The morning after the night before

A night of excess is rarely without its consequences. But common wisdom is that the level and length of suffering the morning after depends on the quality and combination of what you had been drinking as well as the amount you consumed the night before.

Put simply, a couple of glasses of Picpoul de Pinet will have a very different outcome to a bottle and a half of cheap Shiraz followed by a not-so-cheeky Calvados.

There is little doubt that the intoxicating exuberance seen across large parts of the prime UK housing market through the second half of 2020, the whole of 2021 and the first nine months of 2022, have given way to a period of much greater sobriety when it comes to pricing. But, it has felt very different to both the early 1990s and 2008, not least because it follows a burst of price growth rather than a prolonged and pronounced upswing.

Rude awakenings

The seeds for a change in market conditions were sown prior to the short-lived and ill-fated experiment with ‘Trussonomics’, as Bank base rates were increased to tackle growing inflationary pressures and the economic hangover of the pandemic was exacerbated by the war on Ukraine. But for the mortgage markets, the events of late autumn 2022 were the equivalent of a disgruntled neighbour pulling the plug on the music system, turning on all the lights and threatening to call the police.

And while the top end of the market was less exposed to disruption in the mortgage market than the UK housing market as a whole, it was not immune. As data from TwentyCI shows, the net number of agreed sales over £1 million fell by 35% in October of last year, as buyers became markedly more circumspect and recalibrated their budgets.

Activity returns

This continued into November but with each month that has followed, there has been a gradual normalisation in activity levels.

That recovery in activity has been underpinned by sellers re-setting their price expectations. While at the height of the mini-housing market boom sellers could price high and wait for the market to catch up with their expectations, this is no longer an option, particularly given the reduced buying power of upsizers.

Our November client survey showed that 43% of these upsizers, who are the bedrock of demand across the bulk of the prime market, cut their budgets to reflect higher debt costs. By April that had fallen to 31%; though a further 11% were looking to use more equity than debt to fund their next purchase.

Still feeling sensitive

As a consequence the market has become more price-sensitive, particularly in the prime regional markets where values softened by -2.3% on average in the six months to the end of March. The effect in the prime markets of London has been less pronounced, partly because prices rose less between June 2020 and September 2023 and partly because demand has refocused back towards the capital as day-to-day life has returned to normal.

But even here not all parts of the prime market have been affected in the same way. In prime central London, where the use of debt is often more of a convenience than a necessity, the effect has been muted. During the mini-housing boom it had essentially adopted the role of “designated driver”, quietly watching as buyers fervently shifted their attention to the allure of country living. And so while it understandably lacked a sense of urgency over the past six months, demand has continued to gradually build from an increasingly wide range of international buyers, though their propensity to commit has been reined in by an increasingly tight regulatory environment.

Across the board, composition of the market has also changed, as cash buyers and those with the least reliance on debt have found themselves at a competitive advantage, not least because of their ability to act with greater speed.

When will the fog clear?

As sure as a good night’s sleep does wonders for the process of recuperation, that will change as mortgaged buyers progressively return to the market. In all likelihood that will be a prerequisite for a market-wide return to price growth. In turn, this is heavily dependent on what happens to the cost of debt.

Yes, we have seen far greater stability and competition in the mortgage markets, given an expectation that in due course Bank base rate will be cut once inflation is tamed. But inflation remains stubbornly high. That means we can be reasonably certain that any fall in the cost of debt will be gradual, less so about when exactly we can pencil that in.

All of this suggest the market will be price-sensitive for some time to come, during which period its fortunes inevitably will ebb and flow. Certainly we cannot rule out further price adjustments, not least because of the impact of weak sentiment feeding up from the mainstream markets. Yet without the same pressures of previous downturns, we expect to see a more seasonal prime housing market continue to function, especially where needs-based buyers underpin demand and equity holds sway over debt as a source of funding.

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