In my final column on the UK housing market, I thought I would clarify all the final smaller points that are either a drag on the market or support it. The previous two can be read online of course.
There was a marked spike in house prices up to 2021. Like much sentiment, it was euphoric, and we wrote about that then. Homeowners faced with living in lockdown needed space, and so they borrowed a deposit against their city homes and mortgaged the country or seaside purchase for outside brain space and so as not to go mad! They now had two mortgages, and were encouraged to see the house price rise off the back of this temporary euphoria. They had a place to go, and the cost of borrowing the money was so cheap, it was a no brainer. Until it wasn’t.
And so, when rates rose alongside a return to city living, the supply/demand issue was going to put prices under pressure. That’s ok and understandable. That is a headwind we pointed out in 2022. That, coupled with those who want to ‘simplify’ life and sell down second properties and pay off debt is one to continue to keep your eye on.
In September 2022, I explained the ratios used by unhelpful journalism where like licking a window of a restaurant to ascertain the menu. Pointless. The one ratio I explained was a more helpful contribution was the ‘house price to earnings ratio’. The higher the earnings, the higher the borrowing ability. In 2002, the ratio was 5 times earnings. In September 2022, I explained it had soared to 7.8 times, and ‘if there was a bubble, that was it’. It was.
In June last year it had fallen to 6.7 times earnings, as prices had eased and income had risen. The ratio had fallen by 0.6 over 2023.
That strong wage growth is a double-edged sword. The more upward pressure on wages, the higher rates will go, but if the wages are supported and sustainable, they support house prices alongside easing of interest rates.
Prices have been supported of late by this, and also by the panic created by the Bank of England. When there is emotional panic, psychologically we freeze or run away. Sellers have therefore decided to wait until ‘everything is okay again’. That may be too late.
Remember, the worst-case scenario if you are selling a home is that no-one might be interested at that time, and no-one buys it. The outcome is the same if you never put your house on the market in the first place.
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2023 was an ugly year to try and make money. Very little made money, whether it was shares or property. That happens. We can’t time that.
Inflation appears to be under control and is falling, which eases pressure on interest rates and in turn supports house prices. The US is the same. The obvious caveat is the Middle Eastern conflicts which could create supply and demand issues and increase inflation, which of course is not caused by you, but rate rises could be blamed on it.
Many comment on what happened in past markets, but this market is supported in very different ways. For example, just 38 per cent of homeowners have a mortgage. In 2011, 49 per cent of all mortgages were on a variable rate. By November 2021, that had fallen to just 5.1 per cent, meaning that interest rate hikes impacted the market much less.
While there has been an increase in interest rates and the returns investors can receive on their capital at the banks or even the gilt market, there is very little return, if any over and above inflation and this always makes the housing market attractive. Furthermore, rental income is very strong indeed with UK rental prices revised upwards from 6.1 per cent to 8.4 per cent, which supports the second home investor who wants a return each year on the income alongside potential capital uplift.
And so, to finish this final housing market column, prices are supported in very different ways than before, so think of it as your home and go speak to your estate agent and a well-researched independent mortgage broker.
- For a complimentary mortgage meeting with our mortgage director, please email my Mortgage Director Pat Greene on pgreene@wwfp.net or call 01872222422. Also ask Pat for the latest copy of our Mortgage Interest Rate Guidance Report.
- Peter McGahan is the Chief Executive Officer of Independent Financial Advisers, Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.