Market Overview – Year End 2023

By on Wednesday, January 10th, 2024 in Lettings, Market Trends, Research, Sales.

RENTS STABILISE

Interest rates were the main housing market story for 2023 in London, as they were throughout the UK and in other parts of the world, with governments battling to suppress inflation. In central London, around 4% was chipped off house prices which had already been broadly flat for a decade. That modest fall, combined with a fall in enquiry levels created an opportunity for cash buyers or first time buyers with large deposits, to secure homes in prime locations. The upshot was that sales volumes held up better than could have been expected and ended the year at the same level as 2022. 

Our market performed better than the outer London boroughs and other regions of the UK where higher interest rates caused a more dramatic fall in demand. We note that reduced demand and price falls were also reported in the United States and Europe. The Wall Street Journal reported in October that the highest mortgage rates in 23 years were dragging down home sales in the US to their lowest levels since the subprime crisis of 2008.

In the UK, interest rates rose rapidly from 3.5% in December 2022 to 5.25% in August 2023 before a slow down in inflation enabled the rate to stabilise ending the year at 5.25%. 

Steep increases in service charges had an impact on demand in our markets because so much of the housing stock is apartment blocks rather than houses. Service charges have been driven sharply upwards over the past 2 or 3 years by a combination of high inflation, spiralling energy costs and insurance for fire safety. 

While higher borrowing costs can be built into a buyer’s budget, the level of annual service charge is out of a leaseholder’s control and this is now the single biggest drag on sales in the City, Midtown and East London. 2023 was another lost year for up to 1.5 million flat owners who are unable to sell their properties and continue to wait for fire safety remedial works to their buildings. 

The complexity of fire safety regulation also acts as a barrier to sales. Additional requirements fell on the shoulders of owners 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.   

Neither service charges nor fire safety regulations apply to freehold houses and buyers of houses in our markets are often less affected by interest rate rises. In consequence, demand in this part of the market has been resilient and buyers continue to compete for long term family houses. 

The most sluggish part of the sales market this year has been one-bed apartments but there is still nothing sluggish about the rental market. The rate of rental growth has subsided since the frenzy of 2021 and 2022 but the supply of properties to rent is still far below levels of demand and the upshot is that there are fewer new lettings as renters opt to stay in their current homes rather than expose themselves to the open market. 

Rates of rental growth have settled back to between 3% and 5% and for larger apartments in the City, there was no rental growth in 2023. Rents are now some 40% above their low point in December 2020 and 20% above 2019. 

With higher rents and lower purchase prices, projected gross rental yields on a one-bedroom apartment now average 6.25%, the highest they have been for 22 years and yet new investors are not returning to our markets.  The anti-landlord legislation introduced by successive governments over the past 20 years, has driven some landlords out of the market and deterred new ones. The double consequence has been to reduce the number of buyers, so depressing sale prices and reduce the supply of rental properties, so driving up rents. The list of measures bearing on landlords deserves to be repeated: a stamp duty premium, the withdrawal of tax allowances, local licencing, a tenant fee ban and plans to introduce the Renters Reform Act next year. UK buy to let investors have all but disappeared from our markets, leaving overseas investors to take their place. 

With prices unchanged in a decade, they are at a level that is highly attractive to committed buyers. This powerful pool of buyers sustained sales activity in 2023 and they had less competition to secure “best in class properties”. We fully expect this trend to continue into 2024 with only the prospect of a General Election to interrupt this pattern. 

Market Overview – Year End 2023
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