Mainly for Students: A residential round-up

Being “market aware” is an essential part of being a property professional, and this awareness might be tested in graduate or placement interviews for jobs. In addition, for those of you who will embark on the last year of your studies this coming October, some of the following discussion might also form the basis of a research project or dissertation. Interest rates, the residential market and mortgage costs An interest rate is the amount paid to borrow money from a lender or the amount paid by a bank for saving with them. The Bank of England sets the base rate, which is currently 5%, having increased from 0.25% at the start of 2022. This is the rate at which the Bank of England lends money to high street banks. This, in turn, determines the interest rate at which banks lend money for residential mortgage loans. High interest rates make lending more expensive and saving more attractive, whereas low interest rates make saving less attractive and borrowing cheaper. This is just one of the ways that the Bank of England can influence inflation to meet its target of 2% in the UK. The latest Consumer Price Index (inflation) figure in the UK was 7.9% – so the Bank of England (and the government) is some way off achieving this. Owing to the increase in the base rate, lenders have now increased their mortgage lending rates. The average five-year fixed rate is now above 6% and a two-year fixed rate is circa 6.5%. These are much higher than homeowners have seen in recent years. Where mortgage deals come to an end and a homeowner needs to remortgage, or take out a new mortgage, the impact of higher rates is acute. This can make mortgages unaffordable. Alternatively, it can mean that purchasers need to realign their expectations on the price of property they can purchase. However, against that, Halifax said that house prices have fallen by 2.6% – the equivalent of around £7,500 off the average price of a house. Mortgage rises, alongside increased energy prices and the high cost of living, have had an impact on many households. This will put pressure on some people to downsize, reduce their outgoings and save money rather than spending on moving house or perhaps even renovating their existing property.  House prices have fluctuated in recent years, peaking during the coronavirus pandemic and reducing marginally since – all dependent on the property type, location and other key factors. As always, economics are key, and supply and demand will affect the dynamics of individual property markets.  It is unlikely that the situation will change in the next year or so, if the Bank of England continues to try and control the inflation rate through high interest rates.  Leasehold or commonhold? What about residential properties which are owned on a long-leasehold basis? There is a growing movement to allow long leaseholders of certain types of properties, most usually blocks of flats and some new housing estates, to own their properties freehold through what is called commonhold. This approach can even be used for commercial and mixed-use properties. Rather than having a private or institutional landlord owner, which is responsible for things like overall estate or building management and repairs, the common parts would be owned and managed “in common” by all flat or house owners. These so-called “unit holders” would in turn become freeholders instead of leaseholders. For flats, the common parts generally include the structural and external elements of the building, and for estates any shared open space is usually included. Successive governments have been keen to support the conversion of leasehold properties to commonhold, since the passing of the Commonhold and Leasehold Reform Act 2002. This method of ownership is not new, as the approach is used in both North America and Australia. Converting to commonhold, however, requires the outright support of the landlord and all other leaseholders in the flats or buildings. Given some of the challenges of converting to commonhold, the Law Commission was asked to explore the matter and suggest reforms. While the Commission reported in 2020, the government has yet to follow through with any new policy or changes in law, even though there is an expert committee of property, legal and academic experts to advise ministers. This committee hasn’t met for more than a year, but campaign group Commonhold Now has nevertheless continued to remain vigorous in making a case for ending the leasehold system, saying there is “increasingly malicious profiteering through the abuse of service charges – together with the effective powerlessness of leaseholders to prevent it”. Residential surveys  Given the volatility of house prices and market availability – and the possible financial implications of taking on repair costs in a leasehold or commonhold property – undertaking a survey before purchase is arguably ever more important. There are three types of RICS residential survey:  Level 1 (previously a condition report) Level 2 (previously a homebuyer survey) – with or without a valuation Level 3 (previously a building survey).  