Towards the end of December, The Mortgage Lender (part of Shawbrook Bank) published the results of its survey of UK property investors. It found that 74% of residential buy-to-let landlords “feel confident about the performance of the property market over the next 12 months.”

The research identified higher levels of confidence among experienced investors with larger portfolios – i.e. those with five or more units. The authors noted that “those more seasoned landlords that have been renting out properties for over five years were more likely to feel confident about their rental property portfolios over the next 12 months … possibly due to the fact that they have weathered a number of economic cycles.”

Importantly, this is just the latest in a succession of reports suggesting that investor confidence is improving. In December, the National Association of Property Buyers spoke of “cautious optimism” returning to the market. And in the same month, Butterfield Mortgages reported that 65% of landlords were confident their property investments would perform well in 2024, adding that 93% of them intended either to maintain or grow their portfolios.

This chimes with our own experience of investor feedback, and with a market analysis that we explored in our recent Pulse on Property webinar. In this article, we will summarise some of the principal reasons for this returning optimism and consider how well-founded it really is.

Mortgage Rates

In 2023, high mortgage costs exerted perhaps the single most powerful dampening effect on new sales activity and price growth. However, interest rates have been falling steadily for many months now, and that has been helping to improve confidence among investors and house-buyers. As a result, sales activity rates have been recovering, as several agencies and lenders have reported. In its December House Price Index, for example, Zoopla wrote that “market sentiment is improving, with new sales up by +17% year-on-year.”

Looking ahead, it seems reasonable to expect that interest rates will continue to fall. The Bank of England has stated that the official Bank Rate could remain elevated for some considerable time but in the wake of the latest inflation data from ONS, most sources believe that it has peaked.

Many financial analysts expect the Bank of England to reduce its official base rate by the late summer of 2024, and current swap rates suggest a broad consensus that it can only now fall. The timing and scale of that fall remain to be seen but those details matter less than the widespread expectation of a downward trend. That alone has been enough for lenders to offer increasingly competitive mortgage deals over the last few months and it has only been reinforced by the better-than-expected CPI inflation data.

This is not to suggest that interest rates will fall dramatically or return to the sorts of levels that prevailed between March 2009 and March 2022. During that period, the Bank Rate varied between just 0.1% and 0.75%, which was exceptionally low by historical standards. For comparison, the average Bank Rate during the 1980s was 11.4%, and during the 1990s it was 7.6%.

Instead, the UK is more likely to see the Bank Rate drop to low single digits; some commentators have suggested figures of between 3% and 4%. History would suggest that, at such rates, the property market can function perfectly well and deliver solid, inflation-beating growth.

Crucially, though, that would not imply the kind of market dynamics that were at play during the pandemic, when the average residential property appreciated at close to 10% year-on-year. Much more modest capital gains are likely.

However, one shouldn’t forget that what matters most is the real-terms gain; in other words, how a property’s value changes with respect to the current rate of inflation. Gains of +10% might look good on paper but if inflation is also rising at around 10%, that would mean no real-terms gain at all. In Q2 and Q3 of 2022, UK residential property produced some of its strongest capital gains but, at the same time, CPI inflation was running at between 9.0% and 10.1%. According to most indices, values were still outpacing inflation but the real-terms difference was not as dramatic as the headline figures suggested.

It will inevitably take time for house price growth to turn firmly positive again but, as average values rise, so we can also expect inflation to recede. The Bank of England has said that it expects CPI inflation to fall to its 2% target at some point in 2025, by which time, property should again be delivering real-terms capital gains. Savills, for example, predicts average UK-wide gains of +3.5% in 2025, rising to +4.5% in some of the country’s more affordable regions. That difference is what will ultimately determine the real-terms rewards for investors.

The Cost of Living

In 2022 and 2023, mortgage interest costs were not the only concern for ordinary households. The prices of food, fuel and energy also rose sharply, as did several forms of personal taxation. As a result, domestic budgets were tightly stretched, leaving little capacity for house-hunters and tenants to bid up the price of the homes they wanted. These constraints were partially responsible for the slowdown in property sales transactions and price growth.

In 2024 and beyond, those pressures can be expected to ease. CPI inflation has already fallen sharply – from 10.5% at the end of 2022, to its current level of 3.9% – and further drops are likely this year.

However, the decline won’t necessarily be smooth. In January 2024, for example, Ofgem raised the energy price cap again, such that a typical household will see a further +£94 increase in its annual costs for gas and electricity. Moreover, Russia’s invasion of Ukraine continues, as does the conflict in Gaza, and both have the capacity to make world energy markets more volatile. These and other factors could affect the ONS’s CPI calculations in the coming months.

Nevertheless, inflation has been falling across most of the developed world and, again, the general trend seems to be suggesting a more positive economic outlook. And at the same time, average growth in earnings has been strong; substantially above the rate of inflation, so the real-terms affordability of everything from food to property has been improving.

Ultimately, it has been affordability – in a variety of forms – that has shaped the development of the UK property market in the last couple of years. Affordability concerns acted as a brake on the market last year but with mortgage costs and inflation both falling, and with earnings continuing to grow, conditions are slowly improving. In that sense, a certain amount of market optimism certainly seems justified.

Demand Pressures

As we discussed in our recent webinar, many of our investor clients told us last year that they had money ready but that they were delaying any purchase in anticipation of better market conditions. This is important because it suggests that many other would-be buyers across the country will have been working to exactly the same strategy. If so, we can conclude that demand has been building up, quietly but steadily behind the scenes, much as it did at the start of the Covid pandemic when lockdowns prevented sales from progressing.

