The UK is
currently experiencing its highest inflation rate since the early 1990s. This
increase in prices has primally come about by the combination of an increase in
demand for goods and services from consumers following lockdown last year together with global supply
chain disruptions.
Most economists weren’t too
concerned about this increase in the inflation rate as the very same thing
happened in the early 1990s following the Credit Crunch with a similar rise in
demand and supply chain issues. Thankfully, back in the early 1990s, inflation
returned to lower levels quite quickly. However, the situation in Eastern
Europe now could change matters.
So, let me look at all the factors and what it
means for the Neath property market.
The crisis in Eastern
Europe has sparked even further rises in crude oil (which diesel and petrol are
made from), gas and grain prices as pressure on supply chains around the world
increases.
In my previous
articles, I suggested UK inflation would rise to around 7% in the spring and
drop back to 5% in the autumn and as we entered 2023, be approximately 3% to
4%.
Yet, with these
issues, inflation could rise to 8% to 9% by late spring and still be around 6%
to 7% in autumn, well above the Bank of England’s target of 2%.
With Neath wages
rising at only 3% to 4% and inflation at 7%+, Neath household
incomes, in real terms, will fall.
This is because
‘real’ UK household incomes characteristically have been the most consistent
lead indicator of growth (or a drop) in house prices. This is because growing
inflation erodes the value of money you earn, which reduces its buying power.
When the cash in your pocket has a lower spending power, people tend to spend
less when they buy (and rent) a home (and vice versa).
Next month, Income
Tax thresholds will be frozen, and National Insurance contributions are
increasing. Collectively, all these issues will create a drop of around 2% to
2.5% in the real disposable income of Britain’s households in 2022 (real
disposable income – somebody’s take-home wages after tax and then the effects
of inflation are considered).
Will Neath people be more anxious to spend their money?
With less money in
people’s pockets, people’s inclination to spend the money they do have could
also be curtailed. People’s savings are at an all-time high, yet many will
decide to sit on the cash, instead of spending it, especially as consumer confidence
has dropped to minus 26 on the GfK index (whatever that means – but in all
seriousness though – more on that below).
All this can only
mean there is going to be a house price crash.
It’s all doom and gloom! …Or
is it?
My heart goes out
to people caught up in the awful humanitarian crisis in Eastern Europe. Yet, I respectfully
need to put that to one side for just a moment for the purpose of this article.
This blog is about
the Neath property market, and Neath people want to know what will happen to
the Neath property market.
In the first half
of the article, I looked at the impending fall in real disposable incomes of 2%
to 2.5% in 2022. I appreciate it’s going to be tough for many families in Neath.
Yet, it is always important to consider what has happened in previous times.
1982 – a drop of
2.3% in real disposable income
1992 – a drop of
3.7% in real disposable income
2008 – a drop
of 5.8% in real disposable income
Yes, it’s
going to be tough, yet we got through 1982, 1992 and 2008 – and so we shall in
2022/23.
Next, the
price of petrol is very high compared to a year ago.
The average
price of unleaded petrol is £1.51/litre today, quite a jump from the
£1.21/litre a year ago. But here is an interesting fact, petrol was a lot more
expensive (in real terms) in 2011 than today. In TODAY’s money, a litre of
unleaded petrol in 2011 would be the equivalent of £1.79/litre. We have some
way to go before we get to those levels – and again, the Neath economy (and
property market) kicked on quite nicely after 2011.
What are Neath people spending on their rent and mortgages?
Housing costs – owner
occupiers were spending on average 17.3% of their household income on mortgages
in 2015, yet in 2021 this had risen, albeit to 17.7% – not a huge increase.
Council house (social)
tenants have seen a drop in their rent from 29.2% in 2015 to 26.7% in 2021,
whilst private tenants from 36.4% in 2015 to 31.2% in 2021.
Interesting that private tenants are proportionally
14.29% better off in 2021 than in 2015.
