2023 UK Residential Update

Contributors

Karen Martinus
Senior Associate, Research

Justin Hildebrandt
Executive Managing Director, Head of Europe

Will McIntosh, Ph.D
Global Head of Research

Mark Fitzgerald, CFA, CAIA
Executive Director, Research

January 2023

Executive Summary

Shortfall in housing supply and barriers to home ownership expected to fuel rental demand. 

Persistently high inflation, and the way in which central banks are responding to it, is dominating the macro-economic outlook. Since December 2021 the Bank of England (BoE) has increased interest rates from its record low of 0.1% in response to soaring prices. Expectations of sharply higher interest rates and rapidly rising debt costs have caused significant movements within the household mortgage market. It means households are paying the greatest portion of their income on mortgage payments since 1989 at a time when the rate of inflation is running at a 40-year high. This article looks at the current state of the UK housing market and indicates how we think it will impact the emerging institutional build to rent (BtR) market, akin to the multifamily market in the United States. Increased difficulty in the mortgage market is expected to fuel demand for rental properties in the UK. As the BtR market matures and the quality of rental accommodation improves, we expect consumers to realize the benefits of purpose-built apartments, with more people choosing to rent their housing based on preference rather than financial restrictions. Key findings include: 

  1. The knock on effect of rising mortgage rates and slowing house sales has been a surge in demand in the build to rent market. 
  2. High inflation and the rising cost-of-living are likely to put downward pressure on home sales and transaction prices, as higher interest rates add further pressure to already squeezed household budgets. 
  3. Overall, we expect less distress in the UK housing market as compared with previous market downturns; however, things could change in the event of a severe recession which has a significant impact on job security. 
  4. New housing supply is expected to fall even further behind target as a result of tightening market conditions. 
  5. Investors continue to favor living assets for their favorable demographic drivers and income stability.