Could the high levels of mortgages that Neath people take
out cause another property crash?
Many Neath homeowners and landlords have been contacting me
recently and asking what will happen to the Neath (and the UK) property market?
More specifically, will we have a repeat of the 2008/9 Credit Crunch property
crash?
High mortgage payments were one of the critical catalysts to
Neath house prices dropping by between 16% and 19% (depending on the type of
property) in just over one year in Neath.
To answer that question, let me look at the mortgage numbers
locally to see where we stand in the Neath area.
12,098 of the 17,900 property sales in the last decade in Neath and Port Talbot were made with a mortgage.
67.6% of our local authority area house purchases have been
made with a mortgage (meaning 32.4% are made with 100% cash).
Interesting, when compared with the national average of 67.4%
of house purchases with a mortgage over the last decade.
However, what is thought-provoking is the number of house
purchasers buying with a mortgage has steadily been increasing over the last
decade.
Between 2012 and 2017, the percentage of people buying with a mortgage was 66.7%, yet over the last five years in Neath and Port Talbot, that has risen to 70%.
Initially, this doesn’t sound good. Yet, as always with my
articles on the Neath property market, the devil is always in the detail.
The issue is that most people need a mortgage to buy their
home.
However, it’s not the amount of mortgage that is the issue,
more the level of monthly payments. So, if you fix your mortgage rate, then
your payments are fixed (a good idea especially as interest rates are on the
rise).
In the last quarter, just under nineteen out of twenty
(94.35%) of new borrowers that took out a mortgage had a fixed-rate mortgage at
an average interest rate of 1.84%.
That’s good news for recent buyers as most of their payments
won’t rise even though Bank of England interest rates have risen over the last
few months. Yet it’s essential to see what existing homeowners with mortgages
have done with their mortgage rates (i.e. fixed or not) as they form the bulk
of the property market.
This is because in 2008/9 (the last crash), many people were
unable to afford their high monthly mortgage payments when they were made
redundant because interest rates were much higher. This meant many Neath homeowners
‘dumped’ their houses onto the market, all in one go in 2008, because they couldn’t
afford their high mortgage payments.
Also, the banks could not lend money for mortgages as easily
because of the Credit Crunch, meaning fewer people could get a mortgage, so the
demand for Neath houses dropped as well.
In a nutshell, the number of Neath properties on the
market almost doubled overnight in 2008, yet demand plummeted as mortgages were
hard to come by. High supply and low demand meant Neath house prices nosedived
in 2008/9.
Going into the Credit Crunch, one in six (60.4%) homeowners
with a mortgage had a fixed rate at an average of 5.76%. By 2013, this had
dropped to one in three people (33.29%) having a fixed-rate mortgage at an
average of 3.34%.
Yet today, just under 17 out of 20 homeowners with a
mortgage have a fixed rate at an average of 1.97%.
Whilst the country might owe collectively £1,630.5 billion
in mortgages, irrespective of increasing rates, most homeowners have protected
themselves with a low fixed interest rate.
Also, the overall ratio of mortgage debt in the UK, compared
to the value of the homes the mortgages are lent on, is also low compared to
the year before the last property crash. This ratio is called the Loan to Value
ratio (LTV). The higher the LTV, the less equity the homeowner has in the
property.
In 2007 (the year before the crash), only 49.4% of people
had a mortgage less than 75% of the house’s value (i.e. they had an LTV of less
than 75%). Today that stands at 60.9%, which means more people have more equity
in their property.
Another thought on why the country is in a better position
is only
4.22% of mortgages have a 90% or higher LTV (compared to 16.28% just before the
crash in 2007).
1 in 6 people were vulnerable to negative equity in
the last property crash, whilst today that would only be 1 in 25.
This means if we do have another property market correction
for any other reason … the number of people in negative equity will be much
smaller, so it won’t affect the property market as much.
So, in conclusion, as we have fewer people with high LTV
mortgages and fixed rates that are a third of what they were in the Credit
Crunch, we are, as a country, in a better position to weather any storm.
If you would like any advice or opinion on the Neath
property market, be it buying or selling or anything to do with investing in
the Neath buy-to-let property market, don’t hesitate to drop me a line.
