National Housing Market Overview Q3 2024

• Nationwide’s latest data shows that the annual rate of house price growth picked up in Q3 to 2.5%, from 1.2% in the previous quarter. This means that average prices are now just 0.5% below their all-time high in summer 2022.
• Perhaps the most notable take away from the most recent figures is that all regions in the UK, with the exception of East Anglia, are now in positive price growth territory. Northern England continues to outperform the South which reflects housing being more affordable and more accessible given the high (although improving) cost of mortgage finance.
• This puts the UK average house price over the quarter at £266,640, compared to the peak in Q3 2022 at £273,135 (Nationwide).
• The most recent activity indicators are significantly ahead of the same time last year and have risen fairly consistently since the start of the year, suggesting we will continue to see a much more active market than last year. The number of gross mortgage approvals in August was 43.4% up on the same time last year and 3.8% ahead of July.
• Accordingly, the transactions picture is relatively positive given how high interest rates still are. The latest data from August shows that transactions were up 5.4% ahead of the same time last year. However, they remain 9% lower than their pre-pandemic average (2014-19).
• The house price growth figures are retrospective and given the rapidly shifting economic conditions leading indicators provide useful insight into the direction of the market for the rest of year.
• A useful leading indicator is the RICS residential market survey, with the most recent publication in September. It paints a relatively positive picture, showing a sustained improvement in market activity. Pricing measures are also positive and expectations around future price growth are the most positive they have been since April 2022.
• Taking stock of the housing market data and wider economic conditions we are still optimistic on market improvement over the course of the next year. Crucially, Oxford Economics expect the Bank of England to cut interest rates slightly faster than previously expected which will support the housing market.
• Despite high mortgage rates over the last two years, house prices have been supported by the strength of the labour market, increased mortgage lengths, less high-risk lending on loan books and the prevalence of fixed rate lending in the market. Along with bank forbearance, this all worked to protect against forced sales and repossessions and to lend some support to demand. These factors will remain supportive during the next stage of the recovery.
• The rental market remains very strong according to the latest data. The latest data from the ONS Price Index of Private Rents showed that the average UK private rent increased by 8.4% in the 12 months to September. This was the same rate as the previous month.
• The key factor driving this rental growth has been a supply/demand imbalance. This is largely structural but has been worsened by large numbers of buy-to-let landlords selling out of the market over the last 18 months.
• To add to this picture, the challenges in the homeownership market boosted demand for rented housing. Higher mortgage rates have sharply impacted affordability, meaning would be first-time buyers remain in the rented sector longer.

The housing market

The Nationwide House Price Index UK saw 2.5% y/y growth over Q3 2024, up from 1.2% in Q2 and the latest June figure was 3.2% ahead of the same time last year. Halifax’s figures were slightly less positive, showing a quarterly increase of 1.2%. Nationwide remains our preferred index until the Land Registry data becomes available (it lags significantly).

The market continues to be resilient and looks to be in recovery mode (albeit subdued). Overall, pricing has held up remarkably well over the last year given the extent of the headwinds; interest rates rising from 1.25% in June 24 to 5%, the short-term shock of the mini-budget, ongoing pressure on costs of living and lacklustre economic performance.

Chart 1: UK house prices

Source: Nationwide

Bank Rate cuts have commenced and the trajectory of these will be the key driver of housing market performance next year. Rate cuts will bring a recovery in demand from mortgaged buyers, as indicated by mortgage approval data improving over the last quarter.

However, while outlook is cautiously positive, currently affordability for mortgage reliant buyers is still significantly worse than it has been in recent years and near-term activity will remain relatively subdued compared to historic norms.

The economic outlook should be fairly supportive as it is broadly more stable than it was for a lot of the year which is good for households’ willingness to undertake a new home purchase. Political stability should also help the housing market, although the prospect of tax increases may lead to additional caution around personal finances.

The most recent transaction data is still 9% lower than the 2014-2019 average but has been steadily improving this year. The latest data from August shows that transactions were up 5.4% ahead of the same time last year.

Mortgage approval data is a more forward-looking indicator of activity and the number of gross mortgage approvals in August was 43.4% up on the same time last year and 3.8% ahead of July.

Our view on the outlook for prices

Interest rates remain the main driver of the current housing market dynamic and the cost of mortgage finance is a key barometer for household affordability. It is therefore useful to look at the relationship between the cost of mortgage finance and the extent of house price corrections in previous cycles.

