Sharp slowdown in capital appreciation adds to landlo...

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02 November 2022

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By Graham Norwood

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Sharp slowdown in capital appreciation adds to landlord financial woes

Landlords relying on capital appreciation to help offset the growing costs of letting out property have been given bad news.

October saw a sharp slowdown in annual house price growth, to 7.2 per cent from 9.5 per cent in September, says the Nationwide.

Prices fell by 0.9 per cent month-on-month, after taking account of seasonal effects, the first such fall since July 2021 and the largest since June 2020.

“The market has undoubtedly been impacted by the turmoil following the mini-Budget, which led to a sharp rise in market interest rates. Higher borrowing costs have added to stretched housing affordability at a time when household finances are already under pressure from high inflation” says Nationwide chief economist Robert Gardner.

“For example, the increase in mortgage rates meant that a prospective first-time buyer earning the average wage and looking to buy a typical FTB home with a 20 per cent deposit would see their monthly mortgage payment rise from circa 34 per cent of take-home pay to circa 45 per cent, based on an average mortgage rate of 5.5 per cent. This is similar to the ratio prevailing before the financial crisis.”

He continues: “The market looks set to slow in the coming quarters. Inflation will remain high for some time yet and Bank Rate is likely to rise further as the Bank of England seeks to ensure demand in the economy slows to relieve domestic price pressures.

“The outlook is extremely uncertain, and much will depend on how the broader economy performs, but a relatively soft landing is still possible. Longer term borrowing costs have fallen back in recent weeks and may moderate further if investor sentiment continues to recover.

“Given the weak growth outlook, labour market conditions are likely to soften, but they are starting from a robust position, with unemployment at near 50-year lows.

“Moreover, household balance sheets appear in relatively good shape with significant protection from higher borrowing costs, at least for a period, with over 85 per cent of mortgage balances on fixed interest rates. Stretched housing affordability is also a reflection of underlying supply constraints, which should provide some support for prices.”

Jeremy Leaf, north London estate agent and a former RICS residential chairman, says in response to the figures: “On the ground, new buyer enquiries almost dried up as uncertainty about the future direction of mortgage repayments added to cost-of-living concerns.

“Activity has slowly started to resume since as mortgage rates began to stabilise and are now starting to fall. Buyers are negotiating hard as they strive to take advantage of good mortgage offers while prices continue to be supported by lack of stock.”

And Tom Bill, head of UK residential research at Knight Frank, adds: “Mortgage market volatility that followed the mini-Budget caused prices to fall in October and we expect downwards pressure to persist despite the steadying effect of a new government.

“Demand will come under more pressure next year as a growing number of people come to the end of fixed-rate deals and mortgage offers made earlier this year when rates were lower begin to lapse.

“Government stability will help underpin transactions but we are witnessing a fundamental shift in rates take place after 13 years of ultra-low borrowing costs that will lead to price declines. Low unemployment, tight supply and well-capitalised lenders mean we should avoid the kind of double-digit falls seen during the financial crisis.”

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- Andrew townshend
- 02 November 2022 07:56 AM
The base value of an investment can go up or down, does it really matter so long as the income increases, and rents are increasing

- David Lester
- 02 November 2022 08:07 AM
Capital growth is always long-term, there is still a shortage of properties and high demand, wait your time.

- Worried Landlord
- 02 November 2022 11:21 AM
I think slower capital appreciation is the least of our woes!! Clearly not written by anyone who understands the scale of the challenges facing landlords.
Not seeing any price reductions in property asking prices locally yet, but as existing mortgage offers expire over next few months I am sure a correction is coming. I have a friend who was about to sell a property but has decided to rent it instead thinking prices had already dropped, just based on news media.

- Michael Foley
- 02 November 2022 16:44 PM
The point that’s missed here is they want Private Landlords out but are driving us out too quickly. The Big Boys are not ready yet to replace us and with the massive hike in interest rates slowing down purchase’s, obviously more people that can’t buy at present will be looking for some where to Rent. So stop your nonsense scrap THE WHITE PAPER, Scrap Section 24 shrinking supply ever further and Scrap any silly unfounded ideas about Scrapping Section 21, what could be simpler for a Government especially at a time of crisis, do your job govern.