Key insights into the residential property market

At our October Property Update event, Lucian Cook, Head of Residential Research at Savills, delivered an insightful presentation on the UK residential property market. His talk covered a broad array of topics, from market trends and regulatory impacts to key factors influencing various segments of the housing sector.

Here are some of the key insights shared during his discussion:

Post-pandemic market trends and interest rates

According to Cook, the ‘race for space’ that characterised the post-Covid housing boom – driven by remote working and the need for more space – has now faded. He explained that rising interest rates have reversed some of this trend, creating affordability challenges for buyers. “Those post-Covid drivers, that race for space, that dash for the countryside, have dissipated,” he noted.

Despite these headwinds, Cook believes the worst of the ‘mortgage pain’ may now be over. Many homeowners who secured fixed-rate mortgages have managed to withstand the period of higher rates. As rates gradually come down, he expects the range of potential buyers and their purchasing power to increase. 

With inflation currently at 2.2% and another potential rate cut on the horizon, Cook sees improved affordability as a factor that could soon support a stronger housing market.

Sales market recovery and house prices

Cook discussed the state of the residential sales market, highlighting signs of improvement despite agreed transactions remaining below pre-pandemic levels. He noted that the market suffered a significant slowdown after the economic turbulence of 2022, which led to rapid interest rate hikes and a sharp decline in sales. However, activity has been gradually picking up since late 2023.

He pointed out that house price growth is still modest, at 3.2% as of September 2024, following a 13% correction in real terms due to high inflation. Although nominal prices only fell by about 5%, inflation effectively reduced the relative value of housing. The market continues to favour buyers who are less affected by borrowing costs: “It is a market which continues to favour cash and equity-rich buyers,” Cook remarked, indicating the resilience of this buyer segment amid recent challenges.

The rental market and regulatory changes

Cook described a period of exceptional volatility in the rental sector, with double-digit rental growth due to an extreme supply-demand imbalance. However, he noted that rental growth has slowed as tenants reach affordability limits. “We have essentially hit a bit of an affordability cap in the rental market,” he explained, underscoring the financial strain on renters.

Cook emphasised the impact of the upcoming Renters' Rights Bill, the most significant regulatory change in over 30 years. The Bill will end the assured shorthold tenancy agreement, which currently allows landlords to recover possession with two months’ notice at the end of a fixed term. However, there will still be certain conditions under which landlords can reclaim possession, such as selling the property or moving in close family. 

Cook reassured the audience that fears of a return to pre-1989 rent control are not likely to materialise, as rent reviews will still be based on open market rates.

He suggested that these regulatory changes could prompt a restructuring in the sector, with some smaller landlords choosing to exit the market. In contrast, larger, financially stable landlords may find growth opportunities.

New housing policies and the ambitious building target

Cook addressed Labour’s ambitious goal of building 1.5 million new homes over five years, acknowledging that it is an unlikely target but noting several policy initiatives aimed at increasing supply. These include reinstating local housing targets, favouring development approvals, planning for new towns and urban extensions, and boosting planning department resources.

He indicated that strategic landowners might find it easier to navigate the planning process in the coming years. However, higher requirements for affordable housing and infrastructure costs could reduce the financial returns on land sales. 

Despite the hurdles, Cook suggested that Labour's approach signals a more interventionist stance on housing, with the potential to reshape the market landscape.

The top end of the market and taxation

Cook observed that activity at the higher end of the market has been weaker compared to more affordable segments. Uncertainty surrounding potential tax changes – such as increases in capital gains tax or higher stamp duty surcharges for overseas buyers – has led to caution among buyers and sellers. He pointed out that, while prime central London prices are still 20% below their 2014 levels in nominal terms, this market segment might not follow the usual pattern of leading the recovery.

“Normally, what happens at this stage in the market is that the top end of the market leads to recovery,” Cook said. “I just think because of these areas of uncertainty, likely, this time around the prime market might just lag the recovery.” He cited potential tax reforms and ongoing regulatory changes contributing to this slower rebound.