How we spend our money
– the average UK home spent 4.2% of their household income on energy in 2021,
and that is due to rise to 6.3% after April (and probably 7% in October). Yet,
as a country, we spend 9% of our income on restaurants and hotels and 8% on
recreation and culture. As with all aspects of life, it will mean choices, and
maybe we will have to forego some luxuries?
Just before I move
on from this aspect of the article, again I appreciate I am talking in
averages. Many people with low incomes suffer from fuel poverty and they will
find the increases in energy prices hard – my thoughts go out to you.
Interest rates – higher inflation is generally brought under control using higher interest rates, meaning mortgage payments will be higher.
First, 79% of
homeowners with a mortgage are on a fixed rate, so any rise won’t be
instantaneous. Yet, there will be a bizarre side effect from the issues in
Eastern Europe. Surprisingly, though the current situation in Eastern Europe,
by its very nature, will bring greater UK inflation, it will also probably
defer the Bank of England raising interest rates. This means mortgage rates won’t
increase as much as the bank won’t want to exacerbate any pressures to the UK
economy in 2023/24 caused by the conflict.
The stock market had
priced an interest rate rise to 2% by the end of 2022. I suspect this will now
be no more than 1% to 1.25% by Christmas, slowly going up in quarters of one
per cent every few months. The crisis in Eastern Europe might even come to be
seen as a defence for higher inflation throughout 2022, all meaning everyone’s
mortgage will be less.
Next, looking at Consumer
Confidence Indexes – these indexes are fickle things. I prefer to look at the Organisation
for Economic Co-operation and Development Consumer Confidence Index as it has a
larger sample range and a longer time frame to compare against. Looking at the
data from the mid 1970s, the drop in consumer confidence is big, yet nothing
like the drops seen in the Oil Crisis of the mid 1970s, Recession of the early
1980s, ERM crisis of 1992 and the Global Financial Crisis of 2008/09. Also,
when compared to the other main economies of the world (G7), the UK has always
bounced back much more quickly from recessions when it comes to consumer confidence.
What about house prices in Neath in 2022/23?
Increasing energy
prices, rising inflation, an increase of sanctions, and a probable drop in
consumer confidence and spending in the aftermath of the conflict will knock
the post-pandemic recovery globally, which will lead to a recession around the
world, including the UK.
A recession is when
a country’s GDP drops in two consecutive quarters. For the last 300 years,
there has been a direct link between British house prices and GDP – (i.e.
when GDP drops, UK house prices fall). Yet in 2020, the British GDP dropped
by nearly 12%, yet house prices went the other way.
But let’s look at what
would happen if Neath house prices did drop by the same extent they did in the
Global Financial Crisis of 2008/09.
House prices in Neath
dropped by 18.1% in the Global Financial Crisis, the biggest drop in house
prices over 16 months ever recorded in the UK.
The average value of
a property in Neath Port Talbot today is £155,531.
Meaning if Neath’s
house prices dropped by the same percentage in the next 16 months, an average
home locally would only be worth £127,379.
On the face of it,
not good – until you realise that it would only take us back to Neath house
prices being achieved in October 2020 – and nobody was complaining about those.
Yes, that will mean
if they do drop in price, the 4.9% of Neath homeowners who have moved home
since October 2020 would lose out if they sold after that price crash. But how
many people move home after only being in their home for a couple of years? Not
many!
The simple fact is that 95.1%
of Neath homeowners will be better off when they move if house prices crash.
And all this
assumes there will be a crash.
The simple fact
is, the circumstances of 2009 that caused the property crash are entirely
different to 2022 (no lending by the banks, higher interest rates and
increasing unemployment compared to today’s increased lending, ultra-low
interest rates and low unemployment environment).
I do believe with
all that’s happening in the world we might see a rebalancing of the Neath
property market later in 2022 and could see the odd month with little negative
growth in house prices, yet it will be nothing like 2009.
The expected fall
in household spending could be counterbalanced by UK businesses’ plans to
invest more in their businesses (with last year’s tax breaks on investing),
which will create even more jobs.
