Market Update October 2022
The UK’s ‘mini budget’ on 23 September caused some significant turbulence in the financial markets. Questions over how spending promises announced at the UK’s mini budget would be funded left investors questioning the fiscal rectitude of the UK government. Bond yields, swap rates, and other debt costs soared, nearly causing an insolvency crisis in the pensions industry before the BoE was forced to intervene. A financial crisis was narrowly avoided but at the likely cost of higher inflation and a deeper recession.
Less than a month later Kwasi Kwarteng was replaced as Chancellor by Jeremy Hunt, with his 17 October statement rolling back most of the ‘mini budget’ plans. Stamp duty savings were one of the only policies to survive the cull. Initial reactions from the market appeared positive. While it seems unlikely that this will trigger a fall in mortgage rates in the short term it is hoped that the roll back will result in greater stability in swap rates and gilts which in turn will limit the need for the kind of rate rises which were being touted at the end of September.
Rising interest rates and the mortgage market
Expectations of a sharply higher Bank Rate and rapidly rising debt costs have caused significant movements within the household mortgage market. It is still too early to assess the full impact of changes to the economy on the housing market. But it looks likely that transactions and prices will fall as higher interest payments add further weight to already squeezed household budgets.
It is obvious that recent shifts in the UK economy will have ramifications across the housing market. However, we do not think this is comparable to market conditions at the time of the global financial crisis. The UK has almost full employment and more stringent lending rules mean far fewer households have loans of 90% or more secured against their properties. Households have built up a significant equity buffer with 60% of outstanding mortgages at less than 75% LTV.
Help to Buy deadline
The deadline for registrations for the government Help to Buy scheme is 31 October 2022 means we expect the number of first-time buyers to fall over the coming year. Coupled with difficulty in the mortgage market, we expect even further increased demand for rental properties. This adds further fuel to an already constrained rental markets and will, we expect, mean the supply demand imbalance and resulting rental growth will continue. The outlook for investors is mixed. Demand for rental properties looks set to continue, and forecasts of rising rents and falling prices suggest we could see a rise in yields across the board. But the cost to service debt will remain a key issue for more highly indebted landlords.
House prices
UK house prices continue to defy all odds over the summer, with annual growth reaching 15.5% in July 2022. House prices grew 9.2% across London over the same period, the highest annual growth recorded in the capital since August 2016.
Rents
The rental market remains competitive in the UK, with stories of bidding wars, gazumping and sealed bids. Zoopla reported that demand for rentals was up 43% on last year, whilst the number of new rental properties on the market was down 23%. The latest Homelet rental index report an annual rent rise of 9.2% in September across the UK, whilst monthly rents in London have risen by 2.5%.
Demand
The RICS reported demand for rental properties was still outstripping supply in September. The supply demand rental story in London is particularly delicate as landlord instructions fell sharply from July to September. In the sales market, new buyer enquiry across the UK rose marginally in September, albeit the number of agents who reported house price increases over the past 3 months has fallen.
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