Let’s not beat around the bush; the news isn’t exactly uplifting at the moment. The conflicts in Israel and Ukraine add to the pessimism, inflation remains high, and interest rates hover between 5% and 6%. The sunny days of summer are behind us. Alarmist newspaper articles abound, and discussions are gloomy. But what is the reality in the property market, and what are the true signals on the ground?
For tenants, things are complicated. High interest rates have changed the game for indebted landlord-owners, increasing their mortgage repayments significantly, leading to higher rents. Some, not finding it profitable anymore, are selling. The conditions for Buy to Let borrowing have also deteriorated, with high rates and the need for a deposit. Consequently, there are few rental investors and the available property stocks for rent are low and decreasing. Given the persistent demand in London, it’s easy to understand the upward pressure on rents—approximately 18% in the last two years for central London (source: Savills).
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Does this mean it’s all doom and gloom for investors? Not if you have substantial amounts of cash and are not dependent on borrowing, as in this case, you should be able to buy with less competition and, therefore, less pressure on the purchase. You’ll benefit from high rents and better returns in a city where the demand far exceeds the supply, minimizing the risk of vacancies and unpaid rents (in the UK, the legal framework tends to favour landlords). However, the golden era of investing repeatedly without a significant deposit at ultra-competitive rates, allowing one to build up a property portfolio to rival the Duke of Westminster’s, is long gone.
And what about those looking to buy their home? Should they wait? Will the market decline or crash?
The sudden and significant increase in interest rates might have raised concerns. In England, fixed-rate periods are not 20 or 25 years, as in France, but 2, 3, or 5 years, requiring borrowers to re-mortgage at the end of the term. They have to renegotiate the best possible mortgage deal at the time. It was feared that many landlords would suddenly find themselves with monthly payments 50% higher, unable to pay the bank, leading to disastrous consequences: mass repossessions and a market crash. This hasn’t proved to be the case. British Banks came up with creative and pragmatic ways to offer more flexibility to support their customers until interest rates drop again. The proposed measures primarily focus on two criteria: the loan duration, which can now extend up to 40 years (up to the maximum age of 75), or the option to pay the interest only without having to repay the full capital (or pay back only a portion of the capital). In the end, monthly repayments are controlled, even though it will take more time (and therefore more interest to pay) to repay the mortgage.
So, business (almost) as usual in the London market, once again demonstrating its resilient nature and reinforcing its status as a safe haven.
However, the significant increase in interest rates has logically impacted the borrowing capacity of prospective buyers, and we should expect, in 2023, a slowdown or a slight decline in property prices. It’s difficult to provide exact figures as various studies have given different results, and there is still limited data. The consensus, however, suggests a 5% decline in 2023, followed by a stabilization in 2024 and a resumption of the rise afterwards. The truth is that these figures and the overall mood can vary from month to month based on the news. Currently, on the ground, we can observe that the supply is low, and demand is still high, even though buyers are more hesitant and seek discounts. The asking prices tend also to be more reasonable. Whilst average prices may be decreasing, our on-the-ground experience shows that quality properties are scarce and still sell very well, often at prices close to or above the asking price. Clearly inflation is high, and interest rates have limited borrowing capacity, but salaries have also increased significantly. High rents also motivate those who can afford it to buy, often with the help of the world’s largest bank: Mum and Dad. That means that there is much demand for well-located, modern or in very good condition, bright 1 or 2-bedroom apartments.
Below are the latest forecasts from Savills, experts known for being rather conservative: London Prime Properties: Capital Value (selling prices)
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It’s also important to realize that historically, interest rates are not that high. We are just emerging from a prolonged period of exceptionally low rates and it will take time, probably a few more months, to re-adjust. Indeed, it might be a while before we return to very low rates, even if we can expect a very gradual reduction over time, perhaps settling around 4%.
In conclusion, the resilience of the London market is still impressive, with upward price pressure always present, albeit constrained by successive counter-currents: Brexit, the pandemic, the war in Ukraine, inflation, and rising interest rates. At French Touch Properties, we believe that the London market still offers significant advantages: strong demand, insufficient supply, exceptional benefits (language, culture, security, dynamism, transport, etc.), undeniable safe haven status, proven market resilience, favourable legal framework for landlords, zero vacancy rates in rentals etc.
For investors with cash, the timing is likely to be very good for investing. It’s not when everyone else is buying and prices are soaring that one should start doing it. However, it’s always complicated for those who need or want to borrow for investment (leverage effect) and who don’t have a significant cash deposit. Borrowing conditions for Buy to Let are not the same as for residential (Live In) and are not very attractive at the moment in the UK.
For those contemplating whether to rent or buy, we still believe that buying is the best solution, provided one can plan for at least 5 years. Given the market’s strength against the onslaught of bad news since Brexit, we anticipate a significant price increase when the stars align again… when?… at what speed?… a mystery! Keep in mind that the market grew by an average of 10% per year for over 20 years until Brexit in 2015.
Certainly, in the short term, the increase in interest rates could mean interest repayments almost equivalent to rent for substantial borrowed sums. Choosing to rent is therefore reasonable. Nevertheless, in the medium to long term, unless one believes that London will cease to be London or expects a property market crash (we don’t believe so – the English government still has many unused levers, especially in taxation, to attract foreigners back), building one’s capital still seems preferable. In the uncertain world we live in, are there any safer investments?
Selling? Buying? Renting your property or looking for a property to rent? Call us! We will take care of everything for you!
