In 2023, the UK property market grappled with high inflation levels, rising construction costs, and a surge in interest rates. Despite the stiff headwinds, house prices have shown remarkable resilience. Looking to 2024, we expect cautious optimism to return with expectations of inflation reduction and potential rate adjustments. However, optimism must be balanced with realism, as concerns over the lagging impact of higher rates, recession risk, continued global instability and elevated living costs persist.  

Market trends and expectations

The UK property sector endured a confluence of challenges in 2023. Yet despite the headwinds, property prices held firm, sliding by just 1% on an annual basis.

In terms of geography, the market witnessed significant regional disparities, as some areas demonstrated annual growth, such as Northern Ireland at +4.1%. At the same time, other regions, like the Southeast of England, have continued to decline (-4.5%). Price resilience may depend more on the shortage of available properties than demand drivers.  

Meanwhile, mortgage approvals were down a quarter across the market, while overall housing transactions sank 20% – the lowest in a decade. Against a gloomy backdrop, homeowners have been reticent to move. Unlike previous financial crises, we have not seen a wave of forced sellers.  

Rates continue to bite

Mortgage rates have reduced in recent months in line with the forward curve, reflecting the consensus view that interest rates will fall.  In November, slowing food and transport price increases, as well as a decline in raw materials cost inflation, led to the surprise drop in CPI to 3.9%. Despite these seemingly positive indicators, higher inflation remains embedded with a marginal increase to 4% in December.  

Economic reality needs to balance sentiment. The lagging impact of higher rates has yet to be fully absorbed. Also, while inflation has fallen faster than expectations, cost-of-living pressures and rates remain elevated, which will continue to put downward pressure on house prices. Indeed, the risk of inflation increasing remains due to the impact of the Red Sea crisis.

Another dynamic is the performance of the wider economy. A recession or asymmetric economic shock could force a dovish turn by the BoE this year. Britain's economy shrank between July and September and growth was flat in the previous three months, suggesting the economy might already be in recession. Fortunately, unemployment has not risen meaningfully, providing some protection against rate rises.  

Looking into 2024, market expectations are of a relatively modest house price fall. Halifax believes UK property will fall between 2 and 4% but expects a 'part-recovery' as rates stabilise. A separate forecast by Nationwide was moderately more upbeat about 2024's prospects. The building society expects UK house prices to drop by low-single digits or stay "broadly flat".  

The Global Context

Geopolitical issues that may hinder the global economic recovery include an extension of the conflict in the Middle East and China’s reaction to the Taiwanese election results. Beijing’s initial reaction to the Democratic Progressive Party’s victory has been muted, with no reactionary military exercises or economic moves, though escalation over the coming months cannot be ruled out. Taiwan’s key role in the production of semiconductors is what is potentially at stake. If a war in the Taiwan Strait does occur, Bloomberg Economics estimates choked chip supplies, blocked trade routes, and economic sanctions could cost as much as 10% of global GDP. However, war thankfully remains unlikely.  

Buy-to-Let dynamics

While buy-to-let (BTL) investors are benefitting from double-digit increases in rents across the UK, the costs to many private landlords from higher interest rates and the increased tax and regulatory burden means we expect many private investors will continue to exit the market, which will further reduce the supply of rental stock.  

Looking forward, the UK residential rental market continues to shift towards purpose-built accommodation owned and managed by financial institutions. Large pension funds and insurance companies are taking the lead here and will increasingly dominate the larger developments, with significant financing opportunities arising in the mid-market development space.  

Support for first-time buyers

First-time buyers remain a pivotal segment in the UK housing market. High mortgage costs and the necessity for substantial deposits continue to present challenges. Government interventions, as outlined in the Autumn Statement, are critical to support these buyers and stimulate the housing market.  

Notably, the statement confirmed that the government plans to prolong the mortgage guarantee scheme. This extension allows prospective first-time buyers to benefit from the scheme until the end of June 2025.  

Living sector – mind the gap

Despite high borrowing costs, the UK's residential property market has exhibited resilience. Factors contributing to this stability include a persistent housing shortage, which continues to exert upward pressure on property prices.  

