2023 could hardly match the drama of its predecessor 2022 and as expected, the UK political landscape became more settled this year. The residential market across Midtown, City and East London performed in line with our expectations, with demand recovering for both sales and lettings in Q2, after a slow start to the year.
However, conditions remain challenging. Inflation has been more persistent than most commentators hoped, and The Bank of England responded with a 13th consecutive interest rate rise on 22nd June. At 5.0%, interest rates are now at their highest level since 2008 and while they are not close to levels of the late 90s, they sit against a backdrop of much higher multiples of house prices to earnings.
Cash buyers have taken advantage of the slowdown in sales but first time buyers and second steppers have struggled to come to terms with the new rates of interest – particularly as they come alongside increases in other living costs and, in our markets, service charges driven upwards by higher energy and insurance costs, and the ever-increasing burden of regulation around fire safety.
The result is that larger homes and freehold houses are in demand while entry-level one bed apartments have been out of favour – and their prices have dipped another 2% this year. Overall, values in our markets have remained stubbornly fixed at 2013 levels for another year – which makes them highly attractive to buyers with the means to act but at the same time offers little motivation to owners to put homes on the market unless they have strong reasons to sell at this point in the cycle. As ever, what is an incentive for buyers, is a disincentive to sellers.
All of our markets, City, Midtown and East London, suffered from a shortage of homes for sale in the first half of 2023. Most homeowners in our areas are in a position to wait until confidence returns to the wider economy before putting properties up for sale and the negative sentiment in the press will only prolong the drought.
The complexity of fire safety regulation also acts as a barrier to sales. Additional requirements fell on the shoulders of leaseholders looking to sell from January, under the 2022 Building Safety Act, which required the production of a Leaseholder Deed of Certificate and a Landlord Certificate. While this was intended to streamline the process, it has actually created greater delays and confusion for buyers, sellers and even for their legal advisors.
These issues do not impact the rental market, other than by slowing the rate at which landlords can sell investment properties. Renters are not exposed to escalating service charges – or at least not directly – because those costs are borne by the landlord.
The balance of power lies with the landlord in the current market and has done since the end of lockdown. After making up for lost ground, rents have grown as much as 19% beyond their pre-pandemic levels although they remained unchanged in the first half of 2023.
The landlord has not always had the upper hand and many feel bruised by the changes to taxation in recent years and, for those holding mortgage debt, by interest rates. Certainly, we are not seeing new investors coming into the market despite the fact that gross yields are moving back towards 5%.
More renters are electing to extend existing tenancies rather than risk the vagaries of the open market especially as other living costs are so volatile. This has helped reduce turnover in the rental market and contributed to the sense that stock of rental properties is no longer enough to meet demand. To some extent, today’s imbalance is still a legacy of the extraordinary conditions during the pandemic which have not yet reverted to normal.
Rental markets are always quieter in the winter months and this year was no exception. There was no rental growth in the early months and, although pressures inevitably push rents up in the busy summer months, we fully expect that to subside towards the end of the year.
All in all, the market has remained surprisingly balanced this year. In the sales market, new sales have been proceeding with lower numbers of buyers being matched by low numbers of sellers and for rental, after a period of heightened activity, it has settled to a more measured pace.