As mortgage rates improve, so we can expect this pent-up demand to begin to exert new pressure on the market. At a certain ‘tipping point’, many buyers who were postponing any decision may well conclude that the time is right to buy. After all, prices have been subdued for many months and within a relatively short period, they could begin to rise again.

When that tipping point occurs is impossible to say. It certainly won’t be so clear-cut as when the government announced an end to lockdown measures. Buyers will have to calculate for themselves whether it is better to wait for lower interest rates but risk higher paying a higher price later on, or to buy sooner and risk having to commit to a higher interest rate. Nevertheless, as market momentum builds and as asking prices start to edge up, people will conclude that more normal conditions are returning. Consequently, they should gradually feel more ready to buy, and the more of them do so, the faster the market should see a return to rising values.

Rental Growth

According to the latest survey by The Mortgage Lender, one of the main reasons that landlords are optimistic about 2024 is that they expect rents to continue to grow strongly. The company writes: “With BTL playing a critical part in the residential market mix, tenant demand has remained buoyant, helping to keep … confidence levels up. Indeed, 73% of landlords said they’d seen demand from tenants increase over the last six months, with 27% saying it had been a significant increase. This increased demand and the wider economic market is also impacting rental prices, with 73% of landlords reporting that they have increased their rental prices over the last 12 months.”

Rental indices from Homelet and Zoopla reported rental growth rates of between 9% and 10% over the last quarter. However, this exceptionally high rate surely cannot be maintained in 2024 because that would put many homes well beyond the reach of ordinary tenants. It seems more likely that rental growth will drop back to more sustainable levels – perhaps closer to +5% over the course of the year. This is a prediction that both Rightmove and Zoopla made in December. It would imply a noticeably slower rate than we witnessed in 2023, but 5% would still be substantially above the rate of inflation and, in real terms, actually better than many of the returns made back in 2022, when inflation was running at 10%.

The General Election

Investors may also be sensing improving conditions because 2024 could well be an election year. Governments generally seek to introduce vote-winning policies in the run-up to elections and, this year, those could potentially include tax cuts or funding mechanisms that could help to reduce affordability pressures for ordinary home buyers and tenants. That, in turn, could help to inject new life into the property market, in which sales activity and price growth often go hand-in-hand.

On 27 December, the UK Treasury announced that the 2024 Spring Budget would be held on 6 March. The BBC writes that “It could be the last chance for the government to announce significant changes to tax policy before the general election. Reports suggest there may be further tax cuts as the Conservatives try to close a major deficit in the polls.”

In his 2023 Autumn Statement, the Chancellor announced cuts to business tax and National Insurance – the effects of which will start to be felt in 2024. However, unless the Budget introduces some fairly radical changes, the UK tax burden will still remain at a record-breaking high. Nevertheless, there is scope for targeted measures to improve the outlook for investors. For example, there is speculation that the Budget could bring new financial help for first-time-buyers. That could potentially boost sales activity and help to get a slow market moving more quickly once again.


There are clear and logical grounds for optimism on the part of investors in 2024. The chief causes of the stagnant market in 2023 are all now waning in their effects.

Most obviously, inflation is falling, and this has three important consequences. First, it means that the real-terms returns from investment should improve – i.e. in terms of capital growth, rental returns and yields.

Second, it should lead ordinary tenants and prospective home-buyers to feel less hampered by cost-of-living pressures in the coming year. As a result, they may be better able to afford moves to the homes they want to buy or rent. This should boost market activity and the resulting increase in demand would almost inevitably exert upward pressure on prices.

Third, falling inflation suggests that the Bank of England’s monetary control measures are working, and that consequently, no further rise in the Bank Rate is needed. This is certainly the view of British lenders, and the expectation of rate-cuts in the second half of 2024 has already been enough to convince them to launch increasingly affordable mortgage rates.

In addition, average earnings have continued to grow strongly, at above the rate of inflation. This should also help to reduce affordability concerns and support improved sentiment amongst buyers and tenants.

As a result of negligible growth in capital values but strong growth in rental values, average yields have tended to be very good. According to Rightmove’s Q3 Rental Trends Tracker, all UK regions produced inflation-beating yields last year. Until we see a substantial rise in asking prices, similarly strong yields should be readily achievable in 2024.

Having said all that, it is important to recognise that there is a difference between optimism and an expectation that the market will return to the exceptional conditions that prevailed in the aftermath of the pandemic. In 2024 and beyond, price growth is likely to be more modest but also much more sustainable. And therein lies an important point: for decades, the UK residential property market has delivered strong and reliable returns for investors – not necessarily dramatic or headline-making but steady, dependable and rewarding.

In 2024, most investors would be happy to see an end to the zigzag graph of sharp rises and falls in asking prices. Rapid rises strain affordability, while rapid falls are hurtful to investors, so neither is a desirable outcome. Far better would be to see a return to a smoother line that trends gently upward, a little way above the rate of inflation; one that runs roughly parallel to the real-terms spending power of potential buyers.

If 2024 can deliver this – a return to more historical norms – then investors could expect a simpler and more intuitive interaction between supply and demand. Given the strength of demand in the UK and the continuing shortfalls in supply, average values – capital and rental – should then rise at a steady and sustainable rate. This has traditionally been the great strength of the UK residential property market, and a return to such conditions would certainly provide a strong basis for optimism.

Find Out More

For information or advice about any aspect of property investment in 2024, please call our advisory team on 01244 343 355.

Article supplied by Residential Estates

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