Falling Southampton House Prices - The Winners & Losers

 

The doom and gloom of the national newspaper headlines regarding the UK property market would make you think Armageddon has arrived, this being the second most interesting topic to the Brits (the first being the weather!).

So, what is happening in the British property market? As with most things in life, the devil is in the detail.

2020 and 2021 were exceptional years for the UK Property Market.

In Q4 2020 (Q4 being October, November and December combined), an average of 23,071 properties were sold per week in the UK (sold - as in a sale was agreed and the property went from available to sold subject to contract (STC)).

In Q4 2021, an average of 21,051 properties were sold per week in the UK.

So by the end of week 3 in November 2022, with an average of 19,694 properties per week becoming sold STC, quarter to date ... the housing market doesn't look good. Yet a different story emerges from the Q4 averages for 2016 to 2019.

In Q4 2019, an average of 16,263 properties were sold per week

In Q4 2018, an average of 15,922 properties were sold per week

In Q4 2017, an average of 15,721 properties were sold per week

In Q4 2016, an average of 15,811 properties were sold per week

  

The British property market is only returning to how things were before the first lockdown.

As I have discussed recently in several posts on the Southampton property market in my blog, I do believe the price that will be achieved for Southampton property in 12/16 months will be around 8% to 12% lower than what was being paid for property in the late spring (of 2022). Note I didn’t use the word ‘crash’.

 

Question - Why do the newspapers use the phrase “house price crash”?

Answer - To sell more newspapers!

 

Include the time, policy and efforts that the political parties go to in order keep British house prices on an upwards trajectory to gain votes and you might believe that a fall in house prices is a total catastrophe.

Nothing could be further from the truth for most homeowners and landlords.

Indeed, when you look at house prices without any emotion, when house prices fall — in isolation — more people win than lose.

So, who wins when house prices drop?

 

Let’s say you own a two-bedroom Southampton home worth £250,000. You have an expanding family, and you need a third bedroom.

The three-bedroom home in Southampton you want is £350,000, meaning you need to find £100,000 to trade up. 

If Southampton house prices rose by 10%, get the Champagne on ice as your Southampton two-bedroom home is now worth £275,000. Mind you before you open the fizzy stuff — remember the three-bed you want has also risen 10%, meaning it is now £385,000. If you want to trade up, you need to find £110,000. 

 

Southampton house prices rising has cost you an additional £10,000.

 

On the other side of the coin, what if Southampton house prices fell 10%?

Your two-bedroom home is now only worth £225,000. Catastrophe! Yet wait — the three-bedroom Southampton home you want to move up to is now worth £315,000, meaning you only need to find £90,000 to trade up.

Also, stamp duty, solicitor fees, and estate agent fees tend to be percentage based - thus saving you money.

 

As over 7 out of 10 home movers move up the property ladder, falling

house prices are not necessarily a problem.

Falling Southampton house prices are great for those who want to move up the property ladder and trade up.

 

So, who loses when house prices drop?

The first set of people that lose out are homeowners moving down market. The gap between selling a larger home and buying a smaller one narrows when one moves down market. Given the massive growth in house prices over the many decades those homeowners have been in the property market, it’s tough to see this as a calamity, yet it’s certainly a loss.  

The second set of people that lose out are beneficiaries of the home being sold when a parent/grandparent passes away.

Let us all be honest; I believe there will be little sympathy in the broader community for those first two sets of people for their loss of money.

However, the most exposed (and many people will sympathise with these) are those first-time buyers who bought their first home with a small deposit. If you had just bought your first home for £200,000 with a 5% deposit (so you had a £190,000 mortgage) but Southampton house prices dropped by 10%, you now own a home worth £180,000 (less than the mortgage). Now you are in ‘negative equity’ (as your mortgage is £10,000 more than what the house is worth, i.e. £190k less £180k), which causes you two main problems.

Firstly, when your fixed rate deal ends, most of the time, it is wise to re-mortgage to another rate. However, when you have negative equity, the range of mortgage deals open to you will be minimal, so you will probably have to pay your bank/building society’s quite pricey ‘standard variable rate’.

Secondly, suppose you want to sell your Southampton home. In that case, the price you achieve will not pay off the mortgage, which means you will have to find the difference elsewhere (i.e. a gift/borrowing from your family or selling an asset like a car)—in a nutshell, making a move very difficult.

How many people will be drawn into negative equity if house prices drop 10%?

 

Just 2.9% of homeowners will be in negative equity,

if house prices drop by 10%.

