LOOKING BACK – LOOKING FORWARD

19.12.2023

Its’s that time of year to review the year ending and to ponder the new one starting in January (named after Janus – the Roman god of transitions, doors and gateways who is usually depicted looking both backwards and forwards.)

To use the football pundits cliché, 2023 for us has been a game of two halves. Up to June, despite rising interest rates, the local housing market carried on relatively unscathed. I predicted last year that might happen for a while as we have some protection because of the area and especially the schools.  For a while there wasn’t any noticeable dip in house prices, and certainly not in rents, which spiralled on up despite tenants also facing higher costs for food, fuel and everything else.

The turning point for the sales market was the BoE (Bank of England) decision on 21st June to raise the base rate half a percent (when every other recent move was just a quarter). This was when everyone realised inflation and dearer borrowing wasn’t a temporary blip and we may have higher interest rates for the foreseeable future. The last few years will eventually be revealed as the blip. A generation assumed cheap money was normal but its not. The 0.1% interest rate in 2020 was the lowest over three centuries. (The highest ever – after massive inflation – was 17% in 1979.) In mid 2023, light dawned the era of cheap money had passed.

It was like Wile E. Coyote in the Roadrunner cartoons who runs off the edge of a cliff but hovers in mid-air till he looks down, realises there’s no support, and plummets into the canyon below. (Before coming back to life again for another go, which is often what happens with the housing market too.)

We started getting buyers hesitating on properties they liked, – perhaps thinking they might get one cheaper if they wait. We started discussing with homeowners what to do when their current mortgage runs out. I remember myself buying a house in 1988 and a year later the interest rate was 14.88%. Ouch. (I didn’t eat out much back then). But lets keep it in perspective, we’re probably not going to revisit the worst of those times. We may already have reached the top of the current cycle.

The BoEs chief economist said UK interest rates would be like Table Mountain, – high but flat. He wanted to avoid the Matterhorn scenario where rates go very high, tank the economy and employment, then have to drop because we’d gone into recession.  I’m probably more in another camp who think we’re climbing Ben Nevis – you think you’re at the top but then the mist clears and it turns out you’re not.

So many people have fixed rate mortgages, car loans etc its hard for the BoE to know if they’ve done too much or too little. At the final 2023 meeting, they held the rate at 5.25% so its looking like Table Mountain. But three rate setters voted to increase and given geopolitical risks, I think we’re still on Ben Nevis tyring to see the way ahead.

But I’m not in the big crash due to a flood of forced sellers camp.  We have sold a lot of our landlords properties as they exit buy to let (squeezing up rents on the lesser supply left), but this was abating in late 2023.  I don’t think we’ll get a repossessions wave either. In 1989 -1993 I worked for the Halifax and attended repossessions almost daily. They’re rare now, – I’ve been to 3 in the last 5 years.  It costs lenders time and trouble, so as with higher mortgage rates, they’d rather restructure the loan by swapping to interest only or lengthening the payback time. New buyers are also accommodating higher rates via 35 and 40 year mortgage terms (the ‘forever’ mortgage).

The available Land Registry data Jan to August 2023 of completed sales in Richmond Borough shows prices only dropped in 3 of those months. Kingston data has prices dropping in 6 of those months, so national figures cloud the picture in different places. Neither is our sales volume down as much as a national picture suggests.  We’ve also noted houses which inflated during the stamp duty holiday and the pandemic ‘race for space’ have softened more than flats and maisonettes, which didn’t increase much in the last 3 years but are now holding their own. We saw more first-time buyers in late 2023. Some pay so much rent its cheaper to buy, despite dearer mortgages. (As long as you’ve got a deposit or the Bank of Mum and Dad).

What’ll happen in 2024? Parliament recently considered leasehold reform and renters rights. Michael Gove declared the current system ‘feudal’ but his proposals for change have been continually altered and watered down. Ground rents would be abolished, then just for new properties, or maybe not at all. The Renters Reform Bill was championed but panic set in because the Courts wouldn’t be able to deal with the fallout, and then we hear its back on again. Its been hard for valuers like me to advise clients whether to extend leases now or wait. Parliamentary time may run out anyway because 2024 will probably be an election year. (It can’t be any later than Jan 28th 2025). Will a government go to the country with a tricky housing market or might they give it a short-term kick? We’re hearing all the rumours. Maybe more help to buy,  maybe another stamp duty cut. But these just add to demand. What we won’t get is any serious attempt to fix housing supply. When Mervyn Smith opened the doors of our office in 1975, the population in England was under 47 million. That year over 300,000 new homes were built, half by local authorities. We’ve never built that many in any year since. Local authorities build a few thousand at best. The population in England is now about 57 million. In a nutshell that’s why rents are high, why young people struggle to get on the housing ladder or even leave home, and why house prices will not fall off a cliff because of higher interest rates.

Will Keir Starmer grasp this nettle (or indeed any nettle?) I hear the same aspiration to build 300,000 homes a year which successive governments have promised but never delivered. Maybe he should be bolder for his own sake. Other countries are starting to see political movements feed off younger voters frustration with housing policy.  

I often finish with quotes from writers more erudite than myself and I was taken recently by the author/journalist Rahul Raina comparing us to India. ‘Britain is not in terminal decline, as it often seems to want to believe. Its history, its sense of self and its value to the world did not end in 1945. Britain did not grow rich from refused planning applications. The country houses, the dreaming spires, the suburban villas, the very riches of Britain did not create themselves. They were the product of centuries of relentless investment and innovation, of constant progress, of annoyed neighbours, of hisses and sneers, of tearing up the settled, mottled fabric and building something new’. With that thought I wish the very best for you and your family in 2024.

Stan Shaw has managed Mervyn Smith since 1994 and is also an RICS Registered Valuer and Assessor. He is a contributor to the monthly RICS Residential Market Report which is reported widely in the press and media.