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What can the residential auctions market expect amidst the economic turmoil?

Those struggling to keep up with the rapidly evolving economic measures designed to get the UK back on track for growth will be forgiven – there has, indeed, been a lot to process.

And even though it’s only been a couple of weeks since the latest interest rate rise and the announcement of Kwasi Kwarteng’s infamous tax cuts, we can already see how these events will affect residential property and auctions in the short term.

The recent rate rise to 2.25% was hardly a big surprise – a series of increases had been expected for a while to help rein in inflation and stimulate market readjustment. UK borrowers had been riding the wave of cheap money for far too long, causing assets to go up in price, but that could not have gone on forever. I suspect professional investors were unfazed by the rate hike, having already priced it into potential/ ongoing deals, so on its own, this event is unlikely to have made a big splash.

The effects of the mini-Budget, however, had been felt even before the measures were officially unveiled and we witnessed that first-hand. On the day of our September residential auction, conveniently sandwiched between speculation on a stamp duty cut and the mini-Budget itself, we sold about 70% of all properties listed in the catalogue (down from the average of 80% ). Even though most of our buyers are experienced private investors, we do occasionally deal with newcomers and less seasoned purchasers, who may prefer to take a more cautious approach. Fast forward to a few days after the announcement, and our success rate had climbed up to 80%.

The mini-Budget sent the pound into a freefall, causing panic in the markets. Mortgage lenders found themselves in a tricky position unable to price their products, and as a result, many have been withdrawn from the market until further notice as banks desperately try to figure out what to do. We’ve heard speculation of property purchases falling through en masse and people’s mortgage repayments skyrocketing, squeezing disposable incomes even further.

The auction market is a different beast, though. Most of our buyers don’t rely on financing so won’t be affected by the rate rise to the same extent. Given what’s happening in the wider property market, with homes potentially becoming more out of reach for greater numbers of people, I struggle to imagine a scenario whereby we wouldn’t see some kind of a market correction. Yields in residential property have been tight for a very long time, so it’s bound to happen.

What we’re likely to see is a flight to quality as investors opt for safer options – properties that only require minor decorating works, in well-connected areas of the UK, and ideally, in locations with strong local job markets (an important consideration for buy-to-let investors wanting to make sure tenants are in good financial health and will honour their rental commitments). We will likely see more demand for rental stock while the mortgage market settles – people will want to wait out and see before taking the plunge. That, in turn, will drive investment from buy-to-let buyers, especially those looking to hold for the medium to long term, and there are plenty of people like that on our books.

The land market (consented and unconsented) is likely to be one of the more challenging sectors to operate in. At the moment, such investments simply come with too many volatile variables. These include the increased cost of construction materials, a slow planning system, more expensive financing, unpredictable GDV’s and the shortage of qualified labour.

The speed and certainty the auction provides also favours buyers looking to enter the market swiftly and avoid being held up by the breakdown of chains which is only likely to become more common place in the current climate. At our last auction, we sold several lots to private individuals, including flats in Barons Court and Shepherds Bush, both highly desirable areas in west London.

The residential auction market is safe as long as we continue delivering what we’re good at – realistic pricing, certainty of sale and speed. The wider residential property sector will weather this storm, too.

Ultimately, the economic situation today is very different from that of 2008: banks are far better capitalised and able to lend, so the property market will remain liquid, although prices would need to shift.

This blog has also appeared on Estate Gazette (11h October) for the full article click here 

Richard Adamson

Residential Managing Partner Residential Auction

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