 

Now of course, if you are one of that 2.9%, that will be challenging. Yet, the vast majority of those first-time buyers have been in their homes a year or less, and most first-time buyers only move to their second home after four to six years. Also, they will be fixed-rate mortgages (mostly five-year fixed-rate mortgages), so re-mortgaging won’t be an issue either.

But what would it mean to Southampton house prices if they did drop by 10%?

 

If house prices drop by 10% in the next 12 months in Southampton, that would only bring us back to the house prices being achieved in September 2021.

 

(For all you property stat fans – the average house price in Southampton today is £249,427, whilst back in September 2021, it was £224,854).

Yet what if they dropped by the same percentage (19%) as they did in the Credit Crunch?

 

If house prices dropped by the same percentage as they fell in the Credit Crunch in Southampton, that would only bring us back to the house prices being achieved in June 2019.

And nobody was complaining about those!

Let me get back to the real problem with falling house prices.

When the country’s house prices fall, that tends to correspond with more challenging economic times. Now, because of rising interest rates and inflation, the price people are paying for a Southampton property is lower than one would have paid in the spring (when you were bidding against multiple offers and had to pay top dollar to secure the purchase).

However, during times of falling house prices, that can start to negatively affect the broader British economy. For some strange reason, homeowners tend to spend less because they ‘feel’ less well-off because the value of their home has dropped, and fewer people move home, meaning there is less choice for people to buy. Lenders start to be meaner about lending because they are nervous about arrears and bad debts building up. 

 

2023 will be challenging for many Southampton families, yet …

As we go into recession, the share of homeowners exposed to falling house prices is smaller than in the 2008 Credit Crunch.

·        92.48% of new mortgages taken out in the last four years have been fixed-rate mortgages, compared to 63.08% in the years before the Credit Crunch.

·        In 2008, 45.4% of existing mortgages were 4% above the base rate, today, that is only 2.1%

·        Going into the Credit Crunch, the average mortgage rate homeowners were on was 5.88%, whilst the average rate existing mortgaged homeowners today are on is 2.17%.

Ultimately, unemployment is the main factor of whether this goes from being a possibly benign slow 10% decline to a full-scale crash.

If homeowners keep their jobs, they will keep paying their mortgages. However, (as in the 1988 and 2008 house price crash) if people lose their jobs, mortgages don't tend to get paid, and that is when repossessions increase and forced selling starts to take effect. 

However, looking at the Autumn Statement, the Government have learned the lesson of previous generations and vastly improved the safety net of contributing to people's mortgages. Should someone become unemployed, at the moment, homeowners must wait 39 weeks before the Government will help pay the mortgage (thus increasing their chances of repossession). This will be reduced to 12 weeks in the spring, reducing mortgage repossessions later in 2023/4.

So where does that leave us?

We should be less keen to celebrate ‘house price booms’ throughout the ‘good times’ because the usual ‘house price crashes’ tend to worsen the ‘bad times’.

In its place, we should concentrate on what British society can do to obtain a more stable property market over time. That is a topic for another article in my property blog! (Do send me a message if you want a link to the other articles I write about the Southampton property market).

Final thoughts: the house prices being achieved in late 2021/early 2022 in Southampton will be a distant memory in a year’s time, yet for most people, that is not a bad thing. 2023 will be a challenging year, but don't let the price paid for property by 3.54% of the UK population (the percentage of privately owned houses that will sell next year) affect your outlook and worth as a homeowner/landlord.

These are my thoughts; what are yours?

Southampton Tenants Face Further Rent Hikes, as the Number of Available Rental Homes Drops by 36%

 

• The number of properties available to rent in Southampton has dropped from 3,519 to 2,267 since February 2020.

• The average rent a tenant has had to pay in Southampton has risen from £932 to £1,716 since February 2020.
• 
  
•     Many Southampton landlords have cashed in on the post-lockdown property boom of the last two years and sold their properties to owner-occupiers - not fellow landlords.

• The supply of Southampton rental property isn't near what is needed, which is of benefit to Southampton landlords rather than Southampton renters. 

 

The Southampton rental property shortage is currently very evident. In this article, I will investigate why there is such a significant lack of homes available for rent across Southampton and what it means for buy-to-let investors.

Anybody who enjoys surfing the property portals (Rightmove, Zoopla and On the Market) will have observed an emerging trend that the number of properties available to rent in Southampton has dropped considerably in the last couple of years.

This reduction has been seen all around the UK as well. For example, on 1^st November 2020, there were 372,931 properties to rent on portals. By the 1^st November 2021, that had dropped to 275,650; by the 1^st November 2022, that had fallen to 171,224.

