Residential Roundup 19 April 2024

This week saw a raft of housing and economic data released. But for those of us hoping it would bring further clarity on the outlook for the market, and more importantly the point at which rate cuts might hit, the waters remain decidedly muddy.

Inflation figures for March fell back to 3.2%. Good right? Well yes, but the reduction was not quite as significant as many forecasters had expected. The Bank of England still expects we’ll hit their 2% target in the next few months, a reduction in energy costs seen as the tipping point to reduce the rate of inflation further. But messaging from both the Bank of England and the Federal Reserve in the US suggests fewer drops in the base rate are anticipated this year. Indeed, comparing forecasters expectations of cuts to the Bank of England base rate this year shows a fall from an optimistic 170bps (equating to a 3.55% rate by the year end) in January to 75bps (down to 4.5%) in April.

Markets are now pricing in fewer cuts this year

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So what does this mean for the election? The Conservatives (and they are not alone here) will be hoping for an earlier rate cut, giving enough time for the resulting feel-good factor to filter through to the electorate. Few seem to think Sunak will be looking to drag things out for a January 2025 election (no one wants to be campaigning during Christmas party season). That means October still appears most likely, squeezing in prior to the 5 November US election.

Rental growth

The recently relaunched ONS rental index points to a further acceleration in rental growth, up 9.2% annually (from 9% last month). London is ahead of the rest of the country at 11.2% growth, an acceleration from 10.6%. The ONS index, as a measure of new and existing leases, lags the Homelet index, which measures just new lets. Once growth among new lets has fallen, that will, over time, filter into the ONS index. So, is that what we are seeing?

Well, we are now months removed from peak double-digit growth, with the Homelet index sliding down to +7.5% annually. However, growth is still far higher than the typical levels we would have seen pre-2021, and after an initial drop in the second half of 2023, it has remained at around 7.5% for three consecutive months. In some markets, most notably London, growth has ticked up again (6.2% compared with 4.8% previously). In Scotland, rental growth is back up to nearly 9%.

These rental figures are somewhat at odds with the latest RICS survey, which shows the supply and demand indicators starting to converge. Demand continues to outstrip landlord instructions, but the gap has narrowed, particularly in London. A net balance of 0 respondents expect to see rental growth in the capital in the coming three months.

UK rental index climbs to 9.2%

The fall among new lets seadies at 7.5%

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Sales market

UK house prices fell 0.2% in the year to February 2024 according to the latest government figures, continuing the trend we have observed for more than a year now of prices moving sideways. But with inflation running higher than historic norms, particularly over the course of 2022 and 2024, house prices were one of the only things which didn’t rise. This means that in inflation adjusted ‘real’ terms prices are falling. Comparing prices now with those at the peak of the market in Q3 2022 show a fall in inflation adjusted terms of -13%.

In better news, activity looks set to increase as we move into the spring market. As we reported in the last Roundup, mortgage approvals were at a 17-month high in February, suggesting buyers are readying themselves to purchase. The latest RICS survey also points to more positivity in the market, with views on new buyer enquiries moving into positive territory in March and opinions on house prices at their least negative since before the mini budget in 2022.

Homeowners don't think of house prices in realterms....but

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Economy

The Consumer Prices Index (CPI) fell to 3.2% in the year to March, down from 3.4% last month and the lowest for two and a half years. But the 3.2% figure remained a touch above expectations. With services inflation proving sticky at 6% and wage growth still at 5.6%, dreams of an immediate interest rate cut will likely remain unfulfilled.

The Bank of England have re-asserted their view that we are only a couple of months off hitting their 2% target. Oxford Economics feels less optimistic about inflation reaching the target 2% in April but is still expecting the first rate cut to be in June – if there are no more surprises.

London development

Molior London have released the latest Q1 2024 figures on residential development, with less activity across the London new build market evident. There were 25% fewer homes completed in the year to March 2024 compared with the previous ten-year average. This is a trend which looks set to continue. Homes starting on site fell -42% in the year to March compared with the previous ten-year average, and both planning applications and permissions granted were down almost 50%. We’ll delve into the detail behind these numbers and the implications for the sector in the coming weeks.