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London Property Market Update 2022


A year of two halves.  We have worked on some wonderful transactions this year and repeatedly added value to our clients’ objectives at every opportunity.  We also resolved some very complex situations for our clients and we welcome the challenges of 2023 with you.  


There is no doubt that we are in the midst of economic turmoil – the uncertainty over increased interest rates, soaring energy prices, supply shortages and the growing fears of a deeper recession all promise a challenging year ahead.  The rapid rise in inflation has led to a collapse of consumer confidence and falling retail sales, creating the biggest drop in real household disposable incomes since the 1960s.  


Buyers who purchased apartments in London in 2015 (peak being 2016) would be lucky to sell their property for the same price today.  This week FT’s James Pickford wrote: “Property prices in central London have fallen by 24% in real terms over the past five years, according to research underlining the effects of the pandemic on demand in city centres and a housing affordability crunch in expensive areas of the country.” 


With factors such as high interest rates, exorbitant build costs, service charges (which are only guaranteed to increase), agent fees, renter’s reforms, tax reforms (for individual landlords), spiralling ongoing maintenance/refurbishment costs, local authority licencing, the position for landlords is complex, albeit tempered by an increase in rental income. 


Rishi Sunak can’t fix this 

Although Prime Minister Rishi Sunak continues his attempts to stabilise UK’s economy and housing market, his attempts will not be enough.  He cannot fix inflation and high-interest rates by himself.  Interest rates have increased to 3.5%, the ninth consecutive increase since December 2021.  While projections from The Bank of England suggest that inflation may have reached its peak, it is expected to remain ‘very high’ over the coming months. 


The severity of the inflationary problem is only magnified by the current economic climate.  Normally, we would see a cut in interest rates to counter an economic downturn, but the reverse being true highlights the gravity of the present predicament. 


The Bank suggests the possibility of two years of falling economic output, with recovery being pushed back to the second half of 2024. Further rises in rates are inevitable as the Bank tries to bring inflation back towards its target of 2%.  


The latest forecasts suggest Bank Rate will be 4% to 4.25% at the end of 2023. With inflation set to remain high for a prolonged period and real household disposable incomes being at an all-time low, consumer confidence will remain weak. 


Residential Sales are understandably in trouble 

We started the year with a rebound in property sales, but in sharp contrast we are closing the year with sales significantly below the prices we would have liked to achieve. 


Although house prices were increasing in the months leading up to September, a noticeable easing in the pace of growth was reported by RICS. October saw prices fall by 1.4%, which was the largest month-on-month fall since June 2020, according to Nationwide.  


While recent political events have presented some real opportunities for overseas buyers to take advantage of the weak pound, others have seen the turmoil as a reason to stay away from the London property market; together with the pound, they have seen their existing assets devalue significantly. 


Households face rising mortgage costs, significantly higher prices for essential items, and a further rise in energy bills in the coming year.  The ongoing cost-of-living crisis and gloomy economic outlook have weighed on consumer confidence.  Another possible explanation for the decline in London could be the over-reliance on mortgage debt, with average loan-to-income ratios and total mortgage costs being far higher than it is in the rest of the country.  


Going into 2022, Savills was predicting a growth of 1.5% in London in 2023 and Knight Frank forecasted 3%, but after the year's events, both companies radically revised that to predict a drop of 12.5%.  Some firms are suggesting prices will drop by 6% next year across the capital, but even more estimate this figure will be between 8% to 10%, including the Office for Budget Responsibility (OBR).  In contrast, Lloyds Bank and Barclays Bank expect prices to fall as much as 22%.  Yet, we are all expecting house prices to grow in 2025. 


Residential Lettings outperform 

With so many professionals and students moving back to London, rental demand has been exceptional. The latest figures show that while the average rent has grown by 10%, in some parts of London this figure reached 15%, the highest rise on record.  


