All the signs are that the Southampton housing market is sat on good foundations, yet one key hazard could still scupper the market.
‘UK Property Prices
Rising at Record Levels’ is the headline of many newspapers. In the last few
weeks, the Halifax reported they had grown by 6.5% in the last 12 months,
whilst the Nationwide said 7.1% and not to be outdone, the Government’s own
Land Registry said 8.6%. Nothing new there then you might think, don’t UK house
prices always increase?
Actually,
they don’t, as many Southampton homeowners will remember 2009, when they
dropped by 19%. Also, some more mature Southampton homeowners will remember the
early 1990’s where house prices dropped just over 40% over 4 years (after the
1989 property crash). So, the increase in UK house prices over the last 12
months has mystified all the forecasts made by most economists as…
house prices were forecast to drop during the pandemic because
during the previous six UK recessions experienced since WW2, house prices have always
fallen sharply in real terms.
Yet 2020 was
different with house price growth increasing at its highest rate since 2014 as
the substantial Government support programmes (including Bounce Back Loans,
grants and furlough) has mollified the hit to household incomes. Add to that
the pent-up demand from the Boris Bounce, all the people working from home
wanting an extra room for an office and therefore needing to move, plus the
stamp duty tax holiday, with the cherry on the cake of 0.1% Bank of England
interest rates keeping borrowing affordable. This has meant…
Southampton property values are 7.8% higher than a year ago.
Yet the
affordability of property is a big issue going forward. By the time of the
height of the last property boom in 2008, the national ratio of average
property values to earnings had risen from 5.1 in 2000 to 8.8 (i.e. the
average house price was 8.8 times the size of the UK’s average person’s annual
earnings). We then had the property crash in the proceeding years, and the
ratio dropped to around late six’s/early sevens. However, over the last few
years, the ratio has been steadily rising and now with the recent growth in
demand for property (the five reasons mentioned in the previous paragraph), the
ratio has now smashed past nine. Looking locally…
the ratio of average property values to earnings in Southampton as a comparison was 3.9 in 2000, rising to 6.0 in 2008, dropping to 5.3 the year later when the Credit Crunch hit, and now currently stands at 6.8.
So, are we heading for another house price crash? Maybe, maybe not - because the House Price to Earnings ratio only tells us part of the story. Another indicator of the property market is mortgage affordability, which measures the proportion of mortgage payments to average incomes. For all mortgage holders, in 2015, this stood at 24.13% and today it is only just above the national long-term average of 25%, demonstrating that property is still affordable.
Yet, the life blood of the property market are first-time buyers. The long-term average percentage of income which goes on mortgage payments for first-time buyers is 33%. Just before the 1989 property market crash, this stood at 54%. Whilst just before the 2008 property crash, it reached 49%. Today, it stands at 31.7% (and the reason it’s so low even with record high property prices is low interest rates, because when mortgage interest rates are low, this permits people to afford larger mortgages, which enables them to bid up house prices).
So why aren’t more first-time buyers buying more homes? Well in fact they are buying more homes. At the turn of the Millennium, just over half of 25yo to 35yo were homeowners and by 2014, this had dropped to just a third, although since then it has increased to 41%. Now with the reintroduction of the Government backed 95% mortgages in April, this demand will continue further.
Once furlough
ends, unemployment will doubtless rise in the following 12 months, yet the
economy is more than likely to be in a boom phase, so by the spring/summer of
2021, the unemployment rate should start to fall.
So, does everything
look great for the Southampton property market?
Before you
get the Champagne out, there is a cloud on the horizon - the possibility of
higher interest rates.
Undoubtedly,
for the next few years, interest rates will not go up (and if they do – it will
only be nominally). However, down the line it may be a different tale. Interest
rates are used to control a number of economic factors, one being the currency
and secondly inflation.
As many
suggest, if we get an economic boom in the next 12 to 18 months, as we come out
of lockdown, this will put upward pressure on the price of goods and services.
Normally, when prices go up (inflation), to ensure that inflation doesn’t get
out of control, interest rates are normally increased to dampen down the
inflation.
So, will
interest rates rise? Undoubtably they will. Southampton homeowners and
buy-to-let landlords should seriously consider protecting themselves with fixed
rate mortgages (yet 3 in 10 mortgagees are still on variable rate mortgages!).
I believe we will see some inflation in the order of 3% to 5% in the coming 24
to 36 months, yet the interest rates won’t be enabled to bring it down. We had
a similar case in the early 2010’s when we had a mis-match of demand and supply
of goods, and inflation spiked to 5%, before returning back to its long term 2%
average quite quickly thereafter.
The
Chancellor will also encourage some inflation to reduce the ‘real’ cost of the
Billions he has borrowed because of the pandemic, yet won’t want to see
interest rates increase to take the cost of the borrowing upwards.
If you are
considering moving home or buying/selling a buy-to-let property in Southampton
in the next 12 to 18 months, and want a chat about your options, don’t hesitate
to drop me a line.
Finally, these
are interesting times ahead – I would love your thoughts on this matter. Please
do share them in the comments.
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If you would like to pick my brains on the Southampton Property Market – Just drop me a line on social media or email me @ brian.linehan@belvoir.co.uk you can also call me on 023 8001 8222.
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