Why didn’t Southampton House Prices Crash in 2023?

 

As I review the performance of the Southampton property market in 2023, it's evident that despite the challenges, the housing sector in the city has shown remarkable resilience.

At the beginning of the year, many commentators in January 2023 suggested house prices would drop like a stone in 2023. The Halifax thought there would be an 8% drop, Savills suggested 10%, and the respected Nomura Bank 15%, yet according to the Land Registry, they ended 0.5% higher. Looking at the Land Registry figures for Southampton…

Southampton house prices are only 0.1% lower than a year ago.

The final quarter (Q4) of 2023 recorded above average levels of new property sales in the UK, 11.1% higher than the year before (221,996 homes sold stc in Oct/Nov/Dec ’23 in the UK compared to 199,807 for the same three months in 2022).

What was of particular interest was a drop of 25.4% in the number of sale fall throughs (sale fall through being home sales agreed yet cancelled before legal exchange and completion), dropping from 75,033 in Q4 in 2022 to 56,761 in Q4 2023.

Looking at the local figures for Southampton (SO14-SO19) …

In Q4 2022, 821 Southampton properties had a sale agreed on, but 345 property sales fell through, meaning there were 476 net property sales.

Looking at Q4 2023, 887 Southampton properties had a sale agreed on them, yet only 238 property sales fell through, meaning there were 649 net property sales.

This surge in activity is a testament to the enduring value and attraction of homeownership.

Market sentiment has been bolstered by rising incomes and an initial decline in mortgage rates, making property investment increasingly feasible for many.

Demand is also considerably higher, up 19% according to Zoopla's property searches from last year.

Coupled with an increase of 20.7% in available properties for sale (633k in Q4 ’23 vs 524k in Q4 ‘22) compared to last year, the property market has seen an increase in choice, supporting robust sales.

This pricing alignment between buyers and sellers has reduced the downward pressure on values.

So, why didn’t Southampton house prices fall by 8% to 15% as predicted in 2023?

Despite average mortgage rates climbing from just over 2% to over 6% in the last two years, house prices haven't plummeted as anticipated. This defiance against more significant falls is attributed to several key factors:

1. Labour Market & Earnings: The UK's robust labour market and a 7.3% growth in average earnings have provided British households the financial stability needed to sustain mortgage repayments, even amidst rising rates.
2. Lender Restraint: Lenders have adopted policies to support many British households struggling with repayments, effectively reducing the number of forced sellers and maintaining market stability.
3. Mortgage Affordability Testing (Stress Testing): Perhaps the most influential factor has been the introduction of stricter mortgage affordability ‘stress testing’ (the Mortgage Market Review tests) for new borrowers since April 2014.

These ‘stress test’ regulations were designed to prevent British households from taking on excessive levels of mortgages during periods of low mortgage rates. They have been pivotal in preventing a significant housing crash because, like 1988 and 2008, when borrowers borrowed too much in the years before, that caused rapid house price inflation (due to over-borrowing). The added advantage to stress tests is the built in resilience for higher mortgage rates, enabling many households to manage the transition to higher mortgage rates more effectively.

For instance, even though the average rate all new mortgage borrowers have paid has dropped from around 4% in the autumn of 2014 to just under 2% in the autumn of 2021, borrowers have had to prove they could afford a 6.5% to 7% mortgage rate to secure that mortgage during that time frame. As interest rates have risen in the last couple of years, the stress levels have increased to an average of 8.7% (i.e. borrowers now need to prove they can afford to pay a mortgage of 8.7%).

Impact on Southampton's property market in 2024.

As an estate agent witnessing these trends first-hand in Southampton, I've seen our local market reflect this national resilience. The regulatory constraints on buying power, while capping the purchasing ability up to and post-pandemic, have, on reflection, maintained a steady demand for quality homes.

Southampton first-time buyers are still buying plenty of homes yet approaching the market with slightly more caution and greater financial preparedness than a couple of years ago. They are adapting to the current economic climate by opting for smaller Southampton homes to offset the elevated costs associated with borrowing. Interestingly, another reason for higher first-time buyer demand is rising rental prices, which have risen at nearly double-digit annual percentage increases since 2021.

As I anticipate the future, it's crucial to understand that while base rates may start to fall later in 2024, the regulatory constraints on buying power continue to hold. While ensuring market stability, these limitations suggest that house prices are unlikely to rise sharply in 2024 and are more likely to drift slightly downwards by 1% and 3%.

For homeowners and prospective buyers in Southampton, there's an opportunity to plan and navigate your property decisions with a long-term perspective.

As the housing market navigates through fluctuating mortgage rates, there's cautious optimism that a slight ease in these rates might boost buyer confidence. This shift could encourage more individuals to proceed with buying homes.

