I often get
asked what is going to happen to Neath house prices.
Many
things affect house prices, and it comes down to simple supply and demand.
On
the supply side of the equation, in the short-term, the number of people
wanting to sell their property at any one time has a massive effect on house
prices.
In 2007, the number of
properties that came onto the market in Neath jumped drastically. In January
2007, 512 properties were available for sale in Neath and by October in the
same year, that had risen to 807 properties.
This
flooded the Neath market with houses to buy whilst, at the same time, the banks
almost stopped lending money because of the Credit Crunch, thus causing the
house price crash of 2008.
Also,
on the supply side of the equation is the total number of houses in the whole country
(irrespective of whether they are on the market or not). This is an essential
factor in house prices, although that has a longer-term effect. Governments can
control the number of properties being built with changes in planning
regulations, incentives for builders and the buyer schemes such as the Help to
Buy plan.
On the demand side of
the equation, property values typically rise if homeowners believe they will be
wealthier in the future.
Typically,
that occurs when the whole country’s economy is performing well as more Brits
are in work and salaries are higher. The opposite is also the case when the
economy goes into recession; people tighten their spending, lose their jobs,
and thus, house prices drop. Inflation will affect British household budgets
(because if more of the household budget is going on increased bills, there is
less available for mortgage payments).
Another
factor on the demand side for housing is when the population increases (through
people living longer or increasing net migration) or when the divorce rate
increases (making one family household into two single-person households). As
always, rising demand typically means higher house prices.
One
aspect of the demand side of housing that the Government can control is the
taxation of moving home. In the late spring of 2020, the Government vastly
reduced the tax (Land Transaction Tax) paid to buy a house, saving many home
buyers thousands of pounds.
Also, on the demand
side, property values usually increase if more homebuyers can borrow more money
with a mortgage to buy their home.
The
more banks and building societies can offer mortgages, the more homebuyers can
buy their future home, thus raising house prices.
However,
the constraint is the amount a home buyer can borrow on a mortgage.
What
someone can borrow depends on what they earn and if they can afford the monthly
mortgage payments. The level of mortgage payments is dependent on three things.
- How much you borrow
- The interest rate charged
- The length of the mortgage
The
lower the interest rates are, the lower the cost of borrowing to pay for your
house is and thus more people can afford to borrow money with a mortgage to buy
a home, meaning house prices tend to go up.
Neath house prices
have risen by 74.37% between 2010 and today, mainly fuelled by low interest
rates.
So,
looking at everything above, apart from Land Transaction Tax and the incentives
for buyers (which historically have made a minimal difference), the Government
in the short-term, irrespective of who the Prime Minister is, makes little
difference directly to house prices.
The most significant
short-term factor which directly affects house prices is interest rates.
However,
the Bank of England (not the Government) sets the interest rate for the UK
economy. That means the Government (and Rishi as PM) cannot directly make any
differences in house prices (apart from the points raised above).
Yet, indirectly, as seen with the Liz Truss / Kwasi
Kwarteng Mini-Budget catastrophe only a few weeks ago, what the Prime
Minister (and their Government) does can make a massive difference to interest
rates and, thus, the property market and house prices.
Since December
2021, the Bank of England has been slowly raising interest rates to combat
inflation. Unfortunately, the downside is that it increases the mortgage rates
homebuyers must pay if they are on a variable-rate mortgage or coming off a
fixed-rate deal secured a few years ago.
As 17 out of 20
homebuyers have a fixed-rate mortgage, when a bank or building society
calculates a 5-year or 10-year fixed-rate deal, they consider what the Bank of
England interest rate is today, but they also consider something equally
important, something called the ‘swap rate’.
As Neath homeowners and landlords, it is vital you
should be aware of the swap rates as they are based on what the global money
markets think future UK interest rates will be.
If
the swap rate rises, then mortgage lenders will increase their rates on the
mortgages they offer, and by doing so, (as discussed previously in this
article), increased mortgage rates will affect affordability and, thus, house
prices.
So, what affects UK swap rates? Mainly one thing, the price of government
debt in the form of gilt yields.
Given the
vast increase of planned government debt originally announced in that
mini-budget by Truss/Kwarteng, the money
markets who would be lending the Government the billions of pounds to fund
those tax cuts got worried the Government wouldn’t be able to pay back such a
rise in borrowing, so wanted a higher rate of return on the money they were
lending the Government.
That return
is measured in the ‘gilt yield rate’, and the gilt yield rate directly drives
the ‘swap rate.’
That rise in the gilt yield rate/swap
rate was the main reason mortgage rates rocketed after the mini-budget and helped
in the collapse of Liz Truss’s Prime Ministership.
So, what
can Neath homeowners expect in the coming weeks and months with gilt/swap rates?
Rishi
Sunak’s first job was to re-establish confidence in the money markets for UK
plc. During the summer, the 5-year gilt rate rose steadily from 1.6% to 3.5%,
in line with the general rise in Bank of England base rates. Yet when the mini-budget
was delivered on the 23rd of September 2022, that rose almost straight
away to 4.6%.
That meant every mortgage rate jumped
in price by 1 to 1.5% almost overnight.
At the
time of writing, the 5-year British gilt yield has dropped to 3.5%, and the
others have either dropped below their pre-mini-budget rate or were moving in
that direction, depending on the gilt type.
The gilt rate
(which directly affects the swap rate, which in turn, directly affects
mortgage interest rates) could drop further, subject to what Rishi Sunak and
his Chancellor Jeremy Hunt have planned in the budget (and supplementary
report from the Office for Budget Responsibility) on the 17th of November
2022.
A drop in
the gilt/swap rate is vital for any Neath homebuyer buying a house or Neath
homeowner re-mortgaging to a new mortgage deal. Why? Because…
with the average Neath home worth £168,415
(a rise of 10.1% over the past year), each 1% extra in the mortgage rate would
cost every Neath homeowner an additional £140.34 per month.
So, what does this all mean for Neath house prices, then?
Greater
certainty will keep the volume of housing transactions ticking over, yet not
inescapably Neath house prices.
In my blog
articles on the Neath property market, I believe Neath house prices will be
lower in 12 months, and I expect Neath prices to return to where they were in the
late spring/early summer of 2021.
And why is
that? Unlike the 2008 Credit Crunch house price crash, today, the country has
very low levels of unemployment and very well-capitalised banks (because the
Bank of England subsequently forced them to keep lots of cash in their banks to
cover downturns). Therefore, I don’t anticipate the kind of double-digit house
price decreases seen 14 years ago.
If you would like to pick my brain about the Neath property market, be you a potential Neath first-time buyer, a Neath homeowner looking at your options on re-mortgaging or selling, or, in fact, anyone with questions, don’t hesitate to drop me a line. I will gladly share my thoughts and opinions without cost or obligation.
