Doom and
gloom in the British property market or clickbait doom-mongers?
Newspapers
and clickbait 24-7 news websites, desperate for clicks, are peddling a story of
a doomsday time for the economy, particularly the property market, as interest
rates and inflation create the perfect storm for the UK property market.
So, let us
look at what is happening in the British property market and whether house
prices will drop.
Yes – Neath house prices will be lower
in 24 months.
Yet the
reductions in what I believe a property will sell for in the next couple of
years compared to the doom-mongers is wildly different.
The
doom-mongers are saying the 2022 property market will be like the crash years of
1988 and 2008.
I’m afraid
I have to disagree, let me explain what the difference is this time compared to
the previous house price crashes.
To start
with …
56.25% of homeowners don’t have a mortgage, whilst in 1988, that was 35.8%. These people are shielded from the interest rate rises.
The next
point is negative equity.
Yes,
negative equity was an issue after 1988 when everyone had an endowment
mortgage, so they never paid any of the capital off their mortgage. Therefore,
when house prices dropped, negative equity was a massive issue as people owed
more than what their house was worth.
By 2008, nobody
was taking out endowment mortgages, yet still, 1 in 2 were interest-only
mortgages (meaning the capital wasn’t being paid off). Today, 17 out of 20 homeowners
are on repayment mortgages – so they have more home equity, so negative equity
isn’t so much an issue.
The issue
is the increasing interest rates. Yes, they are rising … albeit from artificially
low rates.
In 1988, nearly everyone was on a
variable rate mortgage and an average mortgage interest rate was 10.8%, and they
rose to 16.4% by 1990. That hurt, yet most survived.
In 2008, 6
out of 10 homeowners had learned their lesson and were on fixed rates at an
average rate of 6.07%. Today 17 out of 20 homeowners have long-term fixed rates
with an average of 2.14%.
Also, it
must be noted that homebuyers have been stress tested for 6% to 7% mortgage
rates since 2014 because of the Bank of England MMR rule changes. It will be
challenging, and lifestyle choices will need to be made, yet we should not see
the dumping of houses on the market as we did in 2008/9.
The next
issue is the number of mortgages being pulled. Yes, around 1,000 mortgage deals
have been removed in the last week – yet there are still 3,000+ deals out there
… and most are still fixed rates.
Also, let’s
not forget that 1 in 5 people rent today and are protected from all this, yet
in 1988, only 1 in 14 rented.
Therefore, the economic conditions surrounding the house price crash in 1988 and 2008 are not there now.
Don’t get
me wrong, those homeowners coming off their fixed rates of around 2% in the
coming years will have to make tough choices as they will see their monthly
mortgage payments rise substantially.
Yet, as I
have discussed in other articles, extending your mortgage term can
significantly affect your monthly mortgage payments and there are things that
homeowners should be doing now to mitigate the issue in the coming few years.
But back to the question, should people wait to move, and what will happen to Neath property prices?
I believe
that subject to nothing seismic happening in the world, Neath property values will
be broadly neutral and slowly drift downwards over the next 24 months. I
believe they will drift because of the issues of inflation and mortgage affordability,
yet we won’t have a crash for the points made in the first part of this
article. I believe Neath property will be selling for sums of 4% to 6% less in
a couple of years compared to today.
This means
if we achieve prices of 4% to 6% less, homeowners will still be getting the
same prices the property market was getting in the summer of 2021 – again –
nobody was complaining about those!
However, let us assume I am wrong with my thoughts, and we see a significant house price crash; what then?
Well, let
me look at the last two house price crashes first.
The
housing crash of 1988 saw the average house in the UK drop from £63,784 to
£50,167, a drop of 20.09%.
The
housing crash of 2008 saw the average house in the UK drop from £184,132 to
£154,065, a drop of 16.33%.
So,
let’s assume that Neath house prices fall by 18% – surprisingly,
it will not help Neath buyers.
In previous house price crashes, people tend to find their careers
are more at risk, and in turn, their wages don’t rise as much. It is the
younger generation (i.e., first-time buyers age range) that often gets
hit the toughest by these recessions.
Let me look at Neath first-time buyers.
If Neath first-time buyers wait until 2024 to buy and Neath
property values drop by 18%, that will prove more expensive. Let me explain why
…
In the last property crash of 2008, lenders withdrew 5% deposit
mortgages. The smallest mortgage that first-time buyers could obtain was with a
10% deposit, and even those were hard to come by.
When writing this article, first-time buyers can obtain a 5%
deposit mortgage for a fixed rate of 3.92% for five years.
The typical first-time buyer terraced house in Neath sells for £116,764.
If first-time buyers were to buy now, on this mortgage deal, they would
have to find a £5,838 deposit, and their monthly mortgage payments would be £485.84
per month.
So, let’s say property values in Neath do drop by 18% in the next 24
months; the terraced house would now be worth £95,746, a significant saving in
the purchase price.
Or is it?
Everyone believes the Bank of England will raise interest rates
further, so let’s assume they go to 5.5% by the autumn of 2024. That will mean
the rate for a 10% deposit first-time buyer mortgage will be in the early 7%’s,
so let me assume 7.19% (because the lenders have in the past increased the
gap between the Bank of England base rate and the mortgage rate in more
challenging economic times to allow for the extra risk).
The monthly mortgage payment in two years on the 7.19% mortgage would
be £562.03 per month, and in those two years, you would have had to have saved
an additional £3,736 to make up your 10% deposit of £9,575.
So even if Neath’s house prices did drop by 18%, the first-time buyer would be £914 worse off a year in mortgage payments (and would have to save many thousands extra for their deposit)
… and then there is the other cost of waiting.
You have two years’ worth of rent to pay. The average rent for a Neath
property is £691 per month.
If
you waited a couple of years for Neath house prices to drop by 18%, you would
spend £16,584 in rent plus have higher mortgage payments in 2024/5/6 and with the
extra deposit mentioned above it would add up to an additional £23,063 over the
next five years.
Yes, the price you paid for your Neath home would be lower if you
waited two years. Yet, you would only benefit from that when you sold on versus
the economic pain of two years of extra renting, the higher deposit and higher
mortgage payments in a couple of years.
This doesn’t even consider the emotional cost of putting your life
on hold for two years, and there is no guarantee that the mortgage lending criteria
in two years would allow you to step onto the property ladder.
So, now I have shown that waiting will cost you financially and
emotionally, what are your thoughts on the matter?
Neath house prices will drop, yet did you realise it will cost you
more, even if house prices are falling?
Do you believe the doom-mongers, or do you believe in the robust
nature of the British economy?
Don’t forget, George Osbourne said house prices would drop by 18%
in May 2016 if we voted to leave the European Union, whilst many economists
said house prices would fall by 5% to 10% when Covid hit in March 2020.
And we all know what happened to those predictions now.
If you believe you will be better off owning your own Neath home
rather than renting one, don’t bother to wait for the suggested house price crash
that may never happen.
These are my thoughts – what are yours? Let me know in the
comments.
