Fuelled by the surge in demand for more spacious homes during the pandemic, UK housing market activity has been exceptionally strong since mid-2020.
Recent HMRC figures show that more 1.5m homes were purchased during the past 12 months. This represents the strongest annual total since 2008, and more than one-third higher than the 1.1m yearly average recorded over the previous decade.
Accompanying this pick-up in activity, the official measure of UK house prices has risen by 17% since May 2020, equivalent to £37,000, and now stands at £268,000. This has led the ratio of house prices to earnings across the country to reach an all-time high, with the multiple currently at more than 7.5.
Notwithstanding the Bank of England's recent decision to increase interest rates and the prospect of further incremental rises this year, house price expectations are consistent with continued growth over the coming 12 months.
A net balance of 66% of respondents to the latest RICS UK Residential Market Survey anticipate prices climbing higher over the year ahead, well above the long-run average of +29%.
Demand for purchases appears to be somewhat less exuberant following the removal of stamp duty concessions in September. Although the latest survey evidence suggests buyer enquiries remain high, the year ahead is likely to see some moderation in sales volumes and house price growth after such a strong performance in 2021.
However, supply shortages are set to remain a dominant influence on house prices even if demand tapers off slightly. Data from Zoopla illustrates the scale of the shortfall, with the stock of homes for sale estimated to be down 33% in a year-on-year comparison.
Moreover, the flow of new supply becoming available has weakened by 10% on the same basis, in line with RICS survey data that shows a fall in new listings across each of the past eight months. Bringing all these variables together, it would not be surprising if house price inflation came in at somewhere between 3% and 5% in 2022.
The housing stock shortage is not just an issue across the sales market: supply pressures are arguably even greater when it comes to rental properties.
Research from Hamptons shows the stock of homes ready to let is down 46% on 2019 levels. Meanwhile, RICS survey feedback indicates that tenant demand has risen sharply in each of the past three quarters, as the breadth of growth has outstripped any comparable period since 2008 in net balance terms. Whereas price growth should ease to a certain extent as the year continues, there is little evidence that any such reduction will occur in rental growth.
On the contrary, given the widening mismatch between strong demand and dwindling supply, rents are being driven higher at an accelerating pace. According to Rightmove, national asking rents outside Greater London now average £1,047 per month, having risen 8.6% over the past year – the fastest pace of growth outside the capital ever recorded by the property portal.
Moreover, it appears these lofty rates of increase are set to continue over the coming months, as near-term rental growth expectations derived from the RICS survey hit a record high at the end of 2021 (see Figure 1). With rents likely to continue to rise sharply in the coming year, affordability across this market will likely be further stretched.
Figure 1. Rent expectations three months ahead – quarterly series
The latest Department for Levelling Up, Housing and Communities (DLUHC) English Housing Survey shows that rents, when expressed as a proportion of the occupying household's income, excluding housing benefits, increased to 37.4% in 2020/21 from 36.5% in 2019/20.
In comparison, although house-price-to-earnings ratios are at an all-time high, mortgage servicing costs remain much less burdensome thanks to low interest rates. For those able to purchase their home with a mortgage, repayments equate to a much smaller proportion of their incomes on average, at 17.7%. This measure has remained broadly stable in recent years.
Even in outright terms, the DLUHC survey estimates average weekly rents across the private sector were £198 for 2020/21, while weekly mortgage payments stood at £174. You have to go back to 2007/08 to find the most recent edition of the survey in which average weekly mortgage payments exceeded rents, with the relative costliness of renting in the private sector becoming a fixture of the market ever since.
As it stands, there is little reason to expect the imbalance between tenant demand and rental housing supply to be redressed any time soon. In fact, research conducted by Nottingham Building Society last summer showed that the number of landlords planning to sell over the next two years outnumbered those intending to buy more properties. The most widely cited reasons for this were increasing regulation across the sector, alongside tax changes such as the end of tax relief on buy-to-let mortgages.
Although build to rent is growing quickly as an asset class it still accounts for a small share of the market at this stage, with around 64,000 such homes in the UK as of the third quarter of 2021. To put this into perspective, there are currently 4.4m households living in private rented housing.
As such, new build-to-rent homes will not be able to compensate for the enduring decline in letting instructions seen over recent years, which has led Hamptons to forecast that the private rented sector will be smaller in 2024 than it is today.
In keeping with this continued squeeze, longer-term rental price growth projections identified in the RICS survey have risen steeply of late, with respondents now anticipating close to 5% growth a year over the next five years.
Evidently, housing supply remains a significant challenge across all tenures, with affordability deteriorating further over the past 12 months. For quite some time, the rate of housebuilding seen in the UK has not kept pace with demand. To alleviate these pressures, policy measures should aim to boost output across the whole spectrum of housing options, with the private rented sector now requiring particular attention given the less favourable investment environment created by interventions over recent years.
BUILT ENVIRONMENT JOURNAL
Craig Newbound 06 June 2023
Chris Jofeh 02 June 2023
Jen Lemen FRICS 29 May 2023