UK PROPERTY MARKET UPDATE: FEBRUARY 2023
March 01, 2023
Newly released official figures in February show the UK economy’s “underlying resilience.” This underlying resilience confirms much of what we’re seeing at the moment in the UK housing market; city centres doing well (especially new build apartments), record rental prices and mellowing mortgage rates. We’re hearing lots of chat about the UK being a buyer’s market – particularly a foreign investor’s market with the exchange rate still advantageous; but one thing we can certainly say for sure at the moment, it’s most definitely a landlord’s market.
A Covid correction for the rest of the country, but a resurgence for city centres
Let’s be honest, 2022 didn’t end on the most positive note for the UK. The energy crisis exacerbating the cost-of-living crisis, crazy mortgage rates and self-inflicted political turmoil upset the markets. But as they say, a week is a long time in politics, particularly UK politics, and under the careful hand of Rishi Sunak, we’re seeing a return to normality.
And we don’t mean the ‘new normal’. We mean business as usual. Because what’s important to remember amidst the talk of easing house prices is the abnormal level they have risen to as a result of the pandemic. The UK market is undergoing a Covid correction that really, we should all have anticipated. House prices rocketed during the ‘race for space’, further fuelled by low-interest rates and the temporary suspension of Stamp Duty.
When it comes to an easing off, we are emphatically not looking at a case of history repeating itself; be that the 2008-9 crash or the 1990s. As The Economist put it, “The [UK] housing market is in better shape to deal with the headwinds than in previous economic cycles.” Even if house prices fell by 10%, that would take the price of an average house back to the level it was in the second half of 2021.
The UK has wised up to the influence of its housing market on the wider economy. The fundamentals are very different. UK homeowners have £ 8 trillion invested in equity. LTV ratios mean that very few people will fall into negative equity. According to the Financial Conduct Authority, in 2007,15% of mortgages had an LTV ratio of more than 90%. The ratio in 2021 was only 4%!
Demand is showing a rebound to pre-pandemic levels in line with 2018, and 10% higher than 2019 (Zoopla), whilst the gap between asking and achieved prices is 3-4% and seems to be holding. But what’s clear is that we can’t talk about the property market as a monolithic whole. Investors have to look for profitable pockets; and the RPA view is that city centres, namely London, Birmingham and Manchester offer solid and safe investment growth.
Everybody wants the new build on the block
Recent figures released by Zoopla in January 2023 showed increased demand for flats; particularly those within commuting distance of city centres, a trend witnessed across the entire UK. The number of people looking for one-two bedroom flats is up 5% from one year ago.
Richard Donnell, executive director at the property portal, commented “There has been a clear shift towards flats as the early buyers focus on value for money and adjust expectations given the hit to buying power from higher mortgage rates.”
It’s not surprising that given the cost-of-living crisis, new builds are back in fashion. Generally, they have cheaper bills (an EPC A or B rating), modern energy-efficient appliances, more favourable insurance premiums (because they’re regarded as more secure) and 10-year building warranties are especially attractive when budgets are pinched. The Home Builders Federation reported that new build owners save £2,600 a year in bills.
It’s now cost-of-living, not Covid that is dictating the housing preferences of UK buyers. But, the problem is, the flow of new builds to the UK market is -26% on its five-year average, which is producing a serious supply-demand imbalance. The good news, however, is this insulates the market, making large-scale price falls unlikely to materialize.
Supply & Demand: A buyers’ market or a landlord’s market?
Agents are reporting an appetite to buy, but what of rent? According to Zoopla, rental demand is 142% higher than the UK 5-year average. ONE HUNDRED AND FORTY-TWO PERCENT! To give you some context, again, based on the five-year average, rental demand was up 64% in 2021 and 20% in 2022. And, to add to the squeeze, available rental stock is down -47% on 2022 levels.
This squeeze is particularly acute in London, where in early February agency Benham’s reported that “low supply was pushing London rents to giddy heights.”
Indeed, landlords have every reason to be giddy. In 2022 annual rents in Birmingham jumped by 17.6%, Manchester by 20.5% and Greater London by 16.1%. But in London, we’re seeing a rent-on-steroid situation; tenant demand up 20% and, owing to the cost-of-living crisis, studio flats have overtaken one bed at the most in-demand flat for renters.
According to Rightmove, the competition for available studios is 71% higher than it was in 2021. Four times as many tenants are looking for a studio flat as there are studios available. Anecdotally, one lettings agent described how in the first 48 hours of marketing a property 5-10 enquiries were standard, and now they’re getting 30-40.
Tenants are even driving rents further by offering more just to secure the apartment. It’s easy to see why property lender Finanze is predicting a 4.3% rise in London rents in Q1 alone and a UK-wide increase of 12.91% in 2023.
A recent article in the Financial Times lamented that rising rents would make it harder for first-time buyers to get out of rental accommodation, especially with big lenders like Natwest pulling out of the government Mortgage Guarantee Scheme (which supports first-time buyers with a 5% deposit) to launch its own product for first-time buyers. On the flip side, this shows how lenders are pivoting to help first-time buyers enter the housing market by offering them specific finance deals. To our eyes, it seems as though all levels of the market present opportunities.
Mortgage wars
The Bank of England increased their base rate by half a percentage point to 4% in January and it’s likely to stay that way for the foreseeable future. Every day, we’re seeing more and more competitive mortgage deals available to our clients, a far cry from the hysteria we saw at the end of 2022 about rates of 6+ per cent.
Nick Morrey of Coreco brokers said, “there is plenty of margin for lenders to drop rates,” whilst David Hollingworth of brokers L&C spoke of a “fixed rate price war” with rates dropping to as low as 3.5-3.8% by the middle of the year (they’re presently 5.45%). The rapid repricing of the last few weeks has seen HSBC introduce a new 3.99% five-year fix for customers, lower than the BoE base rate and Virgin Money offering 3.99% for 10 years.
All this to say, if you’ve been discouraged from buying because of interest rates, it’s a good time to pick up the phone to the mortgage broker again.
Big news out of Birmingham
Real estate giant Lendlease’s plans for Birmingham made the news in January with the announcement of their £1.9bn Smithfield scheme described as the ‘last piece of central Birmingham needing repair’ and ‘the most important city-centre regeneration project in the country today by far.’
With proven growth and further strong growth, figures forecast already for Birmingham, Lendlease’s presence in the UK’s second city cements its appeal further for investors. If you’re keen to get it on action take a look at our new launch, Tyndall Court, the second phase of the sold-out scheme, The Copperworks in Birmingham’s much-coveted Jewellery Quarter.
If the news out of London is whetting your appetite, then our New Hayes scheme ticks all the boxes; with studios from £292,000 and we also have a small boutique development in ‘Prime Outer London’ Putney with studios from £500,000 that will be completed by the middle of the year, thus enabling clients to get in on the current London rental renaissance.
As ever, we’re here to answer any questions you have. But in the meantime, as the Brits are fond of saying, keep calm and carry on.
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ABOUT THE AUTHOR
Managing Director
RICHARD BRADSTOCK
RPA’s founder, Richard has worked in residential development investment for 20 years and oversees the general running of the business ensuring the RPA Group retains true to its founding principles. Over his career Richard has built an incredible network of international property investors and like-minded industry professionals. The RPA Group was born out of a duty of care to provide property investors with an industry-leading and integral service, one that connects investors with quality and desirable investment opportunities, whilst providing reliable and trustworthy market commentary and analysis alongside, enabling investors to make the best, most-educated decisions for them.
