David Woodward, managing director of Woodward Financials, looks at a volatile property market and economy and queries whether that bubble is about to burst.
Are house prices about to collapse? What is likely to slow or cause house prices to go down in the coming year or two? Well, the mortgage market review impacted affordability, especially for first-time buyers, and continues to do so. This means lenders must ensure customers will be able to afford repayments and obtain evidence of income. However, they must also account for committed expenditures such as child maintenance or outstanding loans, as well as basic essential expenditures such as utilities and essential travel; all of which could impact affordability.
Most recently we have the strains of affordability: due to the pandemic, many lenders are restricting multiples or earnings when calculating borrowing to around 4.75 times salary. But most importantly, they are looking at the occupation of the lender, their credit risk and whether they have been impacted by the pandemic or have been furloughed, not to mention asking for a higher deposit.
House prices and rising interest rates
Interest Rates are historically low, with many homeowners not even aware that mortgage interest peaked 30 years ago at 16.63% and in the first eight years of this century interest rates fluctuated between 3.5% and 6% but could easily increase back to these levels and likely to start creeping up in 2022.
First-time buyers aren’t overly concerned about interest rate rises and don’t realise that their mortgage payments could rocket when interest rates start to climb.
Inflation has been a concern for many months and the cost of living is increasing, causing additional strains on household budgets and relationships. Will this be the straw that breaks the camel’s back sending divorces through the roof following the summer break?
Looming tax rises; the most likely tax rise following the end of the pandemic is reported to be around a 6% increase to marginal rates. How will that affect household expenditures, especially with many carrying substantial, secured and unsecured debts? Don’t expect to rely on another balance transfer as credit card companies such as Barclays have already started reducing limits with little warning, pushing the percentage of borrowed to the point when only high-interest rate cards (if any) are available at all.
Section 24 starts to bite. What is it? Gradually phased in since 2017 and now fully implemented as of 2020, it removes landlords’ ability to deduct the cost of their mortgage interest from their rental income. In effect landlords will be taxed on their turnover rather than their profit, meaning that tax will be payable on non-existent income.
For some, tax rates will exceed 100%, as landlords will have to pay all their profit in tax and then pay more tax still.
Section 24 will mean that most landlords will be paying an extra tax of 20% or more of their annual mortgage interest and other finance costs. The tax they pay may be greater than their real profit, leaving them with a rental loss and a cash shortfall.
As a result, landlords have been offloading property to reduce their tax liability, which is freeing up housing supply and so could also bring down rentals.
Talking about demand, following Brexit many Europeans that have made the UK their home have decided, or started to consider, moving back to their countries of origin – freeing up supply.
To recap: if interest rates, inflation and tax rises soar, will there be surplus cash for a family holiday or two, a new car, will there be any money available for home improvements, or a weekly trip to the restaurant, or night at the theatre, will the hope of economic growth continue or slip away?
With affordability being squeezed from every direction, adding in the cost of building materials for new homes, may further suppress the housing market. Without affordability, there is no demand and prices will fall.
Rising house prices and first-time buyers
There’s more Stamp Duty holiday; the first one was crazy, and the extension was bonkers! Talk about throwing fuel on the fire. If you were going to buy, you would have bought by now. You could understand those poor first-time buyers taking the opportunity to get on the housing ladder.
Unlike their parents that had it easy, when buying their first home was 3 times their salary, do today’s buyers realise it’s now 10-15 times their salary? Do they know stamp duty is at 5 figures just to add to paying inflated rents and increased cost of living?
Throw in a few financial shocks like a divorce or job loss, anyone that has managed to buy probably feels like they have reached the summit of mount Everest, but don’t get too comfortable in the death zone. You need to get down to safety from those dizzy heights as fast as possible before it’s too late, start cutting your cloth now.
If the housing market falls, those that have bought in the last 12 months may find themselves in a negative equity position quickly. Or worse, they could be facing repossession or being locked into ‘a help to buy scheme’, with a growing family unable to move.
Unfortunately, first-time buyers will be hardest hit, there will be some parents that will give the condescending parental sympathy line of “you’ll manage” or you should’ve rented, not bought.”
A rise in unemployment also affects the housing market, coming out of a pandemic are we seeing a distinct change in behaviour that could slow the recovery. Are you eating out as you did pre-pandemic, or going to the cinema or theatre? These jobs are already at jeopardy as we witness the furlough scheme coming to an end.
So, what could stimulate the housing market? Net migration which is likely to see a jump following the offer of citizenship for those coming from Hong Kong, which could see between 258,000 and 322,400 people over the first five years*, or government stimulus by way of building the country out of economic uncertainty and thus creating excess supply which reduces rents.
A fall in confidence comes when the pros are outweighed by the cons of investing or buying in property. Will we see a shift sooner or sometime in the future? Only time will tell.
No matter what situation we’ll find ourselves in for the years to come, there were those furloughed that shouldn’t have been, there were grants given that shouldn’t have been handed out; but even if the recovery could have been shortened, our council tax will continue to rise year on year while our infrastructure continues to crumble.