- According to some newspapers and pundits, the
property market boom could soon be over with the increasing interest rates and
inflation.
- In this article, I share the 3 fundamental
economic reasons why things are different to the last property market crash.
- The insider’s way to find out if there will be
a property crash.
- … and 4 reasons why buy-to-let landlords are
coming back into the Neath rental market to protect their wealth and hedge
against inflation.
With inflation and the cost-of-living crisis, some say this could
cause property values to drop by between 10% and 20% in the next 12 to 18 months.
There can be no doubt that the current Neath property market is very
interesting.
At the time of writing, there are only 100
properties for sale in Neath (the long-term 15-year average is between 350 and 370), meaning house prices have gone up considerably.
According to the Land Registry …
Neath
property prices have increased by 18% (or
£23,500) in the last 12 months.
So, as Robert Kiyosaki says, ‘the best way to predict the future is to look to the past’. I need to look at what caused the last property crash in 2008 and how that compares to today.
- Increase in Interest Rates
One reason mentioned as a possible cause of a crash
is the rise in the Bank of England interest rates, affecting homeowners’ mortgages.
Higher mortgage rates mean homeowners will have to
pay a lot more on their mortgage payments, leaving less for other household
essentials. In 2007 (and the 1989 property crash), many Neath people put their
houses up for sale to downsize to try and reduce their mortgage payments.
Yet the newspapers fail to mention that 79% of British people with a mortgage have it on a fixed interest rate (at an average mortgage rate of 2.03%).
Also, just under 19 out of 20 (93.2%) of all UK
house purchases in 2021 fixed their mortgage rate.
So, in the short to medium-term (two to five
years), most homeowners won’t see a rise in mortgage payments for many years.
Also, 27.8% of all UK house purchases were 100% cash (i.e. no mortgage).
Of the 932,577 house purchases registered since February 2021 in the UK, 259,205 were bought without a mortgage.
Yet some people say this will be a problem when all these
homeowners come off their fixed rate. The mortgage lending rules changed in
2014, and every person taking out a mortgage would have been assessed at
application as to whether they could afford their mortgage payments at mortgage
rates of 5% to 6% rates, not the 2% to 3% they may well be paying now.
No pundit says the Bank of England interest rates will go
above 2% with a worst-case scenario of 3%. If the Bank of England did raise
interest rates to 3%, homeowners would only be paying 4.5% to 5.5% on their
mortgages and thus well within the stress test range made at the time of their
mortgage application.
This means the probability of a mass sell-off of Neath properties or Neath repossessions because of interest rate rises (both of which cause house prices to drop) is much lower.
2. House Price/Salary Ratio
Another reason being bandied about by some people
for another house price crash is the ratio of average house prices compared to
average wages.
The higher the ratio, the less affordable property
is. In 2000, the UK average house price to average salary ratio was 5.30 (i.e.
the average UK house was 5.3 times more than the average UK salary). At its
peak just before the last property crash in 2008, the ratio reached 8.64.
The ratio now is 8.85, so some commentators are
beginning to think we’re in line for another house price crash. However, I must
disagree with them because mortgage rates are much lower today than in 2007.
For example …
The average 5-year fixed-rate mortgage in 2007 was 6.19% (just before the property crash), yet today it’s only 1.79%.
So, whilst the house price/salary ratio is the same as the last property crash in 2008, mortgages today are proportionally 71.1% cheaper.
3. Banks Reckless Lending
Another reason for a property crash in
2008 was the reckless lending practices in the run-up to that crash.
The first example of reckless lending
was self-certified mortgages. A self-certified mortgage is when the lender
doesn’t require proof of income.
In 2007, 24.6% of new mortgages were self-certified mortgages.
So, when the economy got a little
sticky in 2008, the people that didn’t have the income they said they had to
pay for their mortgages (because they were self-certified) promptly put their
properties on the market.
The banks’ second aspect of reckless
lending was how much they lent buyers to buy their homes. Today, banks want
first-time buyers to have at least a 10% deposit and ideally more. There are
95% mortgages available now (meaning the first-time buyer only requires a 5%
deposit), yet they are pretty challenging to obtain.
