Thoughts from our Property Experts

Where we are now and what we face for the immediate and medium term - inflation, higher interest rates - the hard grind and tough decisions ahead.

by Jerry Epton MRICS Jerry Epton MRICS, author of this post , Tuesday 01 August 2023

The property market is coping with the change of high borrowing costs but it’s important to note that high borrowing costs are here for the immediate and medium terms. Here we take some time to discuss why.

At the beginning of the year, Prime Minister Rishi Sunak, as one of five pledges, promised to reduce inflation by half from its peak of over 10% to 5%. At the time this seemed an easy win. Now, over halfway through the year with inflation in the UK at 8.7%, with transaction volumes slowing in W11, the uncertainty that this creates is reducing the volume of transactions. Largely this is down to the UK’s battle with inflation and the tool used to counter it, interest rates.

Since the banking crisis of 2008/9 the UK/US/ Eurozone has experienced low inflation ranging from 0.2% to around 2%. The pandemic saw these “advanced economies” experience a recovery in demand, consumers spent before supply caught up, prices of goods increased; turning an economy off and then back on again proved to be more difficult in practice. As a consequence, the UK saw a big increase in inflation from 2% in the spring of 2021 to double digits by the middle of 2022 with the US experiencing domestically sourced inflation, shortage of workers, increase in wages, increase in prices to protect profit margins. Europe’s was largely based on energy and the UK suffered a combination of both; an energy price shock and US style worker shortages.

The timeline in the UK after a long period of low inflation saw inflation begin to grow after the pandemic with a sustained surge from March 2021 to September 2022 over the end of the UK’s lockdown, with spending on goods (rather than services) and energy. This all before the Ukraine war (February 2022) peaking at 11.1% in October 2022.

In February 2022 when Russia invaded Ukraine, UK inflation stood at 6.2%, more than three times the Bank of England’s “target rate” of 2%, US stood at 8.9%, Germany 5.5% and France 4.2%. The BoE had started to raise interest rates before the war up to 0.25% in the 1.3 million households (of a total of just under 7m mortgage holders) renewing their mortgage this year face a significant increase, the cost of some people’s repayments could treble after the BoE increased the base another 0.25% to 5.25 % in August...economists are projecting rates to peak at around 7%.

Yet in the face of these painful events, people currently are continuing to spend and the property market remains active; whilst these are outliers in terms of size and £ per square foot rate achieved, W11 has seen large turn-key houses on Clarendon Road and Ladbroke Terrace sell for around asking of £33m (£5,069/sqft) and £45m (£3,137/sqft) respectively.

People continue to buy, broadly 30% using finance/ mortgages. A turn-key 3,810sqft maisonette on Arundel Gardens, in good condition but with the lower ground floor flat under separate ownership and not available for sale, had been on the market for nine years at a range of prices with a number of agents.

Jerry Epton, Property Expert, Notting Hill