Residential Property Market October 2023

The real estate market is potentially at a turning point, with the gloom beginning to lift in the residential sector but concerns about the US financial system & bond markets loom large for CRE. US banks are bracing for potential losses in commercial real estate, with nonperforming loans rising due to perceived weaknesses in the valuation of office investments. While the UK may have limited direct exposure to this crisis, it could still feel the effects indirectly.

Escalating geopolitical tensions in the Middle East could now disrupt oil supplies and capital flows, impacting investment strategies. On the positive side, sentiment in the residential sector has improved in September. Expectations that base-rates rises will end soon have boosted confidence among homeowners and investors. Some banks have recently begun lowering their 5-year fixed-rate products to below the psychologically important 5% mark.

At the same time property portals Zoopla & Rightmove have started to report increased buyer activity, as households facing mortgage refinancing decisions in mid-2024 feel they have cause to be more optimistic about their future finances. The Office for National Statistics (ONS) revised post-Pandemic GDP recovery figures upwards, wages continue to rise in real terms and employment levels remain healthy, adding to an improving macro-economic narrative.

However, these positive factors may in turn may be seen as additional upside risk to inflation by the Bank of England. September's inflation data showing CPI sticking at 6.7%, suggests pressure could be on the Monetary Policy Committee (MPC) to raise base rates at their November meeting. With the narrow vote to hold in August and some MPC members clearly angling for a 5.5% base rate for some months, a final pre-Christmas rate hike could still be on the cards.

However real-time CPI trackers show price inflation plateauing between June and August, hinting at a future drop in official figures, possibly going to below 5.5% in the October numbers which will be released 2 weeks after the next MPC meeting. This raises the likelihood that interest rates should peak soon, and by the New Year, the market should be on an upswing as sentiment and debt prices start to reflect the pivot in monetary policy.

The narrative around inflation and finance costs should turn more positive in the spring, just in time for the 2024 Budget. If these trends then continue into Q2 2024 we should see CPI falling to below 4%, with most real estate sectors then seeing increased activity as investor confidence, sentiment & debt costs improve. Any pre-General Election ‘giveaways’ in the 2024 Budget, such as changes to stamp duty, homeownership stimulus packages or planning reforms, would encourage markets further.