GENERAL ELECTION EXPECTED
It is expected that inflation will continue to fall in the first half of 2024, particularly with a General Election in prospect helping to restore confidence to the property market. On that basis, it is anticipated that the Bank of England will be able to cut interest rates by mid-year and rates are widely expected to fall back below 5% by Q4 2024.
Mortgage rates will naturally follow which in turn will encourage more would-be buyers back to the market including tenants with large deposits or parental assistance. Where many would be buyers adopted a wait and see approach in 2023 we will see more commitment in 2024 as confidence returns to the sales market.
We see supply being the bigger problem in 2024 as, in our experience, owners continue to wait for prices to improve before putting their properties up for sale. All in all, we expect another year of caution on the side of buyers mismatched by owners only willing to sell at premium prices. Stronger demand for larger flats and houses will again outperform demand for one and two bedroom apartments.
Politics will play a starring role in the 2024 housing market as the government and the opposition parties vie to offer solutions that appeal to the electorate. No-one yet knows the date of the General Election but whether it is May, October or even later, the uncertainty around the build-up will inevitably be a dampener on activity. In reality, the build-up had began before 2023 ended.
Whatever the outcome, we can expect a post-election bounce in confidence once a new government is elected, with the associated boost to the economy, so the timing of the election is critical to the outlook. There is growing potential to deliver price growth from the current low base in 2025 following a decade of no growth in residential values across the city and City fringes.
Irrespective of the election, the property market faces considerable uncertainty arising from several pieces of new legislation affecting the rental, sales and new homes markets. First the uncertainty over the timing of the Renters’ Reform Bill, then the prospect of leasehold reform with its proposed changes to ground rents on existing apartments in the sales market and finally the requirement for two staircases in new residential building above 18m as part of fire safety regulation.
The level of service charges for leasehold flats will continue to be a major issue for buyers. They have been driven up by fire safety requirements, higher insurance premiums, energy costs and inflation and are unlikely to fall in the short term. Demand for freehold houses will remain in favour in 2024 partly due to the fact that they do not come with any service charge risk.
The final pieces of regulation introduced by the Building Safety Act 2022 came into force on 1 October 2023. The new regime is focused on improving building safety in the design, construction and occupation of higher-risk buildings (i.e. multi-unit residential buildings over 18 metres high), but it also aims to improve standards across the whole industry.
We understand that only around 12% of all buildings affected by the fire safety issue are covered by the UK developers’ pledge – which leaves 88% of buildings relying on an application for grant funding from the government’s Building Safety Fund. In some cases, buildings that had successfully applied to the Building Safety Fund and were ready to start works, had to withdraw from the fund on receiving confirmation that their housebuilder had signed the government’s pledge, putting the buildings and leaseholders back to square one.
Following modest rental growth in 2023 we expect rents to stabilise at current levels in 2024. Rents are at an historic high and renters have choices. They can relocate further from the centre of London, or compromise on the amount of space they occupy. We expect growth to revert to its long-term trend of around 2-3% per annum from now on, particularly if inflation is back under control. Over the long term, wage growth is the strongest indicator of rental growth.
Both main political parties have acknowledged the risks of further intervention in the rental market. The lessons from Scotland have been noted. The Renters Reform Act has been scaled back and, in any event, it is now unlikely be implemented until after the next Election. That said, any new legislation designed to disincentive investors would lead directly to the loss of more rental stock and result in further upward pressure on rents. We will be on the alert for any such intentions.
Certainly, we do not expect any tax incentives designed to encourage new buy to let investors, meaning the lost stock will not be replaced by small investors. Policies that attract landlords are politically unpalatable as it would make homes less accessible to first time buyers. This conflict lies at the heart of the UK’s housing crisis.
Institutional investors are still keen to deliver rental homes at scale and a fall in interest rates will facilitate their expansion. In our core central markets, the most likely route to market for institutional investors is by converting surplus office space. Office occupancy has plummeted since the pandemic and hybrid working has become an accepted norm. The logic of converting offices into homes is sound – it would help alleviate the housing shortage and spread spending in the local economy across weekends and evenings.
However, there are planning hurdles which ensure that office to residential conversion will not be a short-term fix for the housing market in London. The inner London boroughs continue to opt out of the permitted ‘change of use’ directive in a bid to protect employment uses. We expect to see a gradual transition over several years but only isolated examples in 2024.
Political manifestos will take priority over economic issues as the dominant factor in 2024. Looking further ahead a post-election surge in confidence, if it occurs, would stimulate a rebound in sales transaction numbers and also provide greater clarity to landlords on what the future holds for their property investments.