Why buying or owning a home with a mortgage is going to be painful
Jeremy Hunt, the fourth Chancellor in less than a year, will unveil his fiscal plan in two weeks. Regardless of how it is received, interest rates will immediately rise. If Truss is then ousted as Prime Minister, we will be looking at a fifth Chancellor before Christmas and yet more mayhem.
However you cut it up, uncertainty, inflation, war and political instability are always bad for markets, and that includes the housing market.
Each year around 1.2 million homes complete, with a third of these being sold to first-time buyers. Covid and the third last Chancellor Rishi Sunak, with his giveaway SDLT scheme, distorted these completion numbers a little, but each year 400,000 plus homes sell to new buyers.
The Bank of England base rate is 2.25%, and first-time buyers can get a mortgage at 6.0% fixed for two years, but early in November the base rate will go up 100 points, or perhaps 150 points, to 3.25% or 3.75%.
We know this as the Governor of the Bank of England Andrew Bailey has already flagged this, saying: “As things stand today, my guess is that inflationary pressures will require a stronger response than perhaps we thought in August.”
This would increase to a two-year fixed rate of 7.25% to 7.75%, which would lock out potentially 350,000 plus buyers from the housing market. This would decimate the new home builders, and the residential marketplace as first-time buyers underpin the chains when second steppers look to move.
For the seven million people who already have a mortgage, or specifically the 100,000 plus who each month may be coming out of a fixed rate mortgage deal that was under 2%, the new fixed rate deals at 10%, which is five times higher, will be a huge wake-up call.
Having been an agent from the mid-1980s I have seen many boom and bust housing cycles, usually sparked by Chancellors tinkering with taxation ploys around housing, from Lawson in 1988 through to the folly of Rishi Sunak’s giveaways.
In my view, having marketed over 18,000 properties in 30 years, the nation sits on its hands when it has no cash in its pocket, and if your mortgage repayments increase by £600 a month, the last thing you think about is buying another home…you just hunker down.
The knock-on effect is obvious too. In the lettings sector, tenants will be paying higher rents, as landlords hit by increased financing costs pass these costs on. And with many landlords exiting the market, the PRS will be squeezed with a supply problem further compounding a rise in rents.
A lot of it hinges on the fortunes of Liz Truss and the next fortnight. A coup seems most likely, but even if she stays the money markets are going to react negatively to her new austerity Chancellor.
Housing market trends: Agents offer their predictions
Each week I get to talk to around twenty agencies, some small some large, and during the confusion of the last seven days, some clear patterns are emerging.
First, all agencies are scrambling to get as many sales as possible across the exchange finishing line, typically one-third of their sold subject to contract pipeline gets exchanged every month. But due to the lending turmoil and market uncertainty, getting buyers to do the deal has become far more complex.
Some first-time buyers have just pulled out, waiting to see if house prices will fall, and many chains are seeing renegotiations of sale prices, caused by down-valuations or buyers wanting a ‘discount’ to do the deal.
There has been a flurry of new property coming to the market, with some vendors clearly realising that 2023 will probably be a very sticky market, and thus they are looking to move while they can. Agents also tell me that this new inventory is coming on at strong money, so will not sell quickly.
In fact, with the cost of borrowing rising and homes being listed at super high values, many agents say there is a Mexican standoff as the market decides whether it is a buyer’s or seller’s market. The paucity of instructions has given vendors the whip-hand for most of 2022 until they become a buyer and have to pay full money on their next purchase. Now it seems that buyers may well have the power moving into the last quarter of 2022.
Letting agents are saying that rents are continuing to climb, stock levels of new tenancies are hard to find, and most of the activity is existing landlords reletting their property, with a number of landlords concerned over the section 21 legislation which may or may not be on the cards. Truss is saying section 21 will be repealed, but will she even be prime minister in a few weeks, and if not what might a new prime minister think?
Covid is also factoring into the property world again. With 1 in 35 now contracting Covid, some agents are again locking the door to their branches to minimise risk and facemasks are making a return to some viewings.
The biggest concern that agents are expressing is by far and away the new calm that seems to be enveloping the market. October is typically the month when the housing market starts to seasonally slow, but the fear of many agents is that by January interest rates may have risen so much that the whole market stagnates.
As one agent put it, people always want to move, but if the cost to move becomes too great, only those who have to will actually do so.
The agent went on to say that new enquiries were slowing and there was definitely a feeling that the tap was being turned off. They also said that they thought in 2023 it would take longer to agree on sales as buyers would become pickier, sensitive to the much larger loans that would need to service to buy their next home.
Proptech and Property News in association with Estate Agent Networking.
Andrew Stanton is the founder of Proptech-PR, a consultancy for Founders of Proptechs looking to grow and exit, using his influence from decades of industry experience. Separately he is a consultant to some of the biggest names in global real estate, advising on sales and acquisitions, market positioning, and operations. He is also the founder of Proptech-X Proptech & Property News, where his insights, connections and detailed analysis and commentary on proptech and real estate are second to none.