Resilience or stagnation: two readings of UK housing and economics
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
UK GDP was flat in the third quarter, down from a 0.2% increase in Q2, according to official figures published this morning. That leaves the economy 0.6% larger than it was this time last year.
You can read the data two ways. Clearly, the economy has shown remarkable resilience in the face of a stormy year of geopolitics and a brutal tightening of monetary policy. It is also the case that we are locked into a period of economic stagnation with no clear end point. The Bank of England expects marginal growth next year, before output picks up to 0.25% in 2025, and 0.75% in 2026.
The property market
You could weigh up similar points when it comes to the residential market. I talked on Wednesday about the Halifax and Nationwide indexes showing UK house prices rose during October, raising the prospect that values end the year unchanged from last December.
The RICS Residential Market Survey, out yesterday, offers a nuanced picture of why that might play out. The measure of new buyer enquiries, at -28%, remains poor, but represents the least negative reading since May. Agreed sales, at -25%, points to weak activity levels, though not quite as weak as the previous two months. Meanwhile, the flow of new instructions continues to slow: the net balance of -7% is consistent with a marginal drop off in supply, but it is the fifth consecutive contraction. The weak reading for market appraisals suggests we'll see little change in supply in the near term.
All of that points to a sluggish market with many would-be movers postponing plans until the outlook for mortgage rates and the economy becomes clearer. It's worth noting that the RICS metric for sales expectations over the twelve month time horizon is stable. This is what Tom Bill told various media following the release of the RICS report:
“The story of this housing market slowdown is a double-digit fall in transaction volumes rather than a dramatic price correction. Buyers and sellers are both hesitant as mortgage rates normalise, which has kept price declines in check. We expect prices and sales volumes to bottom out next year as the economic backdrop stabilises.”
Mortgage rates
Mortgage rates are now significantly higher than most borrowers are used to, but the stability we've had since late July is one of the major factors that has prevented a steeper housing market downturn.
The cheapest two-year mortgage rates dipped below 5% for the first time since June this week. Nationwide introduced a 4.99% two-year fix for homebuyers and it cut several products by as much as 0.38%. BM Solutions also announced cuts to its buy-to-let range.
It had looked like mortgage rates were easing to a plateau, but chinks have emerged in Bank of England governor Andrew Bailey's "higher for longer" narrative. Investors expect 0.75 percentage points of rate cuts next year, despite Mr Bailey reiterating his view that it's too early to talk about rate cuts and there remain “upside risks”. See Wednesday's note for more on that.
"Swap rates keep ticking down and lenders are eager to pass it on in the form of lower rates," Hina Bhudia of Knight Frank Finance said on Wednesday. "All are doing less business than they would like to be and are eager to catch up where they can. Nationwide's 0.38% cut across some of its product range is a good move from a large bank. It's great to see more meaningful rate cuts in the BTL market too.
"We still hold the view that this isn't the beginning of a more meaningful fall in mortgage rates, which won't happen until the base rate begins to fall."
Lettings
The imbalance of supply and demand continues to worsen in the lettings market, according to the RICS survey.
A net balance of +33% of contributors noted an increase in tenant demand in the three months to October and +53% of participants expect rental prices to increase in the next three months. Landlord instructions fell to a net balance of -18%. The group expects UK residential rents to climb 4% over the course of the year. Again, here is Tom Bill:
"Landlords have faced higher taxes and growing red tape in recent years, which means many have left the sector. As the Renters Reform Bill goes through Parliament, it is a reminder of the unintended consequences that government intervention in the housing market can have. What started as a politically-motivated attempt to deter landlords has become financially punitive for tenants.”
Housebuilding
Higher mortgage rates have had a marked impact on UK housebuilding, according to a new S&P Global/CIPS Construction PMI. The measure of housing output registered its eleventh monthly contraction, with the index falling to 38.5 (see chart).
Higher interest rates are only part of the story, and housebuilders repeatedly tell us via our Land Index surveys that planning delays are curbing their ability to get projects off the ground. Poor management of housing policy has also caused problems, which has put the sector at the centre of an election likely to take place next year.
A report this week by the former government housing economist Simon Clarke suggested the number of homes completed next year could fall to 151,000, down from 249,100 last year. The report blames the lack of a national housing strategy for a large part of the decline, according to the Times write up linked above.
The housebuilders have been given a break to some extent by the improved outlook for costs. The PMI I referenced in the first paragraph of this section reported that softer demand for construction products and materials resulted in pressure on suppliers for price discounts. Overall purchasing prices decreased at the fastest pace for over 14 years as lower timber, steel and transportation costs were passed on by vendors. The survey signalled another strong rise in the availability of sub-contractors, and rates charged by sub-contractors fell for the first time since July 2020.
These themes came through in reports published by some of the housebuilders this week - see updates from Persimmon, Taylor Wimpey and Redrow.
In other news...
Vistry this week announced an 819 million pound ($1 billion)-deal with Blackstone-backed firms Leaf Living and Sage Homes to deliver 2,915 homes starting this year. Anna Ward provides some analysis.
Boniface Abudho, Research Analyst in our Africa team, explores the untapped potential in African real estate.
Elsewhere - overdue commercial property loans hit 10-year high at US banks (FT).