Those ready to ascend the property ladder may leverage the buyers' market depending on the type and location of their second or third home in Southampton, presenting offers lower than the asking price in hopes of securing a deal.

Additionally, those looking to relocate would welcome any dips in fixed-rate mortgages. A significant decrease in two-year rates has already been observed, potentially enticing a segment of buyers to re-enter the market.

Buy-to-let Southampton landlords are facing a mixed scenario.

While they may be experiencing notable increases in rental income, the financial pressure from elevated interest rates, insurance costs, and taxation is real. There's plenty of speculation in the press that these factors may lead to a reduction in the number of rental properties as landlords potentially exit the market, which could further impact the availability of rental stock. However, as the number of British landlords selling up has increased by 55% (over the last couple of years) and the number of landlords buying has only decreased by 22% (again in the previous two years), the net numbers of British buy-to-let properties are still very marginally growing!

Final thoughts to Southampton homeowners.

To all Southampton homeowners considering a move in 2024, I encourage you to view this period as an opportune time to evaluate your options. With a comprehensive understanding of the local and national property landscape, I am committed to guiding you through every step of your property journey.

Whether you want to buy or sell or want to discuss your options, I invite you to connect with me. There's no cost or obligation – just a straightforward conversation to help you make informed decisions in a changing market. Let's navigate your future move in the Southampton property market together!

2024, a New Year – Maybe a new Southampton Home?

As we settle into the first few weeks of 2024, you may contemplate moving home. Whether it’s a quest for more bedrooms or reception rooms, a desire for a larger garden, a view, a move closer to the countryside, or downsizing, the New Year symbolises new beginnings.

In navigating this journey, selecting the right Southampton estate agent becomes crucial to help you move.

Begin by consulting those closest to you. Recommendations from friends and family can provide valuable insights, particularly regarding estate agents in Southampton. Their experiences can highlight agents who are communicative, knowledgeable, and efficient, essential qualities in securing a property that meets or exceeds your price expectations.

Next, turn to the wealth of information available online. Reviews on platforms like Facebook and Google offer a window into the experiences of others with various Southampton estate agents. However, approach these reviews with a balanced perspective, recognising that not all feedback may be entirely objective.

Your research should extend to the agents' websites. Compare their services, fees, and property marketing strategies. Assess their engagement with the Southampton community through social media interactions, demonstrating their local area expertise.

Equally important is understanding the different operational models of estate agents in Southampton – from high street offices to internet based and hybrid models. Each comes with its benefits and drawbacks, tailored to individual needs. Please pay close attention to their terms and conditions. How long is their sole agency agreement (this is particularly important)? Do they have any charges if you withdraw your property from them?

As you narrow down your choices, evaluate the agents' performance and ability to meet your specific requirements, whether the number of viewings, website views, proactive outreach to potential Southampton buyers, or achieving a timely offer.

Remember, the right agent should excel in selling properties like yours and possess in-depth knowledge of the Southampton area, ensuring accurate valuations and effective communication with prospective buyers.

Finally, trust your instincts. The right agent for your Southampton property will often resonate with you beyond just the facts and figures.

For personalised, no-obligation advice on selling your home in Southampton, our expert property team at Belvoir Southampton is ready to assist.

The Emergence of Accidental Southampton Landlords in a Slowing Housing Market?

 

A Southampton landlord remarked to me the other day that he felt that there were more 'posher' up-market properties coming up for rent in the last six months compared to a couple of years ago.

I stated that this was the case, and it wasn't all down to the recent rental growth – it was the growth of the upmarket 'accidental landlord'.

With the Southampton housing market showing signs of a slowdown and predictions of further house price declines, I am starting to see the return of the ‘accidental landlord’, but in a somewhat different form to what they were in 2008/9.

An ‘accidental landlord’ becomes a landlord unexpectedly or unintentionally. This often occurs when homeowners rent out their property instead of selling it due to a slowing housing market, a change in personal circumstances, or other unforeseen reasons.

While the sales market in Southampton has experienced a period of strength in recent years, activity has started to slow down from the levels seen in 2021/2. In contrast, there has been soaring demand for Southampton rental properties.

To give you an idea of the growth of rents.

 

The average rent for homes coming on the market in the Southampton area in 2021 was £919 per month, whilst in 2023, it has been £1,128 per month.

 

Some Southampton homeowners, fearing not achieving their desired selling price, might opt to retain ownership of their properties and instead rent them out until market conditions improve.

 

Back in 2008/9, this trend was particularly evident in the middle market segment.

 

However, in 2023, many property commentators are suggesting if ‘accidental landlords’ do start to emerge, it will be in the upper quartile property segment (i.e., the top 25% of properties by value), where many homeowners bought in the post Lockdown race for space of 2021/2. 