The chart below shows the monthly cost of a new 80% LTV mortgage on average-priced house purchase as a proportion of median full-time disposable income after tax.

Chart 2: Monthly affordability of mortgage payments

Source: AY, Capital Economics, Bank of England

Based on past housing market downturns, in January 2023 we thought the cost of monthly mortgage payments for a new home purchase would have to fall to around 45% of the median salary for demand to strengthen enough to stabilise house prices. But the resilience of the market and recovery in prices in the last quarter suggests that the affordability tipping point for house prices is instead more like 50% of median pay.

This is because multiple factors are serving to protect against repossessions and forced-sales (which bring significant downward price pressure) which were a big feature of previous recessions.

• Strength of the labour market – the UK unemployment rate remains extremely low by historic standards, despite increasingly slightly recently. Oxford Economics are predicting unemployment to peak at 4.4% and Capital Economics 4.5%. In the GFC it hit 8.4% and in the early 1990’s correction it was over 10%. Also, wage growth has (and continues to be) strong.
• Tenure trends – there are significantly less mortgaged households than in the previous two corrections. In 1989, 40% of households had a mortgage and 38% at the start of the GFC. Currently, 30% of households have mortgages, with higher proportions owning outright or living in the rented sector. (Source: DLUHC)
• More prudent lending – in 2014 the FPC introduced mortgage market regulation - including loan to income flow limit on lending to borrowers with LTI’s at or above 4.5. The FCA also introduced responsible lending requirements.
  • Accordingly, lenders now have far less high LTV lending on their books, at the time of the GFC around 25% of mortgages had LTVs over 75% compared to less than 10% now. (Source: Bank of England, ONS).
• Prevalence of fixed rate lending – the proportion of borrowers with fixed rate mortgages is far higher than at the start of the GFC, when around 70% of mortgages were fixed rate compared to 96% at the start of the current hiking cycle. In the early 1990’s only around 30% of mortgages were fixed rate.
  • The proportion of those with a five-year fix also increased in the run up to the start of the current cycle (see chart below). This suggests that borrowers were anticipating rising rates and acted to lock in more attractive terms.

Chart 3: Change in distribution of mortgage types

(Source: Bank of England, ONS)

• • While the extent of fixed rate mortgages will mitigate the fall-out from higher interest rates (particularly the increase in five-year fixes), monthly repayments significantly increase for those that need to re-mortgage. There are around 1.95m mortgages due to expire over the next twelve months of which 895,000 are on rates under 2%.
  • But – as part of the mortgage market measures introduced in 2014, borrowers were required to be stress tested to a 3% increase on the standard variable rate (SVR) at the end of their fixed term. So, looking at historic mortgage market data, a borrower taking out a two-year fix at 2% in 2019 would see a reversion to an SVR of 4.9% at the end of the term. They would need to be able to afford their repayments if the SVR rose to 7.9% within five years.
  • This implies that the majority of these households should be able to withstand the current levels of interest rates and even some further rises (although undoubtedly will experience significant pressure on finances). It is even likely that many of the 895,000 or so households that are currently on rates under 2% will have been stress tested to levels that are higher than the current average mortgage rates. Clearly these households are the most exposed but they make up less than 7% of the approx. 13.1million outstanding mortgages.
• Lower household debt levels - overall household debt levels are far lower than pre GFC (see chart below). It was 126% in Q3 last year, compared to almost 150% just before the last major correction. This means that households overall are better placed to absorb the squeeze from higher mortgage costs.
• Forbearance – the banking sector is well capitalised, profitable and under a lot of political pressure to do as much as possible to support households with payment difficulties. There has been formal agreement between the UK’s principal mortgage lenders and government that:
  • Allows for 12 months of missed payments before foreclosure can begin;
  • Can switch to an interest-only mortgage for six months, or extend their mortgage term to reduce their monthly payments and switch back to their original term within the first six months, if they choose to. Both options can be taken without a new affordability check or affecting their credit score;
  • Customers approaching the end of a fixed rate deal will be offered the chance to lock in a deal up to six months ahead. They will also be able to apply for a better deal right up until their new term starts, if one is available.

So, despite the sharp increase in the cost of servicing debt and other pressures on household finances, the counterbalances mean the housing market has been very resilient and crucially there is no reason to believe these factors will recede over the next twelve months.

