Green Shoots in the UK Housing Market

Posted by Knight Frank Newcastle on 10th May 2023 -

House prices rise

UK house prices rose 0.5% in April following seven consecutive monthly declines, Nationwide reported yesterday. That leaves values 4% below their August peak.

There are good reasons to believe that we are close to the bottom when it comes to pricing and activity levels. Mortgage rates have eased since late 2022 and mortgage approvals - a good leading indicator for sales - rose in February following five consecutive monthly declines. Consumer sentiment, too, is running at its highest level for more than a year.

That's not to say that we expect a rapid recovery. Activity levels have improved slightly from a low base. The Bank of England will likely raise the base rate again - perhaps more than once. Borrowers rolling off fixed rate products will still face painful monthly payments relative to the deals they signed two or five years ago. The picture for first-time buyers looks particularly difficult.

However, it seems clear that stability is returning and enough borrowers are able to cope with where mortgage rates have settled. You can still get a five year fixed rate product for a shade under 4%, but perhaps not for long. We'll get more mortgage approvals data from the Bank of England tomorrow morning, which should provide more clues as to how the spring and summer sales markets are likely to progress.

Housebuilding policy

Many first-time buyers find themselves squeezed between surging rents and unaffordable mortgage rates. The average 90% LTV five year fixed rate mortgage rate sits at 5.26%, up from 3.64% a year ago, according to Moneyfacts.

This is going to be an important issue during next year's general election campaigns. We talked last week about the delicate balancing that the Conservative party must take as it seeks to boost homeownership without alienating constituents that oppose new homes.

The manoeuvring has already started. Help to Buy is "back on the table", the Times reported on Monday. The paper cited three government sources who said that a new buyer support scheme could be unveiled as part of the Autumn statement. Labour, too, have been hinting that homeownership will be a key plank in their campaign - the Times's Patrick Maguire had a good round up on Monday. Pledges are likely to include restoring housebuilding targets, handing more power to local authorities, promising 70% home ownership and delivering hundreds of thousands of new council homes.

"I’m told a Starmer government would wield both carrot and stick," Maguire says. "Councils would be made to work together to come up with plans for development at a regional level, spreading a burden few want to shoulder individually, with cash and infrastructure as the prize for new housing."

The land market

For now, the housebuilders are grappling with heightening planning risk and various interventions by Natural England that the Home Builders Federation reckons could cut housebuilding in half.

This week it emerged that Berkeley Group had written to Michael Gove informing him that it will go to court to challenge his “irrational decision” to overrule planning inspectors and refuse permission for its 165-home development in Kent.

Sales rates in the new homes market are improving, but recent trading updates by the housebuilders suggest that a combination of tough economic conditions, elevated build costs and planning issues will keep output very subdued this year.

All of this is having an impact on the land market. UK greenfield and urban brownfield values fell on average by 3% and 4.6% in the first quarter of this year, taking the annual fall to, 9.1% and 13.7% respectively, according to Knight Frank’s Q1 Residential Development Land Index, out this morning. In prime central London, an ongoing scarcity of sites for sale meant values were flat, bucking the national trend. Developers are cautious on planning risk and are prioritising consented land deals, of which there are very few available.

US banking turmoil

The crisis of confidence in mid-sized US lenders continued yesterday as the share prices of a handful of US regional banks suffered double-digit falls.

The longer this goes on, the more likely it is that credit conditions tighten meaningfully, weighing on asset values. So far, the Federal Reserve has deemed that inflation poses a greater risk to the economy than stress in the banking system, and that's likely to remain the case when it publishes its interest rate decision later today.

The committee is expected to raise the policy rate to a range of 5-5.25%, the highest level since 2007, but that could mark the end of this cycle. Jobs market data out yesterdayshowed real signs of loosening, with openings falling to their lowest level in nearly two years.

In other news...

We have updated our House View with new analysis of the logistics and retail markets.

In a new Rural Market Update, Mark Topliff considers the booming exports of scotch whisky.

Elsewhere - pandemic-era graduates struggle with teamwork, say Deloitte and PwC (FT), your next landmark is due to arrive at Liverpool St (Times), and finally, than uncertain outlook for Golden Visas (Bloomberg).

Read article on the Knight Frank website 

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