Looking at the figures, they could be correct.

The upper quartile rental market (excluding student lets) starts in just over the £1,500 per month range in Southampton.

·        In the first seven months of 2021 (Jan to Jul) in the Southampton area – an average of 49 properties a month came onto the market for rent at £1,500 per month or more.

·        In the first seven months of 2022 (Jan to Jul) in the Southampton area - an average of 66 properties a month came onto the market for rent at £1,500 per month or more.

·        In the first seven months of 2023 (Jan to Jul) in the Southampton area - an average of 79 properties a month came onto the market for rent at £1,500 per month or more.

(Southampton area being SO14 to SO19).

 

Many of these could afford to be patient in pursuit of optimal selling conditions. The rise of ‘accidental landlords’ can be attributed to various factors, such as limited property appreciation, increasing mortgage costs, and robust demand for Southampton rentals, making renting out properties an attractive alternative.

 

‘Accidental landlords’ are also created through other diverse circumstances.

 

Irrespective of what is happening in the economy and Southampton property market, births, deaths and marriages continue. There will always be some new couples who decide to rent out one of their properties after moving into a shared home, while others inherit properties through the passing of parents or grandparents.

The current average tenancy length of 51 months provides these new Southampton landlords with just over four years to allow Southampton property values to recover before re-evaluating the market. However, stepping into the role of an accidental landlord carries specific implications that homeowners need to be mindful of.

 

Understanding the tax implications is a crucial aspect that ‘accidental landlords’ should grasp.

 

Transitioning to landlord status may result in the loss of specific tax benefits, including stamp duty relief, and necessitate payment of income tax on rent. Furthermore, upon selling the Southampton rental property, landlords may become liable for capital gains tax on the profit made from the sale, as it is no longer considered their primary residence and I implore you to take advice from an accountant.

To mitigate the impact of tax changes, some Southampton landlords have chosen to incorporate their properties into Limited Companies. Corporate structures offer potential tax relief on mortgage costs and the opportunity to pay lower Corporation Tax rates than individual income tax rates. However, incorporating properties involves additional expenses, such as stamp duty and capital gains tax on existing properties transferred to the company.

Individual landlords with only one property may find incorporation less advantageous, but it could be a viable option for those planning to expand their buy-to-let portfolios.

 

Investing in property maintenance is a crucial consideration for Southampton's 'accidental landlords'.

 

Well-maintained properties are more likely to retain or increase their value over time. Retrofitting properties to improve energy performance can also benefit tenants and future buyers, helping reduce utility costs and enhance overall comfort.

Accidental landlords must diligently handle this critical area: appropriately protecting tenants' deposits. Please safeguard deposits adequately to avoid significant compensation claims, with landlords potentially losing up to three times the deposit amount. To protect against such risks, landlords must ensure compliance with deposit protection schemes and provide tenants with essential documents, including Energy Performance Certificates, the Government's "How to Rent" guide, and current gas safety certificates.

 

Misunderstandings can inadvertently arise to renting direct to family or friends, leading to legal disputes.

 

Even though you know the tenant, it still could be wise to employ the services of a letting agent to establish clear terms in writing at the outset of a tenancy to avoid potential conflicts and protect the rights of both landlords and tenants. This becomes particularly relevant as the Renters Reform Bill, set to introduce significant changes to the private rental sector, including tenancy length and the process of regaining possession, is awaiting approval.

My overriding message to every Southampton ‘accidental landlord’ is that they must be aware of the tax implications, consider incorporation a potential strategy, invest in property maintenance, protect tenants' deposits, and establish clear terms to avoid disputes. Additionally, there are over 170 pieces of regulations regarding renting your property out. Also, it's essential to stay informed about forthcoming changes in renters' rights introduced by the Renters Reform Bill.

In conclusion, with the Southampton housing market experiencing a slowdown, I suspect an increasing number of Southampton homeowners are considering becoming ‘accidental landlords’ by opting to rent out their properties instead of selling.

 

You must weigh the risks of renting your Southampton home and the potential rewards.

 

I know of many stories of Southampton homeowners who waited five or six years after the Credit Crunch to hit their ‘target price’ for their existing home, only to realise it cost them tens of thousands of pounds in costs and the price they had to pay for their new home. On the other side of the coin, I know plenty of ‘accidental landlords’ in Southampton who used the fact that they became an ‘accidental landlord’ as an opportunity to build an impressive rental portfolio over the last 15 years.

If you are uncertain or do not possess all the facts, don't hesitate to contact me to discuss your plans. Then I can give you appropriate level-headed advice to make the right decision. By taking proactive steps and understanding the risk and rewards of being an ‘accidental landlord’ in Southampton, you can navigate the Southampton property market successfully, even during uncertain times in the housing market.