Blog post
March 26, 2024

LendInvest House View – Q1 2024: Property market analysis and sentiment

Welcome to the Q1 2024 House View analysis, offering insights into the dynamic landscape of the UK housing market. We explore how challenges such as economic turbulence and fluctuating interest rates may shape market sentiment and potential trajectories in the months ahead.

Macroeconomic update

The outlook for the UK economy has improved since the last update, largely due to the rate cuts anticipated for this year. The economy stagnated for much of 2023 and entered a technical recession in December, though recent data suggests that this is likely to be short and shallow.

Late last year the Bank of England’s (BoE) Base Rate (BBR) peaked at 5.25%, and financial markets started 2024 with expectations of a rate cut in May. That has since been pushed out to August for a few reasons. Firstly, inflation and wage data remain too high. Secondly, there has been a global shift in rate cut expectations as well as the prospect of tax cuts at the March Spring Budget. In reality, the scope for significant tax cuts is constrained, but, assuming other factors remain constant, such cuts would require a prolonged period of tighter monetary policy.

Whilst the Monetary Policy Committee (MPC) voted to keep BBR unchanged at 5.25% at the February meeting, it was divided. Two members voted for a rate increase, while one voted for a decrease, reflecting differing views on the economic outlook and inflation trajectory. Governor Andrew Bailey highlighted that inflation is “moving in the right direction”, with the BoE noting a significant drop from a peak of 11% year on year (y/y) in 2022 to 4% by December 2023. There is an expectation that inflation could temporarily hit the 2% target in the second quarter of 2024 before rising slightly again as the base effect from energy prices fades.

The BoE’s decision comes against the backdrop of recent economic data indicating a slowing pace of price rises. However, despite this positive trend, the BoE stressed the need to keep interest rates high for an extended period to ensure inflation settles at the target level, reflecting concerns about persistent domestic inflationary pressures. Headline Consumer Price Index (CPI) inflation came in at 4.0% y/y in January, unchanged from the previous month, but slightly below both the market and the BoE’s expectations. Core inflation remained at 5.1% y/y, while services inflation edged up 0.1pp to 6.5%. This was 0.1pp below the BoE’s projection for services inflation. Meanwhile, the most recent labour market data saw average weekly earnings growth (incl. bonuses) slow to 5.8% y/y in the three months to December, from 6.7% in November. Although wage gains of 5.8% slightly exceeded expectations of 5.6%, they remain on a downward trend, from the 2023 peak of 8.5%. Regular pay growth, which excludes bonuses, slowed to 6.2% y/y in the three months to December. To note, the BoE sees regular pay growth slowing to around 5.75% in Q1 2024, following a 2023 peak of 7.9%.

Green shoots have started to appear in some of the sentiment indicators, most notably the service purchasing managers’ index (PMI), which has moved further into expansion territory. The PMI surveys are significant because they provide early signs of economic trends. Whilst the manufacturing sector continues to lag, many of the sub-components of the service sector – existing business, new business, employment – continue to grow and suggest that the current technical recession will be short-lived. However, it’s worth noting that much of the optimism seems to be driven by the belief that interest rates will be cut soon.

 

Housing market view

The expectation of lower interest rates has also been a welcome boost for the UK housing and mortgage markets. Interest rates were previously expected to remain above 5% for at least two years but now with several rate cuts priced in, there is room for mortgage rates to fall thereby acting as a tailwind for the UK housing market.

Mortgage approvals for January reached their highest level since October 2022, with a total of over 55k approvals (Trading Economics). This suggests that the housing market is recovering well since the downturn caused by the “mini-budget” crisis and the general squeeze from higher borrowing costs over the last 2 years. Meanwhile, Nationwide reported house price growth in the month to February of 0.7%, translating to growth of 1.2% y/y, the first positive reading for this measure since January 2023. Additionally, Rightmove recently reported that the number of people looking to sell their homes has surged, and the Royal Institution of Chartered Surveyors has reported buyer inquiries at their strongest level in the past two years. Whilst all of these are positive, the short-term outlook remains unclear because of uncertainty surrounding the future path of interest rates. Indeed, the increase in swap rates and the push-back on rate cut expectations since the start of the year could act as a temporary headwind for house prices in the coming months.

The sharp fall in house prices that many expected in 2023 didn’t materialise. This was primarily due to resilient demand, coupled with a limited supply of housing, rising wages and some government support measures. Additionally, despite higher mortgage rates and stretched affordability, the need to force sell at lower prices was limited and this helped to reduce the fall in house prices. Official ONS data saw house prices fall just 1.4% in the 12 months to December, against expectations of much larger declines. Our own forecast was a fall of 7.0% as at the end of the year.

We expect the factors mentioned above to continue to support the housing market and we are of the view that house prices in 2024 will enter a period of stability, with a modest fall, rather than a significant decline or growth. Other forecasters have turned more optimistic on their views of UK house prices. Savills, for example, sees just a 3.0% decline in prices for 2024, whilst both Lloyds Bank and Zoopla see a decline of around just 2.0%. House prices are then expected to turn positive again in 2025.

Rental market outlook

The rental market in the UK has experienced a period of chronic mismatch between supply and demand over the past few years, but according to Zoopla, the UK is now past peak rental growth. The growing unaffordability of renting, particularly in London, will start to weigh on demand and therefore rental inflation. However, any slowdown in the rental market will be limited due to an ongoing scarcity of supply, as well as strong wage growth and a relatively tight labour market. We are of the continued view that this will slow to around 5% as at December 2024.

 

Conclusion

In conclusion, the Q1 2024 House View analysis reveals complex dynamics shaping the UK housing market. Despite recent challenges like recession and interest rate uncertainty, there’s cautious optimism. Expectations of lower rates have spurred housing activity, yet uncertainties may briefly affect prices. Stability is anticipated in 2024 with modest declines in house prices. In rentals, supply-demand imbalances persist, but inflation is expected to slow. Overall, amidst uncertainties, various economic factors hint at a cautiously optimistic outlook for the UK housing market in the coming months, albeit with challenges to address.

 

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