The Royal Institution of Chartered Surveyors (RICS) UK Residential Survey for July 2023 portrays a housing market increasingly under pressure due to the impact of higher mortgage rates.
At the national level, new buyer enquiries have dropped to -45%, almost identical to the previous month’s figure of -46%, marking a continual decline in buyer demand following the recent increase in mortgage interest rates. Across English regions and the four nations, all areas of the UK exhibited a negative return for new buyer enquiries in July.
The survey revealed a net balance of -44% of respondents observing a decline in agreed sales during the month, down from -36% previously. This figure signifies the weakest reading for sales since the early days of the pandemic.
Future sales expectations also appear grim, with a distinctly negative reading of -45% for July, a considerable drop from the net balances of -38% and -11% in June and May respectively. Even on a twelve-month outlook, sales volumes report a net balance of -25%, suggesting a decline, albeit slightly more optimistic than June’s reading of -31%.
Further signs of market stress are evident in the new instructions net balance, which slipped to -13% in July from -3% in June. This suggests an ongoing deterioration in supply. Alongside this, market appraisals were found to be 37% below that of the same period last year. Although inventory levels have been relatively stable, averaging around 38 properties, supply remains tight in historical comparison.
In contrast, the lettings market saw robust growth in tenant demand over the three months to July, evidenced by +54% of respondents noting an increase, the strongest quarterly uptick since 2022 began. Conversely, landlord instructions fell further, declining to a net balance of -30% from -24% previously. With this persistent imbalance between demand and diminishing supply, a net balance of +63% expect rental prices to increase over the next quarter, a new record high for the series.
RICS chief economist, Simon Rubinsohn, commented on the challenging landscape: “The recent uptick in mortgage activity looks likely to be reversed over the coming months if the feedback to the latest RICS Residential Survey is anything to go by. The continued weak reading for the new buyer enquiries metric is indicative of the challenges facing prospective purchasers against a backdrop of economic uncertainty, rising interest rates, and a tougher credit environment.”
Rubinsohn also expressed concern over the lettings markets, saying, “Demand shows no signs of letting up, supply remains constrained and that means rents are likely to continue rising sharply despite the cost-of-living crisis.”
Reaction
Terry Woodley, MD of Development Finance at Shawbrook:
“Buyer confidence continues to be stifled by interest rate rises and challenging economic headwinds.
“As demand becomes subdued, developers are adapting their business models. Our research indicates that 39% of developers are diversifying their strategies and focussing on different types of schemes which may include the likes of build-to-rent and houses in multiple occupation (HMOs) to adapt to the lessening demand from buyers.
“The most resilient investors will seek new opportunities to capitalise on and it’s crucial they work with a funding partner who can adapt with them.”
Jeremy Leaf, north London estate agent and a former RICS residential chairman:
“This report bears out to some degree what we’ve been seeing on the ground.
“Activity has been compromised by continuing cost-of-living concerns and interest rates staying higher for longer but there’s now an expectation that both may be at or near their peak.
“As a result, we’re starting to see more determination to buy, but not overpay, particularly from first-time buyers suffering from ever-increasing rents, and a general belief that the extent of the market’s likely decline in some quarters may have been exaggerated.”
Tomer Aboody, director of property lender MT Finance:
“As affordability becomes even more of a strain due to higher rates, sales are slowing as buyers wait to see what the Bank of England does next and whether mortgage lenders are prepared to become more flexible.
“Interest coverage ratios (ICRs) are causing even greater strains, since rents, although higher than last year, are still not in line to cover the affordability needed to enable landlords to qualify for mortgages. Will banks start taking a view on their 115 to 125 per cent rental coverage to assist?
“The next few months will be telling, as we have potentially reached the peak in base rate and it will then be down to what role banks and government assistance plays in bringing back positivity to the market.”
Dan Wilson Craw, deputy chief executive, Generation Rent:
“When there is little stopping landlords from raising rent in line with the market, no private tenant is truly safe from the cost of renting crisis. In many cases tenants are being priced out of their homes and forced into the lettings market to compete for a new place to live.
“At the same time a lot of people who want to move can’t because rents on new tenancies have risen so rapidly. That has a knock-on effect for the number of homes coming on to the market.
“Long term the answer is to build many more homes in the places people want to live, including social housing to allow more people to escape private renting. But the government can help people now by protecting renters from unaffordable rent increases, and making sure housing support through the benefits system actually covers the rent.”