That doesn't mean the number of privately rented homes in the country has dropped by over half. Fewer properties are coming onto the market to rent. I will explain why in this article.

 

For tenants, especially over the last 12 months, it has become progressively more challenging to find a Southampton rental home, thus making the rent they must pay go up. This state of affairs in the property market isn’t showing an indication of getting any easier either, making for a hard time for Southampton renters.

So, what is the reason behind the Southampton rental property shortage, and what does this mean for existing Southampton landlords or those potential investors considering buying a Southampton buy-to-let property soon?

 

Several different components are making the perfect storm in the UK property market.

Firstly, the number of households in the UK.

The UK has not been building enough homes for the last 20 years. I appreciate that parts of Southampton seem like one huge building site, yet as a country, we are woefully undersupplied with property to live in. This has meant house prices continue to rise due to demand. 

The government have known about this issue for decades. The Barker Review of Housing Supply published in 2004 stated that the UK had experienced a long-term upward trend of 2.4% in real house prices since the mid-1970s because of a lack of house building. The report stated that 240,000 houses needed to be built each year to keep up with demand.

 

The average number of houses built since the mid-1970s has been around 165,000 per year, meaning the UK is short of 3,375,000 houses

(i.e., 45 years multiplied by 75,000 missing homes per year).

 

Several years ago, the government set a target to build 300,000 new homes each year to address this issue.

However, in 2019/20, the actual number of homes delivered stood at just 243,770. In 2020/21, the number of properties built dropped to only 216,000 new homes. In a nutshell, there are fewer available homes to buy, meaning fewer available homes to rent. 

Secondly, Southampton tenants are staying in their rental homes longer.

A Southampton first-time buyer's average house deposit is £60,953

(the UK average deposit is £53,935).

The average rent of a Southampton property in November 2022 is £1,716 per calendar month (up from £932 per calendar month in February 2020) – quite a rise!

These numbers translate into Southampton renters not being able to pay the rent and be able to save for a deposit, or if they are saving, it is taking a lot longer to save for a deposit due to the cost-of-living crisis and higher rent costs.

Also, many Southampton tenants have decided to stay in their existing rental homes because of the rent rises. Many landlords are less inclined to raise the rent on an existing property when they have a decent tenant who keeps the property in good condition and pays rent on time. Anecdotal evidence also suggests that rent arrears in those properties are dropping as tenants know if they don’t pay the rent, the chances are they will have trouble finding another property, and if they do, they will have to pay a lot for their next rental home.

For Southampton landlords, this is all positive news - tenants are staying for longer in their Southampton rental properties, arrears are lower, and void periods are less likely. When it comes to the market, there is less competition (because of the decrease in the availability of Southampton rental properties) so this makes the investment an even better bet.

Thirdly, landlords are selling up on the back of recently increased house prices.

It would be difficult for Southampton buy-to-let landlords to ignore the rising property prices in recent years.

The average property value in Southampton in the summer of 2022 was 11.0% higher than in the summer of 2021.

 

For some Southampton buy-to-let landlords, especially those who were classified as ‘accidental landlords’ (an accidental landlord is a landlord who never chose to become a landlord, it was just after the Credit Crunch of 2008/9, they found themselves unable to sell their property, so they temporarily let their own property out), they chose to ‘cash in’ on the higher house prices. This would have also contributed to the lack of available Southampton homes for rent.

 

Yet everything isn’t all sweetness and light for Southampton landlords.

Landlords have a few costs to consider before investing in buy-to-let, including everything from regular refurbishment costs, buildings insurance, letting agents’ fees, income tax, and, not forgetting, stamp duty.

Talking of costs, one issue some Southampton landlords are facing is their failure to plan financially for the recent mortgage interest rate rises. Some Southampton landlords may have become complacent to the ultra-low Bank of England base rates we have had since 2008 and, therefore, may need to sell their rental property, which, if bought by a first-time buyer, will remove another property from the Private Rented Sector.

Another hurdle to jump is the proposed new regulations requiring better energy efficiency for rental properties. It is proposed all new tenancies must have at least a minimum of a 'C’ rating for their EPC (Energy Performance Certificate) from 2025 (and 2028 for all existing tenancies).

Therefore, as a buy-to-let Southampton landlord, it is wise to do your research to make sure the buy-to-let opportunity is correct for your rental portfolio, particularly when it comes to weathering any impending financial storms. 

Landlords need to consider the returns from their

Southampton buy-to-let investments.

