Current housing conditions
The sales market has been more resilient in the face of higher borrowing costs than many expected – but the adjustment is still ongoing.
Historically, moving from 1% to 5%+ mortgage rates would have led to a double digit drop in house prices.
Mortgage regulations introduced by the Bank of England in 2015 – designed to stop a debt-fuelled house price bubble driven by ultra low rates – limited the over-valuation of house prices and this is why we have had modest price falls over the last 18 months.
Someone buying a home in 2021 paying a 1.5% mortgage would have to prove to their bank they could afford a 6.5-7% mortgage ‘stress’ rate to get the loan approved.
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More new homes across a range of price points
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Housing Benefit to rise in line with inflation and wages growth
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Greater investment in local authority planning departments
Banks were also limited to how much business they could do at high loan to income ratios and have had to hold more capital for risker high loan to value lending.
These regulations have capped buying power and constrained house prices especially in higher value housing markets.
The impact is greatest for first-time buyers (FTBs), who account for over a third of all housing sales and higher for most mainstream builders.
In 2023, the average FTB buying in London had a £90k income and a £150k deposit, while across the rest of southern England FTBs needed a £60-£65k income and £100k deposit.
Across the rest of the UK, FTBs need to earn a £50k income and a £35k deposit.
This big north-south divide in affordability matters and impacts what we need to build locally in order to support sales rates and address housing needs.
In unaffordable areas, there is a need to build a wider price range of freehold and leasehold homes.
The national government needs to empower local government and city regions to get into the detail of what is needed and works for their needs – this can’t be set from the centre.
Rented housing markets face large supply/demand mismatch
The private rented sector stopped growing in 2016 after doubling in size from 2000, while the social housing sector has seen static headline supply for over 20 years.
There is a modest shake out in the rental market as private landlords, who are no longer seeing renting out homes as a viable business, exit the market.
It’s not an exodus – but the business model has shifted from landlords making money on their properties over many years, to one of focused on monthly cashflow.
The sector is becoming more professionalised and 50% of rented homes are now owned by 20% of private landlords.
While there is more corporate investment, private landlords still hold the key to the overall balance of supply/demand for the next decade or more.
The new government should ensure long term private landlords, who want to deliver decent homes, are encouraged to remain.
Long term, cashflow-focused landlords have nothing to fear from proposed rental reforms.
While supply has been static, the demand side has been booming – a strong labour market, record high immigration from people looking to work and study, has led to an unaffordability of homeownership.
Pre-pandemic, we saw 5-6 people chasing every rented home on Zoopla, it peaked at over 30 in 2021 and is now down to 15 people per rental.
Rents have been outpacing earnings growth for almost 3 years – private rents are 31% higher compared to earnings, which have risen 24%, while the Consumer Price Index has risen CPI 20% – and housing benefit has only risen 15%.
Rental inflation is slowing due to growing affordability constraints rather than more supply. Rents have over-shot in some cities and there have been some modest falls. Across the UK overall, rents won’t fall but business plans for rental investments need to have realistic assumptions on how much rents will rise over the next few years.
I should point out renters on low incomes are particularly impacted by strong competition and little-to-no growth in social housing.
Building more affordable rented homes and getting more financial capacity and certainty into the affordable sector is a key pillar to getting more homes built overall, it’s an area where demand is arguably greatest.
Outlook for the market
Rents for new lets will rise by 4-5% this year and affordability constraints among renters will drag on rental inflation in expensive rented markets
We’re now entering an era of much lower nominal house price inflation. House prices are up 1-2% this year and are currently 8% ahead of where they should be in London and southern England.
We expect house prices to rise 2-3% over the next 2-3 years, which is enough to support the development of new homes by builders.
On average, 1.2m homes are sold every year, this year, we expect 1.1m homes to sell, up 10% from 2023.
What a new government’s housing priorities should be
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Introduce rental reforms but not rent controls, and reset Housing Benefit levels so that they are in line with the current market
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Build more homes but ‘set the big picture’ nationally and enable a framework for success locally
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Reform the planning system, with land assessments and housing targets
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Greater investment in local authority planning teams
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Clarity for affordable housing providers to encourage investment
Demand for homes exists, but there’s a huge variation in what is needed across various price points and tenures across the UK.
We need to ensure there is the investment capacity to support more supply of homes at scale and give new homes developers the confidence that there are buyers out there.
