At the point of production for this week's blog, the breaking news is that house price inflation is finally showing signs of cooling, albeit slower than initially anticipated. The latest round of ONS data shows that house prices are below where they were at the peak of the November 2022 high but are tracking ahead of where they were 12 months ago. The significant takeaway from this round of data is that prices in the capital are coming down, falling by 0.6% since the last data release. This seems nominal; however, as some news sources have eagerly pointed out, this is the first-time prices in the capital have fallen since before the pandemic, certainly since the data published in the November 2019 ONS report. So, what does that mean?

Probably not as much as the popular media will insinuate; London, from the beginning of this downturn, has been considered a bit of an island on its own, seemingly subject to its own gravitational laws; indeed, the super prime market in isolation doesn't appear to correlate with the known economic rules of the universe, having had its strongest year since Brexit, showing that the investment appetite is still out there. The wealthy investors on the positive side of the inflationary situation, the debt holders, seemingly still have a gargantuan lust for premium-grade assets in the capital.

Looking at the cooling in the Greater London market, excluding the gilded retreats of the internationally mobile, the core issue, as always of late, is inflation. The newest batch of ONS data shows inflation dropped to 6.8% in July, according to the Office for National Statistics (ONS), with the CPI data dropping from 7.9% in June.  The battle for market share has begun in the world of high street mortgage lending, and under a bit of a political lean from the regulators to pass on some of the profits the banks have accrued from parking capital at the current bank rate, we are seeing better mortgage deals springing up across the board. The average two-year fixed deal is down to 6.79% as of July; however, should the reduction in the core rate of inflation be deemed too slow, we know now from experience how the Bank of England will react, so discount season may be short.

Another factor that may be affecting the overall house price picture in Greater London is the fate of its 2.6 million private landlords. When constructing this piece, the Guardian newspaper had just published an article outlining official figures from H.M. Revenue and Customs – based on capital gains tax data – suggesting that landlords sold 153,000 properties in 2021-22, 8.5% more than initially estimated. The barrier to entry in Buy-to-let mortgages is seemingly still pricing & rental coverage; at these rates, yes, landlords get the asset's price appreciation over time, but the margins are becoming problematic regarding cash flow, the selling point essentially. Looking at the numbers of fixed-rate buy-to-let mortgages that are due to expire in the latter half of this year, estimated at over 2 million, it could just be the beginning of the exodus.

There is one missing piece of the puzzle, though, and it could be why we have experienced what many would consider a ‘soft landing” so far, who is buying all the houses? According to the data, the average sales time for a semi-detached in Greater London is 108 days from advert to offer, which is considerably above the 27-day low of the May 2022 timeframes but is still remarkably quick for a market deemed to be cooling. There is no accurate way to track who is buying these properties, which is where our thesis blends seamlessly from data to wild predictions. Still, something we have covered frequently here is our belief that we will see an increase in Private Equity and Institutional investment in the residential property market, and where we get that notion from is where we get all our trends from in the U.K. We look to the west.

Stateside, Wall Street institutional investors currently own about 5% of the supply or 14 million single-family rentals nationally, which is to be expected; however, according to CNBC analysts, at the current acquisition rate, they will own or control 40% of the supply by 2030. The profits generated from these acquisitions are recycled into build-to-rent schemes, consolidating their position as what will become the great American landlord. Vast amounts of capital are finding their way into the market through specialist businesses set up to be conduits. On the surface, at least, the conditions are present here to encourage the same strategy & behaviours.

Now it's important to caveat that this thesis has polarizing positives and negatives; as backers of the SME development sector, we want a healthy market for our clients to sell into and small businesses to flourish alongside investor returns; it would be disastrous for our rental market to see the U.K. housing stock become completely commoditized in such way as theorised above, but a balanced injection of institutional investment could be the medicine the market needs, via specialists such as ourselves and our peers, to help home builders build at the speed and scale we need.

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