With residential property at a turning point, Lucian Cook outlines the impact of elevated mortgage costs, a difficult trading environment for planning and development, and the five-year forecasts for the housing market.
OPPORTUNITY AND ADVERSITY
It was not without good reason that the Collins English Dictionary’s word of the year was Permacrisis in 2022; beating partygate, vibeshift and splooitng to that particular honour. From both a financial and political perspective, we hit a pinnacle of uncertainty in the early autumn. Consumer confidence plummeted, while inflation expectations and gilt yields soared in the wake of a less than successful mini budget. While we have seen mortgage markets settle somewhat after a change in tack on fiscal policy, this nonetheless marked a clear turning point for the housing market.
QUEEN AND DAVID BOWIE 1981
Together with the largest increase in bank base rate for over 30 years, these events have brought a rapid change in the affordability of mortgage debt sharply into focus. The purchasing power of the majority of buyers has been quickly curtailed, despite the relaxation of Bank of England mortgage regulations in the late summer. Much higher costs of debt than we have become accustomed to are expected to suppress transaction levels and put downward pressure on prices in 2023 and, to a lesser degree, the first half of 2024.
LET'S NOT DO THE TIME WARP AGAIN
That is not to say we face a repeat of the price falls of the early 1990s or 2008. A combination of relatively low unemployment and lenders forbearance are expected to restrict repossessions. Meanwhile, the extent to which borrowers have locked into fixed rates and had their affordability rigorously stress tested by lenders, means the shock to homeowners finances should not be wholly unmanageable (though it will undoubtedly be uncomfortable for many). These factors limit the risk of a flood of stock hitting the market. Accordingly, while we expect to see mainstream house prices fall by 10% at a national level this year, we expect these losses to be made up by 2026, as a gradual reduction in the cost of mortgage debt brings more buyers with less constrained budgets back into the market.
I NEED A DOLLAR, A DOLLAR IS WHAT I NEED
The prime housing markets are expected to be less affected by, though not entirely immune to, increased costs of borrowing. Values of prime properties in central London, start the year -18% below their 2014 levels. This combined with a further currency play for equity-rich overseas investors should limits the scale of prospective price falls in this particular part of the market, though we expect a long awaited recovery to be tempered by a higher tax environment.
AIN'T NOTHING GOIN' ON BUT THE RENT
The two buyer groups who we expect to be most affected are first time buyers and mortgaged buy to let investors. That points to continued strong demand for private rented accommodation against the context of limited supply. This underpins our forecast for continued - if less dramatic - rental growth in the short term, with tenants having to commit a higher proportion of their income to housing costs.
While private Landlords carrying debt are likely to retrench from the market in the face of increased regulation including that contained in the Renters Reform Bill, this is likely to play to the hands of institutions who have already invested in the living sector. High occupancy levels, strong let up rates for new stock and a growing income stream will entrench the credentials of this sector, even if a period of price discovery tempers demand and tests pricing in the short term.
BRICK BY BRICK
From a development perspective the prospect of a downturn in the housing market comes at a time when Help to Buy has been brought to an end, build costs and development finance have become more expensive anddevelopment levies have been increased.
That has three potential consequences; a squeeze on developer margin, pressure on development land value and a fall in housing delivery. With a much less certain planning environment, the biggest casualty is likely to be the number of homes built by both private house builders and housing associations with competing financial obligations.
POLITICS AS (UN)USUAL
But with households housing costs on the rise, a lack of new housing supply is only likely to be politically acceptable for a short time. The economic benefits from housebuilding, across a range of tenures, remain compelling. Equally the societal consequences of a failure to meet housing need are likely to quickly become apparent.
Therefore, even if we are in for a period of purgatory from both a policy and market perspective, the simple fundamentals of supply and demand mean there will remain plenty of space for investment and innovation across the housing sector over the next five years.