Navigating the Unpredictable: Savills’ Forecast in an Ever-Changing Property Market
LPF Member and London’s leading property sector's top research team— Savills reveals insights into market predictions, and cautions about potential future price adjustments.
Forecasting the property market demands a blend of expertise and insight. In this analysis by Savills Residential Research—authored by Emily Williams, Frances McDonald, Ed Hampson, and Dan Hill—we dissect the intricacies of market predictions. Their analysis sheds light on the potential "price adjustments" ahead, and we gain a deep understanding of the multifaceted factors underpinning these shifts.
Highlights:
The first half of this year has witnessed stronger values and activity than Savills’ earlier projections. However, the recent escalation in mortgage rates indicates an anticipation of further price declines in the upcoming 12 months.
A recovery is foreseen in 2024, contingent upon consistent indications of inflation being managed and lenders feeling secure enough to decrease mortgage margins.
The prime market is projected to maintain its outperformance over the mainstream sector due to its lower reliance on debt. Notably, prime central London is leading this trend.
The persistent disparity between rental supply and tenant demand, coupled with robust wage growth, signifies ongoing potential for rental expansion across the entire UK.
Reviewing Savills’ Past Predictions
When previous forecasts were unveiled in November of the preceding year, the outlook for the housing market appeared grim. This followed the mini-budget presented by Liz Truss, resulting in an uncertain market landscape, a weakening pound, and the rapid ascent of interest rates. As the curtains closed on Q4 2022, marking the first quarter of decline since Q2 2020, prevailing sentiment among most analysts foresaw a continuation of this downtrend well into 2023.
However, the housing market embarked on a surprising trajectory in the initial half of this current year. Savills’ November projections had painted a picture of a 10% price decline for 2023. Yet, reality has diverged significantly, with prices experiencing a mere 1.4% contraction over the initial six months and a 4.1% dip since their zenith in August 2022. Remarkably, the market's vigour has surpassed expectations as well; finalised transactions in the initial five months of 2023 have only trailed 13% behind the average recorded during 2017–19
What factors contributed to the unanticipated durability displayed by market activity and house prices? Here’s what Savills think:
1. Strong wage growth has improved housing affordability. House prices have fallen by more than -12% when accounting for inflation. Earnings growth has exceeded house price growth by 10% in the year to April 2023, meaning buyers earn more relative to the price of their house now than a year ago.
2. Buyers have adapted their behaviour to the higher interest rate environment, taking out 30- or even 35-year mortgages in many cases to decrease their monthly bill and help them overcome affordability hurdles. This decision is driven by the strong incentive to leave the private rented sector, given that average UK rents have increased by 10.4% in the year to May 2023. This is helping to support demand in the short term, but further increases in mortgage terms will be limited because banks are reluctant to lend to buyers who may be approaching retirement while still repaying their mortgage.
3. Cash buyers have been very active, increasing their share of transactions to 46% in April, up from 34% in late 2022. With other buyers finding their budgets are squeezed by the cost of debt, cash buyers are taking advantage of a market with weaker competition to secure better deals. Many cash buyers are likely to be investors, for whom rental growth looks particularly attractive, given their returns won’t be diluted by the cost of a mortgage.
What factors exert influence over future developments?
Inflation and Interest Rates
The spotlight is on a significant shift in the trajectory of base rates since November. A consequence of unyielding inflation is the unexpected 175 basis point surge in the projected peak compared to last year, holding steady for an extended period. This trajectory is set to keep mortgage rates elevated, exerting considerable pressure on affordability throughout much of 2024.
Turning to specifics, the base rate's anticipated climb to 5.75% this year, maintained until Q3 2024, indicates a prolonged period of affordability strain that could impact growth. Property price adjustments are expected to persist into 2024, with the bulk of the changes occurring in 2023, aligning closely with the -10% forecasted in November 2022. However, the possibility of inflation's rapid decline or a UK recession could potentially usher in an earlier reduction in base rates, providing some relief from the ongoing affordability challenges.
Mortgage Margins
In dissecting the dynamics of mortgage rate determination, a pivotal factor emerges: the interplay between current and future interest rate expectations. Fixed-rate mortgage pricing hinges on the forecasted cost of debt over two or five years, rendering it influenced by both the ongoing base rate and anticipated rate shifts. Over the past year, the uncertain trajectory of interest rates has spurred lenders to widen the margin between mortgage rates and the base rate, particularly early in the fixed-rate period. This strategic shift has exerted a profound impact on buyer affordability, and the evolving margin's trajectory continues to be of paramount importance.
In the recent timeline, an insightful pattern unfolds. Between 2021 and the first half of 2022, the average margin above the base rate for a two-year fixed-term mortgage stood at 1.4%. Swift market shifts, catalysed by the mini-budget, caused average margins to surge beyond 4%, underscoring market hesitancy. Yet, the narrative shifted as greater certainty coupled with expectations of a dwindling base rate saw margins diminish to a mere 0.5% in the initial months of 2023. Even more intriguing, the landscape for five-year fixes portrayed even lower average margins, occasionally allowing for terms at a discount to the base rate.
