Conveyancing Delays Lengthen
The price of a one-bedroom apartment is essentially the same today as it was in 2013. At these prices, owners in our markets tend to hold on to their assets long term, rather than sell at unappealing prices. It’s a message we have restated many times in recent years and it remains true in the current market.
We have seen no shortage of motivated buyers but unfortunately with interest rates rising on a monthly basis in the first half of 2023, confidence amongst buyers has been understandably missing. The upshot is that prices have held fairly stable, but transaction volumes are lower than 2022.
UK mortgage approvals – a lead indicator of future sales – have remained low so far 2023, averaging 45,000 per month compared to a 10-year average pre-Covid of 60,000 a month. At the end of May nearly 10 per cent of mortgage deals disappeared overnight and rates are now not expected to peak until the end of this year. Inflation is not falling as quickly as had been hoped and that is driving the decision to move interest rates upwards.
There has been a modest decline in prices averaging around 3% in the first six months of the year as the market reacted to the succession of interest rate rises, which is in line with our published expectations at the end of 2022. That makes the average one bed apartment, £15,000 cheaper than it was in December.
With less stock coming to the market we expect prices to hold firm for the rest of the year. In any event, prices are not the barrier to sales given that they are at the same level as they were a decade ago. The real barriers are lack of stock on the supply side and lack of confidence on the buyer side – which results in a calm and balanced market. That said, our offices continue to see strong levels of enquiries for ‘best in class’ homes as cash buyers are less affected by higher interest rates and multiple bids are still being received for well priced homes.
Interest rate rises are not the only cause of stagnation in the market. Around 30% of UK house purchases are financed without any mortgage debt at all, using cash and, in our markets, cash buyers have always been an important driver. At the same time domestic Buy to Let investors seem to have retreated altogether, discouraged by the increased cost burden of being a landlord and the uncertainty created by the government’s evident dislike of small-scale property landlords.
A major drag on the sales market is the time it is taking to complete transactions. For leasehold properties, conveyancing typically takes between 4 and 6 months to reach completion, from the time a sale is agreed. These delays cause frustration all round especially when a mortgage offer expires. Solicitors blame the lenders for their ever-lengthening list of criteria particularly relating to The Building Safety Act, but even where there is no lender involved, buyers’ solicitors look to apply the same stringent tests to ensure their clients are offered a comparable level of protection.
All of this means that first time buyers with large cash deposits are in a stronger position than they have been for some time to secure a home in City, Midtown or East London. They will not be competing with domestic Buy to Let investors and second home buyers although there is interest from some overseas buyers for family homes there are fewer overseas investors.
For dollar-denominated investors, current market conditions with historically low prices remain attractive. We have particularly noted Hong Kong buyers since the start of the British National Visa scheme in January 2021, showing interest in family houses. We have also seen an increase in Turkish and Israeli buyers being active in the London market in the past 18 months.
There is very little difference between our markets in the way prices for apartments have behaved this year (Table 3). Midtown one beds and City 3 beds have been most resilient with virtually no change in price, while one beds in City and East London lost 4% of their value. These small changes are minimal over a short period and they are more about timing. We generally see corrections from year to year which bring all price bands broadly in line over a 12 month period.
Where there is a notable change is in the demand for family houses. The desire for outside space, which was highlighted during the pandemic, has persisted in our markets and particularly for families living in the city.
The preference for houses over flats also reflects the additional burden of service charges and increased regulation around fire safety and the requirements for various certifications which, despite being well-intentioned, are unfortunately causing confusion, severe delays and more costs. (See page 7 for more detail on fire safety).
The owner of a one bedroom apartment in the City, who bought in the wake of the 2008 financial crisis, will be holding an asset worth 67% more than they paid. One who bought in 2015, would not be able to recoup their purchase price. Property investment always comes with a health warning but that same investor who bought in 2015, could have earned well over £200,000 in rental income during that period, far in excess of the interest rates available on cash.
Table 4 illustrates the opportunity and the risk associated with property price cycles. The difference between buying in 1994 and 2000, just 6 years apart, is stark. This helps to explain why owners in our markets are reluctant to sell at decade-old prices – as they are today – particularly when they have been significantly higher in the interim. We do not expect to see activity levels restored until prices rise.
That said, there remains a glamour around owning real estate in central London that is hard to value. London still tops the rankings of global cities and its cultural and leisure scene has bounced back to life. The 21% growth of jobs in the financial and business services sector since the pandemic has been extraordinary and means that even with fewer days in the office, the number of workers in the city is rising.
Experience has become the watchword in the office market, as it did in retail a few years earlier. Employers keen to have their workforce in attendance are well aware that they need to offer an attractive working environment. These days that means lively and appealing spaces for collaboration and interaction, combined with quiet spaces, often cubicles, for calls and concentrated work. Stringent requirements for environmental and energy efficiency standards will, in any event, drive demand towards higher quality building stock.
Meanwhile the hunt for alternative uses for obsolete office space has begun with homes an obvious candidate. The City has, until now, fiercely defended its role as a commercial centre and put measures in places to resist the loss of office space to residential but it seems likely that their policies will be under review as all city centres move to a more mixed-use environment.
The construction sector is a problem, weak numbers for the sector were noted in the latest monthly GDP figures as being a drag on economic growth. The outlook for the sector is of concern given the supply constraints the housing sector already faces. Developers though are faced with much higher build cost inflation and selling into a current market with lower transaction volumes and prices.