The first, and most simple, survey only really identifies major faults or worries concerning a property. The second, and more commonly used, survey identifies all major construction and services defects and their impact on the value of the property. It is essentially based on what the surveyor can see rather than a more intrusive and forensic approach. The report might set out what repairs or upgrading work needs to be done to solve some of the issues identified, and what the costs might be. This then might be used to challenge the asking price in order for the buyer to follow through with the purchase.  The third survey provides a much more thorough evaluation of the building and its components from ground level and under floors where necessary to the roof, both inside and out. As you may imagine, building surveys are likely to be the sensible option where the purchase of an older or listed property is concerned. In addition to an RICS building survey, it may also be necessary sometimes to engage a structural engineer to provide specialist advice.  In terms of older buildings – and especially those considered historic – students should be aware of the RICS and Historic England joint position statement Investigation of Moisture and its Effects on Traditional Buildings. This explains how moisture and dampness can be assessed in pre-purchase surveys, giving guidance on methodology and inspection approach.  Students should be aware of the need to take a “whole building” approach, looking for the signs and source of excessive moisture and ensuring that any data collected (eg using a moisture meter) is robust and accurate. Careful interpretation of data is also required as misuse of moisture meters is a common source of error in surveying work.  For further information, see the RICS Home survey standard professional statement. The RICS has recently sent a practice alert to all members on issues relating to undertaking residential home surveys. This is a result of the profession receiving an increasing number of consumer complaints in relation to the quality of such surveys.  The RICS specifically reiterates members’ professional and ethical obligations to the public, who are the end users of this type of service. Prospective home purchasers rely on the advice in home surveys when making a purchase decision, so it is imperative that they are produced diligently, accurately and with integrity.  It is important to note that this is also a cornerstone of every single one of the five RICS rules of conduct.  The RICS has structured the practice alert around a number of key areas: client understanding and professional indemnity insurance; qualifications and experience of the instructed surveyor; knowledge of the local area; RICS template use; and applying the RICS rules of conduct. The alert echoes what the home survey itself says, so the RICS recommends that all surveyors familiarise themselves with the original document as well. Residential property measurement In terms of measuring residential buildings for sale purposes, the RICS, in Property Measurement (2nd edition), requires the adoption (or dual reporting) of International Property Measurement Standards for residential (and office) buildings.  The IPMS guidance that you need to be familiar with is known as All Buildings, published in January 2023 and available for download at: https://www.rics.org/profession-standards/rics-standards-and-guidance/sector-standards/real-estate-standards/international-property-measurement-standards This supersedes the former IPMS guidance Residential and Offices. Other asset types, such as retail and industrial, are still measured in line with the Code of Measuring Practice (6th edition).  The IPMS measurement bases you need to be aware of are IPMS 1 (external measurement), IPMS 2 (internal measurement), IPMS 3.1 (external exclusive use), IPMS 3.2 (internal exclusive use), IPMS 4.1 (selected areas including internal walls and columns) and IPMS 4.2 (selected areas excluding internal walls and columns).  Having read through this brief round-up of residential topics, think about the follow-up questions below. Then ask yourself, could I start to answer one or more of them and, if not, what merits further research? Questions to consider What do you think are the key factors influencing the affordability of housing? How do you think increased interest rates will affect the housing market in the years ahead? What are the advantages and disadvantages of having a freehold owner and management company looking after a leasehold block of flats compared with a commonhold approach? Should the Law Commission’s leasehold reform recommendations be enacted, and what would the impact be for the property market? Do you think that pre-purchase surveys should instead be instructed by the seller, rather than prospective purchasers? If so, why?  What health and safety considerations should be borne in mind when carrying out surveys? How is the adoption of IPMS working in practice? Do clients understand IPMS, and how can we improve this if not? Jen Lemen BSc (Hons) FRICS is a co-founder and partner of Property Elite, and Paul Collins is the editor of Mainly For Students and teaches at Nottingham Trent University Image © Luiza Giannelli/Unsplash