“The surprisingly high inflation figures for May prompted a reversal of this trend, as lenders were returning to pricing in future rate rises. As a consequence, mortgage rates have risen much more quickly than the base rate over the last couple of months.”
Lender forbearance and forced sales
Amidst the uncertainty surrounding base rates and lender risk attitudes, there's a clearer outlook regarding existing borrowers and their vulnerability to refinancing risks. Over the next 18 months, around 1.9 million homeowners will reach the end of their fixed-rate mortgage terms. While many have already been stress-tested for their ability to manage repayments at even higher rates than the current ones, households will still face significant budgetary pressure.
However, this isn't likely to result in a substantial wave of forced property sales from those unable to sustain mortgage payments. Recently, the Government forged an agreement with major lenders, permitting borrowers to shift to interest-only payments or extend their mortgage durations without any negative impact on their credit standings. Furthermore, lenders have committed to not initiating any home repossessions within the first year of a missed mortgage payment. This suggests a continued equilibrium between muted housing demand and supply, leading to a slower transaction market rather than an influx of properties that could trigger more pronounced price adjustments.
The exception to this subdued activity could be observed among mortgaged Buy-to-Let landlords confronting rising costs and augmented regulatory obligations. This is anticipated to be more pronounced in upscale locations with lower rental yields, where larger mortgage loans have exacerbated the challenges of increased repayments. Nevertheless, the projected departure of landlords from the sector isn't expected to reach a scale that would significantly sway property values in the broader market.
Anticipating Trends in the Prime Real Estate Market
In Savill’s projections for November 2022, they held the belief that the prime real estate sector would showcase remarkable resilience compared to the more conventional market. Distinct in its reduced reliance on mortgage mechanisms, this face of the industry has enjoyed a measure of protection from the upheavals of the preceding year. Noteworthy is the outstanding performance within PCL, a domain where a predominant proportion of transactions culminate in cash payments. In this realm, the value of properties merely experienced a marginal descent of -0.9% throughout the past year. Similarly, in domains steered by discretionary motivations entwined with lifestyle preferences, like the market for Scottish country houses, property values have steadfastly held their ground.
Conversely, other areas have borne witness to a boosted price sensitivity among buyers, particularly in locales encircling London that bear a heavier reliance on debt-driven funding.
The pragmatism of maintaining an accurate pricing strategy assumes paramount importance for the duration spanning the latter half of 2023 and onward into 2024. Notably, Savills’ predict that any price adaptations will remain confined to the boundaries delineated by their initial 2023 projections—namely, a minor downturn of -2.0% for PCL. and a slightly more pronounced decline of -6.5% for prime regional markets.
“The standout performance of the PCL market, where property values experienced only a marginal descent is an encouraging testament to the enduring appeal of this elite segment. Cash payments have likely played a significant role where transactions are not as heavily reliant on conventional mortgage mechanisms. There is no doubt that this emphasises the financial strength and confidence of high-net-worth individuals (HNWIs) participating in this space. Further, the resilience of the PCL market has also been driven by discretionary motivations and lifestyle preferences, which reinforce the emotional and non-financial factors that continue to influence property value. While the prime markets have yet to grapple with the same affordability challenges as their conventional counterparts, buyers are more alive to price sensitivity and with caution still in the air pricing strategies, diplomacy and pragmatic approaches will aid in the success in pushing transactions through in the current market conditions.
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However, the cautionary tale lies in the areas surrounding London, where a heightened price sensitivity among buyers, coupled with debt-driven funding, has prompted a shift in purchasing behavior. The trend of discerning buyers resisting the payment of premiums, even in prime markets, reflects a growing awareness of market dynamics and a more pragmatic approach to property acquisition.
Rental Market Projections
The primary factors driving the dynamics in the Private Rented Sector remain largely consistent with those observed in November when Savill’s current outlook was presented. Importantly, a disparity between supply and demand, most pronounced in London, continues to steer rental growth prospects for the next 12–18 months. The rise in rental prices during the first half of this year, coupled with robust income growth, suggests that the projected rental growth for the UK in 2023 might slightly exceed the initial forecast of 6.5% from November 2022.
On the supply side, the impact of rising interest rates has made it more difficult for landlords with mortgaged Buy-to-Let properties to maintain profitability, leading some to consider selling and exiting the sector. This, combined with tenants opting to extend their lease agreements, has led to a reduction in available rental properties.
Looking ahead over the next five years, the forecast anticipates that the relationship between income growth and rental rates will remain stable. However, it's worth noting that rental growth is constrained by affordability limits. Therefore, any rental growth surpassing the 2023 estimate could result in slower growth in the following years.
thoughts from the luxury property forum
The analysis presented by Savills Residential Research underscores that the property market's evolution is a result of complex interplays between human behavior, financial dynamics, and societal shifts, rather than a product of isolated economic indicators. Successfully navigating this intricate landscape requires a vigilant and informed approach, guided by insights like those provided by Savills.
The property market's trajectory demands careful observation, adaptable strategies, and the ability to discern underlying nuances. Armed with the knowledge and foresight from such analyses, we are better prepared to navigate uncertainties and capitalize on emerging opportunities within the ever-changing property sector.
