Property Market Proves Robust Despite Pre-Budget Slowdown

Leading into the Budget announcement from Westminster in late November, the UK property sector experienced a significant reduction in activity as many households took the “wait-and-see” approach by reducing their search activity on these key platforms. This corresponds with the Theory of Expectations, which states that people will delay their significant decisions if they believe there is going to be an adjustment, such as a change to property tax legislation, to their potential costs of acquiring housing.

Whilst we have seen a short-term decline in activity, property professionals have told us that the number of transactions being completed has remained relatively constant, indicating that there remains underlying interest in the property market from all types of buyers. However, the view from various analysts is that additional government policy support may be necessary in order to stimulate activity within the housing market, which is currently at a level below what would be considered normal within the long-term averages.

Pre-Budget Decreases in Property Search Interest in the UK

Searching for property usually has seasonal variations in terms of activity, but this year’s autumn decline is more severe than usual due to an increase in uncertainty around tax policy. The uncertainty caused by the imbalance of information has led home buyers to delay making decisions on purchasing homes until there is further clarification on future tax policy.

Purchasing a home is a long-term decision for most families, and as a result, they have high sensitivity to future anticipated costs. Due to the uncertainty created by changes to stamp duty and the associated uncertainty in the short term, there has been a decrease in property searches.

With lower demand from prospective buyers, some sellers have reduced their asking prices slightly, while other sellers have temporarily removed their homes from the market. These behaviours are consistent with the dynamic of clearing the market. When there is a slowing of demand, sellers modify expectations and adjust their pricing strategies to create renewed interest. With increased mortgage rates and affordability concerns for many buyers, it is logical to assume that those buyers will postpone making their move until they have more certainty.

How Have Sellers Responded to the Budget Announcement?

The Budget has now been published, and there were no surprises concerning taxes on housing, and as such many sellers who had previously suspended their selling are starting to come back onto the market. Based on continued stability of valuations in the property market, it appears that property prices continue to be sticky in the very short term, a characteristic of property markets that is driven by high transaction costs, emotional attachments to homes, and slow dissemination of information.

Some sellers are cautiously getting their properties back on the market and are creating new marketing for them, while other sellers have chosen to take an “off-market” approach in which inventory is only available to motivated buyers. This helps sellers manage their search costs in order to test demand before putting a property on the market in an open manner.

Sellers needing quicker access to cash are using cash-buyer platforms or internet sales. These options do not present the risk of chain collapses to sellers who are looking to obtain a known level of certainty with their transaction versus trying to maximise their price.

Influencing Factors on Today’s Housing Market Trends

Affordability Constraints: Higher Mortgage Interest Rates

A significant increase in borrowing costs as a result of higher interest rates has decreased buyers’ ability to purchase homes and limited the number of families who can meet the lender's loan criteria for affordability. Due to the increased length of time on the market, buyers are more selective than in the past; therefore, properties are on the market for longer periods of time.

Growth of Digital Sales Channels

The increased economic uncertainty has led to a greater adoption of cash-buyer companies, online agents, and digital auctions. Online searches for "we buy any property” style companies have grown significantly, reflecting heightened demand for speed, certainty, and chain-free transactions during periods of economic instability.

Growing Preference for Chain-Free Transactions

The use of instant-offer systems and digital auctions has enabled sellers to avoid the most common cause of a transaction failing: breaking the chain of ownership. Given the high opportunity costs of delays, fixed closing dates and guaranteed completion are very appealing to sellers.

Despite Uncertainty Over Policies, the Market Is Resilient

Initially, speculation regarding the Budget had a negative effect on both search volume and the growth in asking price, but stabilising conditions have meant that we are now beginning to see an easing of those early issues. There has been an increase in the number of sellers entering the marketplace; prices are remaining steady, and we are seeing an increasing number of buyers enter the market.

Currently, despite the uncertainty regarding both the political and economic environment, we are seeing a very healthy and resilient housing market underpinned by strong ongoing structural demand coupled with constrained supply and an increasingly high level of preference for property as a long-term asset. As such, it can be argued that the housing sector is able to withstand the effects of short-term shocks while continuing to be influenced by affordability levels and uncertainty concerning policies (and consequently market conditions).