For all the turmoil of recent months and years, the message for the long-term remains the same: population growth underpins capital growth.
A highly encouraging first quarter, with all indicators up on a year ago, suggests that we are now in a period of relative certainty, following the turmoil of previous months and years. Through it all, the ‘big picture’ fundamentals have remained the same. These – irrespective of short-term fluctuations – will ensure that underlying capital values continue to grow. Focusing, as we all tend to, on the short term, it is clear that the residential market has at last emerged from the dark days which followed Liz Truss’s infamous ‘mini budget’, prior to which it had barely recovered from the extremes of the covid lockdowns. Since the start of this year, Jackson-Stops offices across the country have seen indicators such as numbers of market appraisals and sales agreed, all move into positive territory. They include one in particular – an increase in ‘lifestyle buyers’ – which was notably down in 2023. These are wealthy buyers, most often based in London or Manchester, who are looking for an additional home, in the country. Theirs is not an essential purchase hence, last year, uncertainties over interest rates and, in particular, long-term corporate attitudes to working from home, prompted many such buyers to put their plans on hold. Now, with caution, they are returning.
Pricing remains sensitive
We are not as far as it might feel from the heady days of early 2022. Talking recently to a couple who bought their quite large Suffolk house at that time, they said “We knew we were paying a few percent over the odds, but it was a calculated risk. We had a loan fixed at under 2% and figured we should be able to save enough, to pay off a fair chunk of it by the time the rate came up for review. And it got us the house we really, really wanted.” Cheap money enabled this couple to prioritise the right house, ahead of the right price, at a time at which prices had risen by around 25% over the previous three years. Today’s buyers aren’t quite so fortunate. With borrowing rates two or three times higher, they are much more constrained. Hopes were raised by industry forecasts that prices would decline by more than 10%. In reality, prices have softened, but not that much (5% is more typical) and are now hardening again, contributing to a persistent ‘value perception gap’ between buyers and sellers. That gap is closing as the stability of present circumstances becomes more apparent. Further base rate adjustments are expected to be small and probably downward, not least as the effectiveness of interest rates in tackling inflation, is questioned (see panel ‘Occupation by Tenure’). The outlook for salaries, bonuses and capital growth also looks positive, if similarly lacking in drama. This relative calm allows buyers to appreciate the underlying market forces, underpinning both their confidence and their caution.
Fundamentals: surplus demand will keep rising
A second home is a luxury; a home, is a necessity. When demand exceeds supply, the question which confronts most buyers is thus not ‘What do we want?’ but ‘What can we afford?’. This is why interest rates matter so much in the short term: along with the price of other essentials, they dictate what we can afford. It’s also why interest rates make little difference in the long term: when there is surplus demand, prices will always revert to the maximum at which enough people can afford the limited number of homes available.
Demand is driven not by price, but by population
Like a tide rising over many decades, the UK population continues to grow. The latest forecast is for an extra six million people by 2036, to over 73 million. Also for decades, our population has increased faster than the provision of new homes, progressively increasing surplus demand and raising the bar for typical first time buyers to purchase an average property. One income used to be enough, then two. Repayment terms were always 20 or 25 years, now more than 50% of new loans are for 30 years or more. Cash from the ‘Bank of Mum & Dad’, once a great rarity, has become normal, as enough buyers have parents who, via this very process (which also attracts property investment cash from overseas), have surplus equity to make available. It is now increasingly hard to see where else even the most resourceful buyer could turn, to find the next, short term competitive advantage. This time, perhaps, we really have reached the limits of affordability. If so, capital gains in the coming months are likely to be modest, even as, for the same reasons and at all levels of the country house market, real capital values remain rock solid.
Politically discounted
Of course, the political event of the year will be a general election, which often prompts inaction. Not this time. The outcome appears, amongst our clients and buyers at least, to have been assumed, the consequences discounted (financially speaking) and the decision taken. They will carry on as before, because it will make little difference; no new government will, or perhaps can, turn the tide. At least until the wisdom of those assumptions is tested for real, the positive, if undramatic current market conditions, should prevail.
