"Despite London’s house price growth falling to 2.9% between February 2022 and February 2023, it continues to boast the highest average house price due to the long-standing lack of supply and elevated levels of demand in the capital"
All industries have been impacted by the political and economic turbulence of the past 12 months. The UK property market is no exception.
With inflation eating into buying power, and interest rates increasing the cost of borrowing, residential property prices have started to dip in recent months, while the annual rate of price increase has also decelerated after a period of remarkable growth.
However, despite these difficulties, some analysts argue that the recent slowdown is simply a blip as the market stabilises and adjusts to the new era of elevated interest rates – this month’s house price index from Nationwide, for example, shows that prices have started to rise again.
That said, national statistics fail to tell the whole story, and – as with any sector – there will always be areas of the market that are under or over-performing.
Breaking down the data
By country
If we break down the data by country, for instance, it is clear that there are some glaring differences between how property investments are performing in the different countries that constitute the UK market. At face value, Northern Ireland has enjoyed the highest increase in house prices with an annual rate of increase of 10.2%. However, it is worth noting that Northern Ireland’s data covers the 12 months up to December 2022, while the data for Scotland, England and Wales was gathered in February 2023.
As such, from the most recent available data from the Office for National Statistics, we can see that the average house price in England (£308,000) is significantly higher than both Wales (£215,000) and Scotland (£180,000). Meanwhile, the Welsh property market has experienced the most growth in the last 12 months, as prices rose by 6.4%.
As such, investments in Wales could see strong growth as the market stabilises in the months to come, while the lower cost of a property could provide investors in the lower echelons of the market with a wider range of options. However, England clearly still provides the best potential appreciation of value when it comes to making a property investment in the UK, making it an overperformer in the current market.
With this in mind, which regions in England have enjoyed the most growth in the last year?
By region
In the 12 months to February 2023, homeowners, property investors and landlords in the West Midlands have enjoyed the best return on their investments as prices rose by 8.6%, with the average cost of a house reaching £253,900, according to Land Registry data. This represents an increase of over £20,000 and an annual rate of growth which is 1% higher than the next fastest-growing region of the country – the North East.
More generally, the data reveals that, despite Yorkshire and The Humber bucking the trend, landlords and investors in the more Northern regions of England have experienced the most growth on their investments in the last year.
However, by considering which regions have the highest average house price, perhaps one can get a better indication of where the most potential gains are as the market recovers.
For instance, despite London’s house price growth falling to 2.9% between February 2022 and February 2023, it continues to boast the highest average house price due to the long-standing lack of supply and elevated levels of demand in the capital.
Therefore, even if prices are not growing at the same pace of the rest of the market, it would be difficult to label property investments in London as underperformers given that investors will rarely see a significant dip in demand.
But how do different property types compare to each other?
By property type
According to data from the Land Registry, the best-performing property type in the year to February 2023 has been detached houses, which have increased in value by more than 7% to £457,449 on average. However, the data also points to some broader trends that are worth noting.
For instance, flats and maisonettes have experienced the smallest percentage of annual growth (2.1%) in the last year, which can be explained in part by the ‘race for space’ that occurred during the pandemic as hybrid working became the norm.
However, some commentators have suggested that this dynamic is starting to shift, with many people returning to cities now that post-pandemic normality is here to stay. Indeed, according to Knight Frank’s data from 2022, the number of property exchanges in regional towns and cities ticked up by 10% between July and September compared to the same period from two years before; in the countryside, meanwhile, exchanges in this period dipped by 9%.
As such, as people move back into more urban areas, we could see flats and maisonettes begin to stage a comeback in the coming months, despite the fact that they have underperformed in the last year.
Buy-to-let sector is overperforming
Elsewhere, as interest rates rise, investments in each sector of the property market will have felt the impact of an increase in the cost of borrowing in different ways.
The buy-to-let sector, for example, could be referred to as an over-performer, due to the fact that rental prices rose by 4.9% in the 12 months to March 2023 as potential buyers paused their purchasing plans and some amateur landlords exited the market when mortgage rates rose too high. As such, due to the imbalance between supply and demand, the average rental yield in the UK last year was 4.71%.
Moving forward, landlords would do well to look for properties in affordable locations that have the amenities nearby that could support higher rental prices, as these areas could provide the most yield in the next few years. For instance, figures show the North of England (7.4%) is providing the best yield in the current climate (2.2% above the average in the South), so could continue to overperform as the market recovers.
Investors in the commercial property market, however, have had a more difficult 12 months. Indeed, despite commercial property prices peaking in May 2022, UK commercial property capital values decreased by 13.3% across 2022, with average total returns dipping by 9%.
However, commercial investors should be encouraged by CBRE’s March data which shows that values have risen again (by 0.6%) for the first time since June 2022. And, with stability in Westminster and the economy set to avoid a recession, commercial property investments could get a boost as returning business and consumer confidence will demand in the coming months.
Lenders must be on hand to help the market recover
It’s clear that there will be a wealth of enticing investment options for landlords and investors to benefit from as the market begins its recovery. As such, lenders and brokers have an important role to play in helping landlords and investors capitalise on the opportunities that the different countries, regions, property types and sectors within the UK property market may hold for them.
However, even as prices begin to rise again, we in the specialist finance industry cannot become complacent; indeed, the economic climate continues to provide the market with challenges as interest rates rise and inflation remains.
As such, to briefly conclude, whether it’s a flat or maisonette in Manchester, a semi-detached property in the North East, or a BTL investment in the North of England, lenders must provide borrowers with the certainty and flexibility that they need to invest in the UK property market with confidence in the months to come. Indeed, those who are willing to take on even the most complex of cases will be best placed to do so.
