Housing market has been ‘relatively resilient’ but ‘signs cannot be ignored’ – Glenhawk

But there was nervousness when Silicon Valley Bank collapsed, less because of the property sector’s exposure – which is negligible – but rather the question of whether it would be a one-off, isolated incident. Turns out it wasn’t, as the fall of Credit Suisse soon followed.

While markets have calmed down following the Swiss government orchestrated rescue via UBS, the ripple effects will be felt for a while as lenders tighten their belts even further. They are likely to become more cautious to buffet respective margins, which will create a more challenging financing environment and nervousness from retailers depositing with challenger banks.

And yet, higher than expected inflation figures in March (10.4 per cent vs the 9.6 per cent economists predicted) saw the Bank of England increase the base rate to 4.25 per cent. We should hope and, with reasonable confidence, expect that this is where rates will peak as inflation is now widely expected to fall to three or four per cent by the fourth quarter.

Housing market has been ‘resilient’ but house price and transaction falls concern

Although the housing market has been relatively resilient – average prices increased by 1.1 percent in February according to Halifax – the signs can’t be ignored.

Blick Rothenberg data shows that the first two months of this year saw the lowest number of property transactions since April 2020, when the country was in lockdown. Nationwide also found that average house prices declined to £257,400 in February, from a peak of £273,800 in August 2022. A March RICS survey also revealed that between 60 and 70 per cent of properties that sold went for less than their asking price.

Suddenly, the gradual 10 per cent drop in national house prices that many predicted doesn’t seem unrealistic. Anecdotal evidence shows that surveyors are already becoming more cautious in their valuation assessments.

Of course, location, availability and asset type need to be factored into this. For instance, we are clearly seeing a reverse of the “race for space” trend and a return to city centres. Average asking prices in London have risen by two per cent since the start of the year, from £667,587 to £680,806, according to Rightmove. That is a significantly faster rise than the 0.8 per cent national average.

Given that first-time buyers mortgage payments have risen to 39 per cent of take-home pay, the highest since 2008, we can expect most transactions this year to be “need-based”. This is opposed to buyers moving up the ladder for a garden or more space, aided by cheap credit.

Whilst demand might not fall off a cliff, more landlords will experience exit stress as financing costs for refurbishment and development projects rise, coupled with fewer buyers on the market. In the current lending environment, they will also have fewer exit options available as more products are pulled.

We have already seen the average length of a bridging loan increase to 11 months, up from nine, because it is taking longer to complete sales transactions. In such a scenario, the market needs more products to help landlords, perhaps to assist with house in multiple occupation (HMO) or multi-let unit conversion to drive yields, or to boost ESG credentials.

Given more people are likely to continue renting, there is scope for bridge to let products as well, which shouldn’t be disparaged as renters will be helped if more refurbished units are brought to a chronically undersupplied market.