The Royal Institution of Chartered Surveyors (RICS) residential market survey for May found that new buyer enquiries recorded a response score of –18 per cent*. This was up from a reading of –34 per cent in April and noted as the least negative reading in 12 months.
RICS said this improvement was consistent across the country and suggested the prospective buyers were “less downbeat”.
The agreed sales indicator generated a score of negative seven per cent, significantly better than the scores of –29 per cent and –18 per cent in March and April respectively. Again, this was noted as the least negative sentiment for agreed sales in 12 months.
The report said the market continued “to turn a little less downbeat, evidenced in particular by metrics on demand and sales returning their least negative readings in over a year.
“That said, the recent upward shift in interest rate expectations, prompted by disappointingly high consumer price inflation data, may place renewed pressure on the sales market in the months ahead.”
As of May, surveyor respondents felt that sales activity would remain relatively positive with a response score of two per cent, slightly down from April’s three per cent.
New instructions also improved to a net balance of 14 per cent in May. RICS said this broke the run of 13 consecutive negative monthly readings and was the strongest score for new listings since March 2021.
Housing stock appeared to rise too, with estate agents having 38 properties on their books on average compared to 36 in April. RICS said this was still below the five-year average of 40 properties per estate agency.
Tarrant Parsons, senior economist at RICS, said there was a modest recovery in May with less negativity in general.
He added: “However, it seems storm clouds are gathered, with the UK’s stubbornly high inflation likely undermining the recent improvement in activity by prompting the Bank of England to take further action through interest rate rises, leading to higher mortgage rates and ultimately reducing affordability and buyer demand. The banking sector appears to expect this with many banks and building societies already introducing products with higher interest rates.”
House prices set to fall
Respondents gave a score of –30 per cent when asked about the movement in house prices, suggesting further declines in May. This was not as negative as the previous three months, however, including the recent low of –46 per cent in February.
Looking at the regional differences, RICS found that this differed across the UK. For example, responses from surveyors in London returned a score of negative three per cent, which was up from –42 per cent and –11 per cent in March and April respectively.
Increases in average house prices were recorded in Scotland and Northern Ireland, but values continued to fall in most English regions. The East Midlands and the South East recorded the most negative readings at –68 per cent and –48 per cent respectively.
Rental supply still under strain
Supply continued to fall short of demand in the lettings market, and RICS said rising mortgage rates and the scrapping of Section 21 were among some of the potential changes leading landlords to exit the market.
The response score for tenant demand rose to 44 per cent, while new landlord instructions fell to –23 per cent.
This compares to readings of 41 per cent for tenant demand and –24 per cent for new landlord instructions in April.
Some two-thirds of respondents expect more buy-to-let landlords to exit the market, while a similar share of surveyors believe interest in buy-to-let investment from the UK will drop. Some 30 per cent predict interest from overseas buy-to-let investors will also decline.
This is expected to push rental prices up further, with a net balance of 53 per cent of respondents saying so. Looking ahead, rents are expected to rise at an average of six per cent annually for the next five years.
Parsons said: “Interest rate rises are also impacting the rental sector and combined with looming reforms proposed in the government’s Renters’ (Reform) Bill, landlords are increasingly deciding to leave the sector and sell up property, causing further constraints to lettings supply.”
The calm before the storm
Terry Woodley, MD of development finance at Shawbrook Bank, said the latest survey showed confidence was “creeping back into the market” and pointed to falling inflation and energy bills as main factors.
He added: “However, further increases to base rate will taper that confidence. The continuing UK house shortage does mean that buyers who need to move will need to do this quickly if they are going to make the most out of the current climate.
“Of course, developers will be looking further ahead in the market to when their schemes will be built and ready for sale so they are keen to seize good opportunities now with the expectation that base rates will have settled and inflation returns to some sense of normality in the next few years.”
Sarah Coles, head of personal finance, Hargreaves Lansdown said May was “the calm before the storm”.
She said mortgage rate hikes seen over the last two weeks would “pile on more misery” for the property market and suppress demand and sales.
Coles said: “There’s every chance this will persuade buyers that this isn’t the climate to buy in. Given that rates are expected to remain higher for months, this could seriously dent the market as we go through the rest of 2023.”
As for the rental market, Coles said the imbalance in the market was getting worse each month.
She added: “Landlords have been selling after concluding new legislation was too expensive to comply with, and they’ve now been joined by a swathe of buy-to-let lenders, who realise that, once they remortgage, higher rates mean the maths no longer adds up.”
Speaking of the prediction that rental prices would rise annually by six per cent over the next five years, Coles added: “Given that rent absorbs a far bigger chunk of people’s incomes than mortgages, these hikes will add insult to injury. It’s going to make it even more difficult for renters to stay on top of their finances, let alone to get a property deposit together and escape the rental trap.”
* RICS survey statistics are presented as scores between negative 100 and 100, with negative scores implying a decline, and positive readings suggesting an increase.