The imbalance between housing demand and supply remains a key driver, maintaining the market's buoyancy despite borrowing challenges. Amidst this landscape, opportunities within the housing sector have expanded, particularly in build-to-rent schemes and the private rented sector. Investors and developers are increasingly accessing these segments due to their potential for consistent returns and growing demand for rental properties.  

The build-to-rent sector, in particular, has witnessed substantial investment, catering to a demographic increasingly inclined towards rental living. Additionally, innovative approaches to other living spaces, such as co-living arrangements and alternative housing models, are gaining traction as viable avenues for investors and residents seeking affordable and community-oriented housing solutions.  

Political impact on property

The government has revealed it plans to expand building activity in city centres and cut red tape around planning restrictions to meet its key manifesto promise of one million new homes in England.  

Housing remains a fundamental political issue. Regardless of affiliation, every political party will include comprehensive policies addressing the core issues of supply and affordability in their manifesto commitments.  

However, should we see a change in government in 2024, we don't expect to see a significantly different approach. Many of the issues on the ground relate to local planning policies and decisions, which continue to be a big challenge for developers to navigate.  

Building on brownfield

One area of division is around the Greenbelt. The Labour Party has set ambitious goals of constructing 1.5 million new homes within five years and is eyeing a review of the planning regulations dictating housing locations in England. Rachel Reeves, the shadow chancellor, emphasised the necessity for a "common-sense approach" to discerning the value of preserving certain lands versus utilising them for housing development.  

This stance might position Labour in opposition to numerous Conservative politicians, who have staunchly supported safeguarding the Greenbelt—a protected expanse of land encircling major cities like London, Newcastle, and Manchester. On the other hand, the Department for Levelling Up, Housing, and Communities has underscored its latest long-term housing plans, prioritising repurposing brownfield sites (unused or abandoned industrial areas) for urban development while aiming to limit any perceived erosion of the Greenbelt.  

Arrested development

SME property developers face a range of challenges, including high development costs and limited access to financing. In a recent survey of the Federation of Master Builders (FMB), the planning system was revealed as the primary obstacle to delivering new homes. Ninety-four per cent said building over the last 12 months had become more expensive.

Buyer demand has also been at its lowest since 2015, when the survey began recording this data. What this survey underlined was that interest rate charges continue to hold SME developers back. Meanwhile, access to finance received its lowest rating in six years.

It is important during this period, for developers to know that alternative or non-bank property finance solutions exist that lend on residential, mixed-use, student accommodation and commercial ventures – and are tailored to meet the needs of experienced UK property developers.  

At this point in the cycle, lenders should also work closely with borrowers to navigate the rate environment, including more collaborative approaches and tailored financing solutions.

Lenders to become more discerning

Lenders are expected to adopt a more discerning approach in 2024, becoming more selective in their lending criteria to mitigate risks associated with property development.  

Another notable trend we see in the UK property market revolves around sustainability, including carbon impacts in property development. We are increasingly emphasising financing development projects with sustainability and environmental factors integrated. For example, lending terms that consider low carbon materials in construction practices. This aligns with global trends and regulatory pressures for climate change. This shift shows evolution as the industry increasingly prioritises responsible and sustainability-conscious developments, made even more important by the impact to emissions that buildings have.

Innovative infrastructure

Major UK cities like London, Manchester, Birmingham, Liverpool, Leeds, Sheffield, and Newcastle are amid significant transformations driven by evolving work and living patterns. The surge in remote and hybrid work setups is reshaping urban landscapes, prompting many companies to shrink or shut offices permanently.  

Consequently, unused city buildings could now be repurposed into much-needed housing, appealing to professionals desiring city living amenities, even while working remotely.  

Conclusion

The landscape of the UK property market in 2024 reflects a resilient yet adaptive industry, navigating economic uncertainties and regional nuances. While developers face broad challenges, the market's underlying structural issues with supply, it’s increasing focus on sustainability and urban transformations spurred by continuing adaptation to post-pandemic trends illustrates that the industry will remain resilient while steering toward dynamism and responsible growth.

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