The UK
property market has demonstrated remarkable resilience despite facing
significant challenges over the past 18 months. Many analysts in the autumn of
2022 predicted a severe downturn in house prices, driven by economic
uncertainty, a cost-of-living crisis, and rising mortgage rates.
Yet,
contrary to these grim forecasts, UK (and Northampton) house prices have
remained relatively stable. This article delves into the reasons behind the
unexpected stability of the property market, providing insights for buy-to-let
landlords and homeowners alike.
Economic Predictions vs Reality
In the autumn
of 2022, following the controversial Liz Truss and Kwasi Kwarteng mini budget,
there were widespread predictions of a dramatic fall in UK house prices. Some
forecasts suggested a potential decline of between 20% and 35%. However, these
predictions have yet to materialise. While there has been a slight drop in
prices since their peak in autumn 2022, the decrease has been modest, with
official Land Registry figures indicating a fall of about 3.12% in UK house
prices in the last 18 months.
Yet if
we look at the last 12 months, British house prices according to the Land
Registry were 0.89% higher in April 2024 than April 2023. Yet the issue with Land
Registry data is that by its very definition, it is 6 to 8 months out of date,
as it measures house prices agreed 6 to 8 months before that data is published.
Data
from Denton House Research using live real time data of £/sq.ft sales agreed statistics
indicate UK house prices on the 97k sale agreed homes in May 2024 stood at
£348/sq.ft.
For
comparison, in April 2024 it was £344/sq.ft, in March 2024 and February 2024 it
was £339/sq.ft and in January 2024 it was £331/sq.ft, a rise of 5.13% since the
New Year.
This
resilience raises the question: Why were the forecasts so inaccurate?
Improved Lending Practices
One
significant factor that has helped stabilise the property market is the
improvement in lending practices. During previous housing market downturns,
banks often came under fire for poor lending standards. However, changes to
mortgage regulations in 2014 with the Mortgage Market Review (MMR) have made a
considerable difference this time. These regulations require banks to ensure
borrowers can afford their monthly repayments even if mortgage rates increase
significantly. This precaution has provided a substantial buffer for
homeowners, enabling them to cope with rising rates.
For
instance, in 2007, shortly before the global financial crisis, many borrowers
did not need to prove their income to their banks. The 2014 MMR changes
addressed this issue, ensuring that lending was based on sound financial
footing. Consequently, many homeowners could afford higher mortgage payments
when their mortgage rates increased recently.
Employment and Wage Growth
Another
crucial element has been the relatively stable employment situation. Although
the UK experienced a brief recession over this last winter, unemployment rates
have remained low at 4.3%, compared to 8.5% during the 2008 global financial
crisis. Moreover, average wages (including bonuses) have increased by 5.7% over
the past year, reaching their record-high level of £682 per week.
This
combination of low unemployment and rising wages means that fewer homeowners
have been forced to sell their properties due to financial difficulties. Even
those facing financial challenges have found support from proactive banks,
which have offered solutions such as interest-only payments or extended
mortgage terms to help them manage their repayments.
Supply and Demand Property Market Dynamics
The
impact of economic challenges on the property market has been more evident in
transaction volumes than in prices. Typically, there are about 1.16 million
house sale completions annually in the UK. However, this number surged to 1.48
million in 2021 due to the lockdown inducing ‘race-for-space’. It then dropped
to 1.26 million in 2022 and further to 1.02 million last year.
While
demand has decreased because of higher mortgage costs, supply has also reduced
as potential sellers have chosen to wait for better market conditions.
There
was an 11.5% increase in net house sales in the first five months of 2024
compared to the first five months of 2023 (400,697 UK net house sales YTD to 26th
May 2024 vs 359,523 UK net house sales), but only a 9.9% rise in new homes
coming to the market (745,715 UK listings YTD to 26th May 2024 vs
678,845 UK listings).
First-Time Buyers and the Rental Market
First-time
buyers have been particularly affected by rising mortgage rates, as they
typically need to borrow a larger proportion of their home's value. Despite
this, they have been more active than expected, partly due to the rapid rise in
rental prices. High rental costs have motivated many to purchase homes, often
with financial help from their families. Data from the English Housing Survey
revealed that just over 11 out of 30 first-time buyers received financial gifts
from their families in the past year, up from 8 out of 30 in 2022. This support
has played a vital role in maintaining activity in the housing market.
Northampton
Property Market
So how
is all this affecting the Northampton property market? One measure is judging
what people are paying for Northampton homes.
Looking at the
monthly exchange of contracts data, the average price paid from May 2019 to
April 2020 for a Northampton home (NN1-NN7) was £265,853. The average price
paid in the last year (June 2023 to May 2024), has been £318,701, a growth of 19.88%.
Now, it is important to stress, this does not
mean Northampton house prices have risen by 19.88%, just the average price paid
between the two 12-month periods has changed. Over the coming weeks and months,
we will be analysing the £/sq.ft data for Northampton and reporting back in the
Northampton Property Blog.
Outlook for House Prices
Eighteen
months ago, economists almost unanimously predicted a decline in house prices.
Now, many are forecasting growth. Estimates vary, with some predicting a 4%
increase, although this might be optimistic. Other estimates suggest a 3% rise,
while some analysts expect prices to remain broadly flat this year due to
stretched affordability, especially for first-time buyers.
The UK
property market has shown an impressive ability to weather economic storms,
thanks to sound lending practices, stable employment, rising wages, and family
support for first-time buyers. Whilst transaction volumes have taken a hit from
the heady days of 2021 and the long-term average, this has meant, along with
the other factors mentioned in the article, house prices have remained more
stable than many predicted.
If you
are wondering about the general election’s effect on the property market, it is
our belief it will have hardly any effect on the medium term direction of the
property market (on assumption neither of the main parties have any ‘creative
and wacky’ policies not yet published at the time of writing this article).
So, as
we progress into the second part of 2024 and beyond, the property market's
resilience will continue to be tested, but the foundations laid in recent years
provide a solid base for navigating future challenges.