The number of people looking to rent rather than buy has risen sharply.  This could be due to everyone going back to “pre-pandemic. life”.  People have started to come back to the city for work and overseas students arrived in large numbers (having previously deferred their studies); this caused a surge in demand for rental accommodation.  Renters faced real challenges as there were simply not enough homes available to rent to meet demand. 


We registered a record number of new renters in the third quarter of 2022.  Competition in the rental market has also been intensified by expensive mortgages deterring many first-time buyers, who are now renting instead in the hope that rates will fall in the new year, according to property site Rightmove. 


It is expected that more homeowners may put their plans on hold and instead of selling during the period of uncertainty, they will opt for renting their homes.  With more landlords leaving the rental market in general this will have only a very limited positive effect on the supply of rental stock.  


Because of the rising cost of maintaining properties (including significant increases in furniture prices, repair costs, refurbishment and interest rate increases), landlords see very little of the increase in rents.  Much will depend on the extent to which higher interest rates translate into a weaker sales market that results in more stock coming from accidental landlords.  At the same time, those higher interest rates will put more financial pressure on mortgaged buy-to-let landlords, which is likely to mean levels of available stock remain constrained for some time to come. 


Many landlords are also worried that it will soon become very hard to evict difficult tenants — including those who may be behind on their rent, have caused damage or mistreated their roommates — if the government passes draft laws that prohibit “no-fault” evictions.  Landlords can evict tenants under a different process, but this often takes much longer and can involve a court hearing.  Parliament is soon expected to vote on the new legislation.  


Developers in West London face a potential ban on new housing projects until 2035 because the electricity grid has run out of capacity to support new homes, jeopardising housebuilding targets in the capital.  Also, while the government has plans to increase the minimum Energy Performance Certificate (EPC) rating for rental properties from ‘E’ to ‘C’, it’s not clear when the new rules could be introduced. 


More recently the supply of higher-value properties has improved and efforts to stabilise the economy have brought a pause to the rate at which rents have been increasing.   


Stagnating retail commercial property 

Commercial tenants need more support.  The Autumn Statement contained a package worth £13.6 billion to help business rates payers, with a commitment to introducing new valuations of properties to reflect more recent market conditions from April 2023, plus a package of relief measures but it is not enough. 


The supply side of the economy continues to be a cause for concern for businesses.  Issues and concerns include the ongoing disruption to global supply chains, Brexit-related challenges for UK exporters, and an inadequate supply of labour, with the wave of disputes across several key sectors including the Royal Mail, transport, health and education certainly not aiding the declining economy.  


The UK Commercial Property Survey reports that both the office and retail sectors continued to see a rise in availability, but supply in the industrial market continued to tighten, albeit modestly.  


Average rental values for high street shops are still falling and have fallen by 2.5% over the last year (to November, MSCI), but the rate of decline has been soft and values have been virtually flat over the last few months. 


For commercial property investors the combination of high inflation, high interest rates and low commercial rent is a very uncomfortable.   


Ring in 2023 

2023 will be a challenging year, that much is clear. If we factor in the current inflation rate of 10%, investors are in a very difficult position.  Is your devaluing cash safer in the bank earning 3%?  We don’t think so. 


Ultimately, a further decline in real household incomes is inevitable.  Although the Government’s Energy Bills Support Scheme is helping, it is scheduled to finish at the start of April 2023, with further support being much more targeted.  This will mean further significant rises in average household energy bills next year.  


While unemployment is rising and is projected to increase further, it is at a near-record low and the labour market remains a bright spot from the point of view of households.  The era of extremely low-interest rates is over. 


Over the forthcoming twelve months we can only hope for a calmer and more predictable market. 


To guide you through these challenges our team will be at your disposal with bespoke advice. Whether you want to buy, sell or rent property, we can help you secure the best terms and reach your goals.  


Our office is open throughout the holiday season.  We appreciate your help this past year and wish you a happy and healthy festive season.  Here's to an opportunity-filled 2023!
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