What awaits residential auctions in 2023?

COMMENT Allsop’s last residential auction sale of 2022 was held on 15 December. The last auction of the year raised £50.3m from a sale of 141 lots with a success rate of 83%. This brings the total raised for 2022 to £372m from more than 1,000 sales, with an overall success rate of 80%. The challenges the economy has faced over the year have been well documented: the aftermath of the pandemic; political instability; Russia’s invasion of Ukraine; Liz Truss’s disastrous mini-Budget; increasing interest rates; expensive building materials; the cost of living crisis; spiralling inflation; rising unemployment; and widespread strikes have all taken their toll – not least on the residential property market. Price correction Despite this, our virtual auction rooms have continued to facilitate active trading. As ever, when times are tough, buyers resort to quality – good buildings or sites in attractive locations at sensible prices. On 15 December, Piers Court in Stinchcombe, Gloucestershire – a Grade II listed manor house, once home to Evelyn Waugh – sold for £3.16m. Five apartment blocks in Halifax comprising 42 flats – 29 let and 12 sold off – was purchased for £1.96m off a yield of 9.43%. And in Archway, north London, a vacant garage site without planning permission raised £1.28m. There is no doubt that the market is undergoing a sustained price correction. Experience shows that auction results dip immediately after major events in our market – despite auctioneers’ efforts to persuade sellers that demand at the point of sale may not support their hopes or expectations. As reality dawns, and the evidence of value is laid bare by auction results, reserve prices at subsequent sales are set more realistically and sales success rates improve. In fact, many sellers will do well to price assets attractively in the first quarter of 2023. If values slide further, many may regret not having priced their unsold assets more modestly. Trouble ahead In 2023, first-time buyers will find the first rung of the property ladder even further out of reach. Existing owner-occupiers will face huge increases in outgoings. Those on fixed-rate mortgages will have escaped to a degree – but only for so long as their fixed periods last. Many buyers took advantage of the post-Covid stamp duty holiday from 1 July to 1 October 2021 and fixed-rate loans available at the time. But many of those fixed-rate periods will have come to an end a year later. Any tax savings made at the time of purchase were probably offset by inflated prices caused by the surge in demand. Now house prices are softening, and repayments will have soared. With affordability impaired, there are likely to be defaults and potentially repossessions in 2023. Although, as with the 2007 recession, lenders will be strongly encouraged by government to exercise forbearance. Buy-to-let investors will suffer additional difficulties. As of today (12 January), domestic private rental properties must meet a minimum Energy Performance Certificate (EPC) rating of E. In 2025 this will be changed to C for all new tenancies, and from 2028 to all tenancies – even those with longstanding tenants. For buy-to-let borrowers, failure to meet these standards could result in a breach of loan covenants. Owners of flats may face cladding issues. Since 2020, all residential buildings of any height require a fire safety certificate (EWS1). Although some investors in this sector may be saved by rising rental values, the case for buy-to-let has altered considerably. With limited, or possibly zero or negative capital growth next year, net yield will be the all-important driver. According to the Office for National Statistics, private rental prices paid by tenants in the UK increased by 4%, and in London by 3.5%, in the 12 months to November 2022 – representing the largest annual percentage change since this data series began in January 2016. New normal Agents in the more affluent areas of the Home Counties report that business remains buoyant and prices are robust. During the pandemic we saw a shift from London to more leafy, commutable areas offering more space for living and home working. Post-Covid, these working patterns have continued and appear to be the new normal. We expect that homes in the doughnut surrounding London will show capital growth in 2023. We expect attractively-priced assets to remain in demand in 2023. As private buy-to-let investors are squeezed out of the market by rising outgoings, the larger corporates may take advantage of thinner competition and escalating rental values. Cash-rich occupiers will seek out value-add opportunities in the form of unmodernised homes. Sites with planning permission or potential for future development are likely to come to market at reduced prices as a result of increased construction costs. Ground rents will remain a stable investment in the longer term, although legislative reforms and cladding issues may stymie enthusiasm. Gary Murphy is an auctioneer at Allsop