The Regional Markets

All regions except East Anglia, are now back into positive price growth territory according to the Q3 data. East Anglia did see an improvement in the rate of falls, so the story is overwhelming a positive one. Regions with lower values, that are more affordable continue to be at the front of the pack. Particularly, the North, Yorkshire & The Humber, North West and Northern Ireland. Regions with higher values, where affordability is more squeezed (with the exception of London) performed worse. As mortgage rates start to come down following interest rate cuts, these regions should return to positive price growth.

The RICS residential survey provides a more forward-looking indicator than measures of house price growth and paints an optimistic outlook for the market. Respondents expect all parts of the UK to see a rise in house prices over the year to come, with expectations around sales volumes also overwhelming positive.

Chart 4: Regional house price growth

Source: Nationwide

London’s housing market

Nationwide’s data for Q3 shows that London house prices are 2.0% higher than the same time last year, up slightly from 1.6% last quarter. Given the fact interest rates are still high and affordability in the capital is so stretched, this is a pretty encouraging sign for the market. It puts the average London house price at £524,685. London house prices have fallen by less than we expected so far which is surprising given the high level of house prices compared to incomes which should mean that high mortgage rates weigh particularly heavily on demand from mortgaged buyers. Mortgage terms being lengthened have helped mitigate this and cash buyers have helped to underpin demand to date. As levels of cash buying activity have remained high over an extended period, we think they will likely continue to support pricing.

The lettings market

The performance in the rental market is a contrast to the sales market. All measures of rental growth have remained strong according to most recent data (some of which lags the sales data) although in some cases have slowed from the highs seen earlier last year. The ONS Price Index of Private Rents showed that average UK private rents increased 7.7% in Q3, a slight decrease from 8.7% in Q2.

The strength of rental growth illustrates the structural supply/demand imbalance in the rental market. Having said this, the gap had been showing signs of narrowing although now looks to be increasing again. Overall, we do think that growth over the remainder of the year is likely to cool from the level seen in 2023.

Chart 4: Rental market supply and demand

Source: RICS

Chart 5: Regional private rental growth y/y (June)

Source: ONS

Housing Delivery

The number of new homes delivered in 2023 was almost 10% lower than 2022 with 231,000 completions. Despite being well short of 300,000 homes it is relatively stable given the wider macro context over the last two years. However, the outlook is not encouraging with planning consents over 2023 reaching their lowest level in 10 years. With the recent introduction of new building regulations along, a slow housing market and a likely period of hesitancy while the election plays it is probable they will remain suppressed this year.

The most recent data available shows that in the twelve months to Q2 ’24, only 235,000 new homes gained planning consent. Given that at least 10% of consents tend to not get built out, this paints a pretty bleak picture for new housing delivery over the next year. Only four regions, Yorkshire, the North West and the North East have enough consents in the pipeline to meet need. Everywhere else will see the imbalance between supply and demand deteriorate which will contribute to upward pressure on pricing and rents.

BTR investment trends

Investor appetite for BTR remains strong and at the high level investment activity has been resilient over the last few years, given the strength of the macro headwinds affecting investment/development activity. The investment recorded in Q3 was the second highest Q3 data for the last four years which is encouraging.

Chart 6 BTR investment volumes

Source: Avison Young

Beneath the headline figures, there are a few themes playing out. Firstly, investors and developers are showing much more appetite for regional locations than they have historically. Two-thirds of UK authorities now have some form of BTR being brought forward.

The other big theme playing out is the shift toward single-family BTR. The sector has seen huge growth over the last two years, with the £1.9bn invested in 2023 428% higher than 2022 and 2024 has already seen close to £2.5bn invested. Single-family BTR activity is predominately regional and one of the reasons why we think regions will see the majority of investor focus in 2025. Alongside this, multifamily activity will also be more regional, as London continues to grapple with challenges around planning and regulation.

There are challenges facing the sector though and these are affecting viability. Local authority (or national) policy support could help mitigate these. Increased cost pressures (partly as a result of regulatory change) and the abolition of Multiple Dwellings Relief (MDR) in June, are two notable factors impacting the ability for schemes to progress due to viability.

Fundamentally though, there is a clear intersection of long term structural demand for rental housing, a limited supply picture, investor appetite to access the sector and a government policy agenda to deliver more homes. Alongside more favourable economic conditions, this should pave the way for an acceleration in the rate of growth in BTR in the UK.

James Roberts

+44 (0)20 7911 2580