Landlords can earn money from their buy-to-let investments in two ways. One is the property's capital growth, and the other is the rental return (often expressed as a yield). In 96% of buy-to-let investments, there is an inverse relationship between capital growth and yield (i.e., properties that tend to go up in value quicker will have lower yields 96% of the time – and vice versa).

Getting the best balance of yield and capital growth depends on your current and future needs from your Southampton buy-to-let investment.

If you would like me to review your portfolio and ascertain if your existing portfolio will match your current and future needs for the investment - whether you are a client or not, feel free to drop me a line, and we can have a no-obligation chat and possibly organise a review.

 

What does all this mean for the Southampton rental market?

 

The continued shortage of Southampton rental properties means it will be more difficult than ever to find a Southampton property to rent, and so rents will continue to grow.

Unlike in Scotland, England and Wales do not have rent controls, with Westminster ruling out the possibility of introducing rent control here to deal with the cost-of-living crisis.

You would think rent controls would be a no-brainer, yet economists from around the world have proved for the last 75 years that rent controls might help tenants in the short term, yet ultimately it drives landlords to sell their investments in the long term, thus reducing the stock of available properties to rent out (not great for future tenants).

Therefore, it is highly likely that Southampton rents

will continue to rise for tenants.

Landlords who persevere with their Southampton buy-to-let properties or become a Southampton buy-to-let landlord are set to benefit because they have an asset in very high demand.

The housing shortage, not to mention the other issues discussed above that are affecting the supply of rental properties, is unlikely to be fixed anytime soon!

In conclusion, the Southampton rental market is a constantly changing picture. What is known is that the supply of rental properties is far from what is needed, which can only be to the benefit of buy-to-let investors rather than of tenants renting.

I see buy-to-let as a long-term investment. Everyone reading this knows that the real value in your buy-to-let investment is playing the long game, allowing your Southampton buy-to-let investment to grow over time. Like the crypto or stock market, getting sucked in by get-rich-quick schemes that are selling 'apparent quick wins' in property investment is very easy.

I regularly highlight the best buy-to-let deals for Southampton landlords with all the estate agents (not just my own). You don't need to be a client of mine either to receive that information. Drop me a line or call (without any cost or obligation) if you are interested in making your first Southampton buy-to-let investment or considering adding to your existing Southampton portfolio.

What Will Rishi Sunak as PM Mean for Southampton House Prices?

I often get asked what is going to happen to Southampton house prices.

Many things affect house prices, and it comes down to simple supply and demand.

On the supply side of the equation, in the short-term, the number of people wanting to sell their property at any one time has a massive effect on house prices.

In 2007, the number of properties that came onto the market in Southampton jumped drastically. In January 2007, 2,619 properties were available for sale in Southampton and by October in the same year, that had risen to 4,400 properties.

This flooded the Southampton market with houses to buy whilst, at the same time, the banks almost stopped lending money because of the Credit Crunch, thus causing the house price crash of 2008.

Also, on the supply side of the equation is the total number of houses in the whole country (irrespective of whether they are on the market or not). This is an essential factor in house prices, although that has a longer-term effect. Governments can control the number of properties being built with changes in planning regulations, incentives for builders and the buyer schemes such as the Help to Buy plan.

On the demand side of the equation, property values typically rise if homeowners believe they will be wealthier in the future.

Typically, that occurs when the whole country’s economy is performing well as more Brits are in work and salaries are higher. The opposite is also the case when the economy goes into recession; people tighten their spending, lose their jobs, and thus, house prices drop. Inflation will affect British household budgets (because if more of the household budget is going on increased bills, there is less available for mortgage payments).

Another factor on the demand side for housing is when the population increases (through people living longer or increasing net migration) or when the divorce rate increases (making one family household into two single-person households). As always, rising demand typically means higher house prices.

One aspect of the demand side of housing that the Government can control is the taxation of moving home. In the late spring of 2020, the Government vastly reduced the tax (Stamp Duty) paid to buy a house, saving many home buyers thousands of pounds.

Also, on the demand side, property values usually increase if more homebuyers can borrow more money with a mortgage to buy their home.

The more banks and building societies can offer mortgages, the more homebuyers can buy their future home, thus raising house prices.

However, the constraint is the amount a home buyer can borrow on a mortgage.

What someone can borrow depends on what they earn and if they can afford the monthly mortgage payments. The level of mortgage payments is dependent on three things.

1.     How much you borrow

2.     The interest rate charged

3.     The length of the mortgage

The lower the interest rates are, the lower the cost of borrowing to pay for your house is and thus more people can afford to borrow money with a mortgage to buy a home, meaning house prices tend to go up.

