Last week we covered some aspects of house price movements and what that may mean to homeowners. I’ll cover some more. Remember, as per many columns regarding stock markets, the housing market and investments, the cool head is better than the emotional reaction which can paralyse you, or expediate poor decisions.
Sentiment, as I said last week is the biggest driver, so what are the factors that could nudge sentiment either way?
Consider March’s headlines of “UK house prices rise at fastest pace in 18 years”. That headline was enough momentum to have you bid on an item at an event that you didn’t need. Less than two months later: “UK house price growth slows as cost-of-living climbs”.
How quickly momentum can turn.
Headwinds for the housing market are there with the governor of the Bank of England stating that real interest rate rises could induce a correction or cooling off. While rates are still well below any average, I remember many have stress tested their outgoings on way less than the historic average, so would be in for an electric shock.
Furthermore, back in the previous crashes, many mortgages were on an interest only basis, allowing the ability to move over to borrow against the repayment vehicle they had set up such as a PEP, ISA or the antiquated endowment. Contracted to pay interest plus capital, versus the ability to stop and start the repayment vehicle and dip into it for cashflow is a colossal headwind. Cashflow is always the killer.
Interest rate rises and mortgages
Around a third of mortgage holders on fixed rate contracts will be in for a bit of a shock when the current terms end. They are on terms which are two years or less. In November 2021, they would have been borrowing at c1.5 per cent but would be renewing that mortgage at c3.6 per cent – a payment which is 140 per cent higher.
Other headwinds are those increasing housing supply by paying down debt and looking to simplify or get rid of the second home. More supply and less demand equals pressure on the market.
The threat, and also a matter that would have gained the attention of the Bank of England is wage inflation. People demanding more from employers because inflation is up even though the employer isn’t earning more because of inflation. That ends economies, but I’ve seen wage growth cited by marketing departments of housing agents as a good thing – ie people can pay more. Companies cannot. They are being squeezed via higher costs and staff demanding higher wages. It’s the Achilles heel of an economy. That wage inflation will be targeted by the Bank via interest rate rises, therefore adding more pressure on the housing market.
A statistical measure of a house price is its relationship to earnings. That was 7.15x in 2007 before the last crash, but its 9.05x now, ie a bigger bubble. Not all bubbles pop. They can deflate slowly to deal with the outside pressure! Mortgage to income ratios is also sitting at record levels.
House sales are taking longer (creating more panic to sell and drop the price) and over five per cent of homes in the UK dropped their prices by an average of nine per cent in April.
Housing market hyperbole
The headlines say the market is slowing. It is never slowing. It has simply slowed. Markets are never in the present participle ie ‘inging’. They are just where they are.
Tailwinds to support the housing market include the fact that over 59.7 per cent of mortgages are on five year or longer fixed rates so will not see a rise. In January 2011, 49 per cent of new mortgages were on a variable rate (therefore subject to the howling winds of increases), whereas today that is just over 5 per cent.
Personally, I think inflation is highly overblown and next year all the current inflation will have left the calculations as its calculated year on year, thereby easing pressure on interest rates too. Add supply chain issues and delivery costs alongside oil/gas, one can think it can only get easier.
The market is also sending a message as new lenders have arrived with 95 per cent loan to value offerings as opposed to the previous 90 per cent. This is a signal by the lender who takes the risk that prices are not under pressure.
As I said last week, if you are in the market, you cannot predict its movements, but you can think to protect yourself against the hikes. I would recommend above all times to see your independent mortgage broker.
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About the Author / Peter McGahan
Peter McGahan is Chief Executive Officer of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
