UK PROPERTY MARKET update: august 2023
August 31, 2023
The August market might be best summed up as being out with sensationalism and in with stability offering plenty of good news for UK landlords. The UK government has promised to ditch the requirement on landlords to achieve EPC C ratings (or above) by 2028; there is a consensus amongst leading market commentators agree that UK lending rates are hitting their peak; and activity amongst first time buyers - a crucial bellwether for the UK market - is stronger than expected. Let’s dive in…
The consensus on interest rates and UK mortgage lending
August saw a distinct consensus amongst those in the market that mortgage rates had probably hit their peak, despite the Bank of England raising the base rate by another 0.5% to 5.25% at the 3rd of August meeting. Savills wrote that mortgage providers had already accounted for this rise in their current product offerings, which is why some lenders (HSBC included) chose to lower rates and thus battle it out at the top of the price comparison websites. Chat ensued of the top rates dipping below 5% soon.
The BoE rise was the 13th consecutive rise since December ’21 but, likely its penultimate rise with the well-respected Oxford Economics predicting the base rate to peak at 5.5% in 2023, before heading southward again. A very useful point of context to note for current UK market speculators is that the average UK mortgage rate between 1995-2022 was 5.62% with lows of 3.59% in September 2021 and a high of 8.87% in September 1998. So given this view, we’re certainly not in unfamiliar or unprecedented territory.
Yes, the higher rates have led to a modest price correction in the market in some places of the UK but as the chief economics correspondent of The Guardian, Larry Elliot wrote, “The idea that a 2.4% annual fall in prices means the property market is in crisis in nonsense. Asset prices can go down as well as up and a correction was always likely after the post-lockdown boom.” He also pointed out that a typical UK property is still worth £45k more than it was before the pandemic arrived.
That we are not seeing a significant fall in activity and market confidence is down to a confluence of stabilising factors including:
· Low UK unemployment rates.
· Solid wage growth (so solid it’s soon predicted to rise faster than prices).
· Home buyers adjusting their budgets to buy smaller more affordable properties – but crucially still engaging with the market (completions rose in June according to data from HMRC, by the way).
What we mean to say here is if your goal as a property investor is strong rental income and long-term capital appreciation, that goal is as good as ever in the UK.
Annual rental growth remained high at 10.4% in June (Savills) and showed a 0.1% increase on May. The North showed the largest leap in rental income, where average rents having increased by 27.9% since March 2020 (the UK average being 23.8%).
What about future price growth?
To best answer this we need to look at supply, which for new-builds reads a bit of a sorry story at present, although not for investors. According to Savills 2023 Q2 update, new-build supply fell to its lowest since 2017, largely a result of higher lending and build costs. Yet the agency has identified a new contributing factor to a sluggish supply - a phenomenon it has termed the ‘Consent Crunch’ where planning consents are down nationwide. This will inevitably have a detrimental effect on future supply, sending prices northward.
The Q2 report states that the government target of 300,000 new homes per year will be missed in the short to medium term and that on present planning consents 40% of Local Authorities would fail their housing need. This is why we can be sanguine about any future predictions in the price of UK new-build property because demand will seriously outpace supply from this year and for the foreseeable future. The problem is particularly acute in the South East where only 81% of homes needed for the next 12 months have been built and only 73% of the necessary future pipeline having been granted planning.
The Build To Rent market, however, offers a different picture, which is on track to meet its targets (interestingly along with the affordable homes sector), largely from its huge growth in investment. This could mean further growth in rents and certainly further growth in sale prices with more rental properties available than stock to buy, forcing the hands of would-be homeowners to rent.
Any more good news?
We’ve saved the best for last! No longer is the pressure on landlords to make properties perform to an EPC Rating C (or above) hanging over their heads like the sword of Damocles. Originally planned to come into law by 2025 and then 2028, the UK government has promised to scrap the proposal completely after landlords deserted the industry in their droves – a contributory factor to the crazy rental market, squeezing supply further. Keen to get a grip on rents the UK government has now recognised the pressure on landlords to get properties compliant and proposed a rethink. However, should Labour be elected in the next General Election (due in or before January 2025) EPC ratings remain a key component of their housing policy so we still advise clients who are browsing the market to buy properties with an EPC rating of C or above – not least as they are obviously more appealing to prospective tenants.
In summary
We repeat our point again of the UK offering property investors a safe environment in which to purchase; strong rental income and long-term capital appreciation remain an achievable investment aim.
To that end, in September we’ll be launching immediate income-producing short term lets in the northern city of Leeds, a brand new and exciting launch in Birmingham's Jewellery Quarter and a brand new market in Germany - more on which to come.
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RPA Group Associate Director
CRAIG WARWICK
about the AUTHOR
Craig is the Associate Director of RPA Group, mainly focusing on South African Investors. He has been in the industry of UK investment property for around 13 years. He has worked across investment land, student accommodation, care homes, and high-demand BTL markets across the UK. Have a clear understanding of the challenges in the local markets related to property investment, the dynamics, and the requirements for local investors to invest abroad.