Now that the BoE have confirmed another increase in Interest Rates of ¾%, the UK seems to be aping the USA by cranking the cost of money, in an attempt to bear down inflation, which at present is at circa 10%+.
Jeremy Hunt (caution: pronounce his surname with care!) is, by the looks of things, quite self-satisfied by trying to rescue the reins of fiscal responsibility by raising taxes and cutting government expenditure, in order to address the debt void created historically by the Covid issue, and presently, the underwriting of the energy crisis.
The Residential Property Market
How does this affect the residential property market and where is it all heading?
Whilst I am trying not to be a mindless ‘contrarium’, I would like to be the bearer of some glad tidings amongst all this doom mongering which abounds at the moment.
Let’s start with the inflation rate. Yes, it is presently at an eyewatering 10+%, but as any economist will tell you, it is a lagging indicator and the good news is that world prices of energy costs (i.e., oil and gas) are significantly down from the frenzied heights of a few months ago. Shipping and transport costs are also down, as are commodities and raw materials.
Whilst the universal underpinning of energy costs may be hugely expensive for the Treasury, adding to the national debt, since not all of it can be ‘costed’ (de facto a second Covid, if you will), all these factors will have a deflationary effect.
80% of mortgagees are on a fixed rate and therefore the present hikes in rates will not have an effect on sentiments, or affordability, for one to two years yet.
No Avalanche of Homes To Market
There is not an avalanche of increased supply of homes coming on to the market, which historically is always a precursor of a downward trend in property values, as demand and affordability usually shrinks when mortgage costs rise exponentially. This is a very telling indicator and is a bellwether of future trends.
As any economic observer would concur, the UK slavishly follow the American economic model and over ‘the pond’ inflation is coming down, although unemployment may rise a little from an historic low of 3.7% or there abouts.
Still confidence in Property Markets
As to the middle market of between £1/1.5 million and £3 million, a few months ago, at the peak of the market, you would have had some 40 applicants over a property resulting in around five offers. Today you would get 20 appointments to inspect and offer.
In fact, Glentree has been busier in the last six weeks, for the middle to top end of the market, than we have over the past three months with the sale price in Northwest London being about £1070 per square foot on average. Properties in the lower to middle market take about three months to sell, with properties over £10 million taking up to three years.
Sale prices are approximately 13% from asking prices according to our data. The cheap pound is a great allure for anyone lucky enough to have dollars and foreign investors are coming back into the water having been absent for a little while.
We sold a property recently for approximately £10million in Bishops Avenue in a matter of 28 days from instruction, which gives you an illustration that people still feel very confident in the residential property market.
Rates to Peak 2023
Pundits are predicting that inflation in the UK will be circa 4% next year and although interest rates have risen a great deal in a short time it is said that they will peak during 2023 at around 4/5%, so as not to exacerbate the shallow recession that we are entering now. Once inflation is under control it is reasonable to assume that interest rates will slowly move down again, having had their beneficial effects, since increased taxes will carry on calming things down.
In the UK we build at least 150,000 homes less than the optimum needed to keep control of property price inflation. This will underpin any fears of a housing price crash, since the unemployment rate is hardly a worry, people, generally, feel secure in their jobs and will receive in the private and public sector an average of 5% wage increases to counteract inflation. This will also ensure stability of the property market.
I think the predictions of a long and drawn-out recession are overdone and I see the property market moving sideways for a while. Issues such as negative equity and repossessions of homes should therefore not be the biggest worry to the Prime Minister and the Chancellor.