In this week's blog, we step away from the political furore on either side of the pond and delve back into the data to try and make sense of asset pricing in relation to housing. The surface-level takeaway is that, as predicted, house prices are rising again, further displaying the sector's natural resilience. However, a deeper dive into the mortgage arrears data, especially in relation to landlords, reveals potential risks. Could this be the first indication of demand destruction in relation to rents? Could this be one of many reasons investors aren't returning to real estate as quickly as initially anticipated? Understanding these trends is crucial for anyone interested in the real estate market.
There are 48 REITs listed on the LSE, most a mixture of commercial and residential yield-bearing assets, and almost all plagued with poor share pricing and discounts. The evidence isn't there yet to suggest the masses are seeing this as a buy. Still, we know the traders & the speculators will be long; the underlying fundamentals coupled with the almost certain-shy-of-the-apocalypse rate cuts that are due will mean they can't afford not to be long. But for people who don't have to place chips on the table for a living, the fence one shall sit.
UK house prices are now reported to have increased in Q1 by 1% from where we were in 2023, so, for now, to continue with the trading jargon, the bottom may be in. This is an amalgamation of mortgage rate stabilisation, wages rising, and inflation levelling off; these indicators are suitable for house price growth in the short term. However, one note of concern is the increase in arrears and repossession. As reported in the wider media at the close of 2023, the outstanding mortgage book arrears in the UK stood at £20.3Bil; that figure was up 50%+ from 2022 and is anticipated to rise in a similar fashion throughout this year. Further data published by the BBC showed a significant increase in Buy-to-let mortgage arrears, growing 124% in the final quarter of 2023, and again, this trend shows no sign of stopping. UK Mortgage, a lending trade body, stated that the number of Buy-to-let repossessions grew steadily throughout this period, topping out at over 500 in Q4 last year.
So, given that our clientele sells heavily into this sector, is this the first indication of demand destruction in relation to rents? No, we don't think so.
It's perhaps too easy to blame the entire situation on rates, legislative pressures on landlords, inflationary pressures, or rental voids; all of those factors are part of the broader issue, but the elephant in the room here is we built a domestic buy-to-let mortgage market on a solid foundation of cheap credit, we actively sort to entice the middle classes to bolster their pensions by becoming asset owners, normal people were tax incentivised into becoming a generation of Mr Rigsbys with very limited focus on affordability and rental coverage throughout the early part of the last decade. Then, one day, on 23 September 2022, all of that came to a crashing halt. In the game of market poker, a bluff was called, and the entire structure and profitability of the buy-to-let investment class changed overnight.
Now, we have grotesquely oversimplified here for comedic effect, but markets are incredibly robust and resourceful. As we have adapted to a higher rate environment and the more exposed have fallen away, the bid is returning, and it's set to return in a big way both from professional buyers and the public. According to online estate agent Zoopla, there are more homes for sale than at any point in the last eight years, and the demand has increased as well, with sales up 13% from last year. Nationwide also released some topical data on elections v volume of transactions in the market, and traditionally, there is no correlation; if anything, elections can create a sense of optimism that things will change for the better and bolster the market, further increasing our sense of optimism.
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