Current Housing Conditions

The housing market has shown resilience despite rising borrowing costs, but the adjustment continues. Historically, mortgage rates increasing from 1% to over 5% would lead to significant drops in house prices. However, regulations implemented by the Bank of England in 2015 have prevented a debt-fuelled housing bubble, resulting in only modest price decreases over the past 18 months.

These regulations include stress tests for mortgage affordability and limits on high loan-to-income ratios, which have capped buying power and constrained house prices, especially in high-value markets. This impact is most pronounced for first-time buyers, who make up over a third of all housing sales and are crucial for most mainstream builders.

First-Time Buyers in 2023:

• London: £90k income, £150k deposit
• Southern England: £60-65k income, £100k deposit
• Rest of the UK: £50k income, £35k deposit

This north-south divide in affordability influences local housing needs, necessitating a broader price range of freehold and leasehold homes in unaffordable areas. Local governments and city regions should be empowered to address their specific needs rather than having mandates set centrally.

Rental Market Challenges

The private rented sector has stagnated since 2016, following substantial growth from 2000. The social housing sector has also seen static supply for over 20 years. A modest shake-out in the rental market has occurred as some private landlords exit the business, but the sector is becoming more professionalised with half of rented homes owned by 20% of landlords.

Despite increased corporate investment, private landlords are crucial for balancing supply and demand. Long-term landlords focused on cash flow should be encouraged to continue providing decent homes. Rental reforms should not deter these landlords, who have a vital role in the market.

Strong demand persists due to a robust employment market and high immigration rates, contributing to un affordability in home-ownership. Rental demand has surged, with multiple applicants for each available home, driving rents up 31% while earnings have only risen 24% and housing benefits just 15%.

Rental inflation is now slowing due to affordability constraints, rather than increased supply. While rents may decrease slightly in some cities, they are unlikely to fall overall. Investment plans in rental properties should include realistic expectations for future rent increases. Renters on low incomes are particularly affected by the competition and stagnant social housing growth.

Building more affordable rental homes and increasing financial capacity in the affordable sector is crucial for meeting demand and boosting overall housing supply.

Market Outlook

• Rents: Expected to rise 4-5% this year, with affordability constraints tempering growth in expensive markets.
• House Prices: Projected to increase by 2-3% over the next few years, supporting new home development.
• Home Sales: An estimated 1.1 million homes will be sold this year, a 10% increase from 2023.

What the New Government Should Consider

• Introduce Rental Reforms: Implement changes to the rental market without imposing rent controls and adjust Housing Benefit to match current market conditions.
• Expand Housing Supply: Establish national guidelines while enabling local frameworks for successful implementation.
• Reform Planning System: Conduct land assessments and set housing targets, with greater investment in local planning teams.
• Support Affordable Housing Providers: Provide clarity and encourage investment in affordable housing.

Overall, there is a strong demand for homes, but requirements vary widely across different price points and tenures in the UK. Ensuring sufficient investment capacity to support large-scale housing supply and giving developers confidence in the market are essential for meeting housing needs.