Back in 2005/6/7, Northern Rock was
allowing first-time buyers to borrow 125% of the value of their home. Yes,
first-time buyers got 25% cashback on their mortgage!
In 2007, 9.5% of all mortgages were 95%,
and 6.1% of mortgages were 100% to 125%.
Meaning that nearly 1 in 6 mortgages (15.6%) taken out in 2007 had a 95% to 125% mortgage.
When the value of a property goes
below what is owed on the mortgage, this is called negative equity. A lot of Neath
homeowners with negative equity (or who were getting close to negative equity)
in 2008 panicked because of the Credit Crunch and put their houses up for sale.
To give you an idea of what happened
last year (2021) regarding mortgage lending, only 2.4% of mortgages were 95%,
and 0.2% of mortgages were 100%. This is because the mortgage lending rules
were tightened in 2014.
So why did Neath house prices drop in 2008?
Well, in a nutshell, a lot more Neath
properties came onto the market at the same time in 2008, flooding the Neath
property market with properties to sell.
Meanwhile, mortgages became a lot
harder to obtain (because it was the Credit Crunch), so we had reduced
demand for Neath property.
Prices drop when we have an
oversupply and reduced demand for something. Neath property prices fell by
between 16% and 19% (depending on the property type) between January
2008 and May 2008.
So, what were the numbers of
properties for sale in Neath during the last housing market crash?
There were 512 properties for sale on the market in Neath in the summer
of 2007 (just before the crash), whilst a year later, when the Credit Crunch
hit, that had jumped to 1,046.
This vast jump in supply and the reduction
in demand caused Neath house prices to drop in 2008.
Compared with today, there are only 100
properties for sale in Neath, whilst the long-term 15-year average is between 350 and 370 properties for sale.
So, what is going to happen to the Neath property market?
The Neath
house price explosion since we came out of Lockdown 1 has been caused by a shortage
of Neath homes for sale (as mentioned above) and increased demand from buyers (the
opposite of 2008).
However,
there are early signs the discrepancy of supply and demand for Neath properties
is starting to ease, yet this takes a while before it has any effect on the property
market, so it will be some time before it takes effect.
This
will mean buyer demand will ease off whilst the number of properties to buy
(i.e. supply) increases. This should gradually bring the Neath property market
back in line with long-term levels, rather than the housing market crash.
My
advice is to keep an eye on the number of properties for sale in Neath at any
one time and only start to worry if it goes beyond the long-term average
mentioned above.
But
before I go, I need to chat about what inflation and the cost of living will do
to the Neath property market.
How will inflation and cost of living affect the Neath Property Market?
There
is no doubt that cost-of-living increases will have a dampening effect on buyer
demand. If people have less money, they won’t be able to afford such high
mortgages. This will slow Neath house price growth, especially with Neath first-time
buyers.
Yet, the
reduction in first-time buyers is being balanced out by an increase in
buy-to-let landlord’s buying, especially at the lower end of the market.
This,
in turn, will stabilise the middle to upper Neath property market. This means
the values of such properties (mainly Neath owner-occupiers) will see greater stability
and a buyer for their home, should they wish to take the next step on the
property ladder.
So why are more Neath landlords looking to extend their buy-to-let portfolios, even in these economic circumstances?
I see
new and existing buy-to-let Neath landlords come back into the market to add rental
properties to their portfolios. As the competition with first-time buyers is
not so great, they’re not being outbid as much.
Yet,
more importantly, residential property is a good hedge against inflation.
Firstly,
in the medium term, property values tend to keep up with inflation.
Secondly,
inflation benefits both landlords and existing homeowners, with the effect of
inflation on mortgage debt. As Neath house prices rise over time, it reduces
the loan to value percentage of your mortgage debt and increases your equity. When
the landlord/homeowner comes to re-mortgage in the future, they will receive a
lower interest rate.
Thirdly,
as the equity in your Neath property increases, your fixed-rate mortgage
payments stay the same.
Finally,
inflation also helps Neath buy-to-let landlords. This is because rents tend to
increase with inflation. So as rents go up, your fixed-rate buy-to-let mortgage
payments stay the same, creating the prospect of more significant profit from
your buy-to-let investment.
