bank of England’s Monetary Policy Committee more room to reduce the base rate in 2024, so this new forecast greatly improved the odds that mortgage costs will fall in the near term.

However, on 22 March, the Office for National Statistics reported that the Consumer Prices Index (CPI) had risen very slightly, from +10.1% to 10.4%. This was disappointing and surprising news, but the Bank of England still appears confident about its end of year prediction.

Partly, that’s because the price of some key commodities (such as energy) are falling, and partly it’s for mathematical reasons. The year-on-year CPI figures compare each month’s prices with those from 12 months previously – February 2023 against February 2022, March against March and so on. Prices began to rise sharply in 2022 after Russia’s invasion of Ukraine, so the CPI rate for the rest of the year will be calculated against a fast-rising baseline. The year-on-year difference will therefore appear to be smaller and, thus, we should see the CPI rate falling.

The following day (23 March), the Bank of England’s Monetary Policy Committee met to agree whether it should change the base rate of lending. It was a particularly difficult decision this time around because so many competing forces are at work. On the one hand, the CPI rate is still very high – giving the MPC a clear and continued incentive to raise the rate in order to reduce inflation. What’s more, the OBR’s forecast for economic activity was slightly better than expected, so the Bank may also have felt less concerned about the effect of a higher base rate on economic growth.

On the other hand, the UK has experienced much slower growth than its competitors; it is the only G7 economy to be smaller than it was before the pandemic, and it’s expected to shrink still further, by -0.2% by the end of the year. Moreover, with higher interest rates putting more pressure on banks and driving continuing instability in the global financial market, the MPC would be wary of doing anything to make a difficult situation worse.

Faced with these conflicting pressures, the Bank ultimately chose to raise the rate by +0.25% to 4.25%. That will raise costs for those not on fixed rates and, of course, for those seeking new mortgages, but the increase was smaller than in previous months and there is a fairly widespread belief that the Bank rate should now begin to plateau.

The Spring Budget

The UK Government unveiled its Spring Budget on 15 March. It wasn’t the most radical of announcements but, then, that had been widely expected. Constrained by high levels of public debt, the Chancellor had little scope to spend, but the Budget did nevertheless refer to some important developments.

The continuation of the Energy Price Guarantee was one of them. Extending now to June 2023, it should help to ensure that householders won’t face a sharp increase in energy costs next quarter. This will help to prevent any worsening of the cost-of-living crisis in the short term and, as global wholesale energy costs fall in the longer term, household budgets should start to feel less strained. That could ultimately help to support more activity in the housing market, particularly if – in the longer term – mortgage costs also start to fall.

The establishment of new Innovation Zones will also come as good news for investors – or at least those with property in the affected areas. With each zone receiving £80 million of funding over five years, local market conditions should improve steadily. Economic growth should support job-creation and higher average earnings, and could ultimately attract newcomers to each zone, thereby raising demand for property. Any one of these factors would be positive for investors hoping for reliable rental returns and longer-term capital appreciation. The funding will be awarded on a competition basis, requiring applicants to make a successful submission, so no definitive list of locations can yet be known.

Other noteworthy developments included:

• £20 billion of funding for carbon capture projects, creating c. 50,000 new jobs

• £200 million of funding for local regeneration projects

• Over £160 million of funding for mayoral authorities

• £400 million for Levelling Up partnerships

Again, it’s too early to say which regional and subregional economies will benefit from these measures, but wherever they are focused, the schemes should give rise to improving conditions in various local housing markets.

The Chancellor also stated that the UK is not expected to enter a ‘technical recession’ this year (i.e. two consecutive quarters of negative growth) although, by year-end the economy is expected to shrink by -0.2%. Thereafter, it should return to modest growth: +1.8% in 2024 and +2.5% in 2025.

Summary

No one is expecting a rapid return to capital growth – certainly not at the pace we saw in 2021 and 2022 – but 2023 is certainly giving investors some cause for optimism.

Most obviously, rental returns are still excellent. BTL properties are typically delivering healthy monthly incomes and, with demand still extremely high and showing no signs of lessening, there are good reasons to expect those returns to continue. On that basis alone, property is still looking like a far better option than most other asset classes.

Investors who have felt rattled by headlines about higher mortgage costs and dipping capital values risk missing out on important opportunities if they were to leave the market now. Economic forecasts are improving, global inflationary forces are abating and as time wears on, British householders should see their finances improve. As they do, so the property market should see new activity because, beneath it all – it is still supported by extremely strong demand. Ultimately, market values are the result of two forces – supply and demand – and both of them are still working very much in the property investor’s favour.

If you have any questions about any aspect of property investment, please call us today.