Southampton house prices have risen by 60.63% between 2010 and today, mainly fuelled by low interest rates.

So, looking at everything above, apart from Stamp Duty and the incentives for buyers (which historically have made a minimal difference), the Government in the short-term, irrespective of who the Prime Minister is, makes little difference directly to house prices.

The most significant short-term factor which directly affects house prices is interest rates.

However, the Bank of England (not the Government) sets the interest rate for the UK economy. That means the Government (and Rishi as PM) cannot directly make any differences in house prices (apart from the points raised above).

Yet, indirectly, as seen with the Liz Truss / Kwasi Kwarteng Mini-Budget catastrophe only a few weeks ago, what the Prime Minister (and their Government) does can make a massive difference to interest rates and, thus, the property market and house prices.

 

Since December 2021, the Bank of England has been slowly raising interest rates to combat inflation. Unfortunately, the downside is that it increases the mortgage rates homebuyers must pay if they are on a variable-rate mortgage or coming off a fixed-rate deal secured a few years ago.

 

As 17 out of 20 homebuyers have a fixed-rate mortgage, when a bank or building society calculates a 5-year or 10-year fixed-rate deal, they consider what the Bank of England interest rate is today, but they also consider something equally important, something called the 'swap rate'.

 

As Southampton homeowners and landlords, it is vital you should be aware of the swap rates as they are based on what the global money markets think future UK interest rates will be.

 

If the swap rate rises, then mortgage lenders will increase their rates on the mortgages they offer, and by doing so, (as discussed previously in this article), increased mortgage rates will affect affordability and, thus, house prices.

 

So, what affects UK swap rates? Mainly one thing, the price of government debt in the form of gilt yields.

Given the vast increase of planned government debt originally announced in that mini-budget by Truss/Kwarteng, the money markets who would be lending the Government the billions of pounds to fund those tax cuts got worried the Government wouldn’t be able to pay back such a rise in borrowing, so wanted a higher rate of return on the money they were lending the Government. 

That return is measured in the 'gilt yield rate', and the gilt yield rate directly drives the 'swap rate.'

 

That rise in the gilt yield rate/swap rate was the main reason mortgage rates rocketed after the mini-budget and helped in the collapse of Liz Truss's Prime Ministership.

So, what can Southampton homeowners expect in the coming weeks and months with gilt/swap rates?

Rishi Sunak’s first job was to re-establish confidence in the money markets for UK plc. During the summer, the 5-year gilt rate rose steadily from 1.6% to 3.5%, in line with the general rise in Bank of England base rates. Yet when the mini-budget was delivered on the 23^rd of September 2022, that rose almost straight away to 4.6%.

 

That meant every mortgage rate jumped in price by 1 to 1.5% almost overnight.

At the time of writing, the 5-year British gilt yield has dropped to 3.5%, and the others have either dropped below their pre-mini-budget rate or were moving in that direction, depending on the gilt type.

The gilt rate (which directly affects the swap rate, which in turn, directly affects mortgage interest rates) could drop further, subject to what Rishi Sunak and his Chancellor Jeremy Hunt have planned in the budget (and supplementary report from the Office for Budget Responsibility) on the 17th of November 2022.

A drop in the gilt/swap rate is vital for any Southampton homebuyer buying a house or Southampton homeowner re-mortgaging to a new mortgage deal. Why? Because...

 

with the average Southampton home worth £340,118 (a rise of 6.89% over the past year), each 1% extra in the mortgage rate would cost every Southampton homeowner an additional £283.43 per month.

So, what does this all mean for Southampton house prices, then?

Greater certainty will keep the volume of housing transactions ticking over, yet not inescapably Southampton house prices.

In my blog articles on the Southampton property market, I believe Southampton house prices will be lower in 12 months, and I expect Southampton prices to return to where they were in the late spring/early summer of 2021.

And why is that? Unlike the 2008 Credit Crunch house price crash, today, the country has very low levels of unemployment and very well-capitalised banks (because the Bank of England subsequently forced them to keep lots of cash in their banks to cover downturns). Therefore, I don’t anticipate the kind of double-digit house price decreases seen 14 years ago.

If you would like to pick my brain about the Southampton property market, be you a potential Southampton first-time buyer, a Southampton homeowner looking at your options on re-mortgaging or selling, or, in fact, anyone with questions, don't hesitate to drop me a line. I will gladly share my thoughts and opinions without cost or obligation.