Kinjal Dalal on the winners and losers in the current UK property market
The UK property space has seen plenty of changes during the past few years. The COVID-19 pandemic led to numerous retail and offices shutting down, while many people who were able to work from home moved away from high-density urban areas. And with the economy entering a recession at the end of last year, the housing market has naturally taken a downturn.
The market had been on an upward trajectory for most of 2020 and 2021, but now, according to Nationwide Building Society, UK house prices have been falling since July 2022, after a sharp increase in 2021. This has largely been driven by two factors: higher interest rates affecting mortgages and dissuading new home buyers, and high inflation translating to increased household costs and lower real-terms household income. This trend is expected to continue through the start of 2023, although there are estimates that it may not be as major as the crash of 2008.
The increased interest rates have had a similar impact on commercial property as corporate borrowing costs soar. The five-year Sterling Overnight Index Average swap rate, an important interest-rate benchmark, increased four times in 2021–22. The pandemic also had a negative impact on the commercial sector as shops and offices emptied. Commercial-sector occupancy rates remain low (about 30%, according to a survey by Remit Consulting) as hybrid- or home-working structures have become more widespread. Companies needing to refinance their mortgages in the current environment are finding this expensive.
On top of this, investment in new property construction is also expected to be slow while borrowing costs are high. In England, an affordable housing programme fell short by 32,000 new homes in 2022. And it is suggested that UK housebuilding targets may shift from being mandatory to advisory.
Large insurers and pension funds looking to invest in long-term property markets could view the falling prices and increasing borrowing costs as an opportunity. According to a Financial Times report, there has been increased activity in the mortgage market from insurers for this reason. Equity-release mortgages are booming, allowing insurers to gradually build a portfolio of long-term investments while taking advantage of current interest rate movements.
Stagnation in the property market has also affected rentals. As landlords pass the interest-rate burden on to tenants, UK rental rates have jumped, with increases averaging about 12% over a year, according to research by market consultants TwentyCi. This has been exacerbated by an escalating demand for rentals versus a fall in landlords leasing out new spaces. Rent affordability has become a serious question for many tenants, which could result in higher claims on default insurance and rent guarantees.
On the flipside, sustainable housing projects in the UK are gaining popularity; these involve building homes using sustainable materials, practices and technologies that reduce heating or cooling costs to minimise carbon emissions. This has opened up a space for insurers to specialise in products designed for more eco-friendly houses, and is a flourishing ground for environmental, social and governance investments. However, this area has been slow to grow due to the skills and training required for workers, and the costs of construction and materials.
The pandemic has led to more property insurance claims. According to a European insurance industry database, UK property and casualty insurance claims increased by 34% in 2020. As the cost of living rises, crimes such as burglary, shoplifting and rental scams could increase in number, posing a challenge for pricing and underwriting in these markets.
Lower rates of real disposable income and slow movement in the property market may also affect renewal rates. Furthermore, with inflation high, homeowners and landlords may put off repairs and maintenance, leading to further deterioration and higher claims on damage.
The main concern for the immediate future is whether higher borrowing costs could lead to a credit crunch and eventual market collapse. As the markets evolve, so must we, if we are to find the next risks and turn them into opportunities.
Kinjal Dalal is a guest student editor
Image credit | Simon-Scarsbrook