What's really happening to property prices? Interest rates at 15 year high, soaring inflation, labour shortages and cost of living crisis, join our discussion #135

EP135: As interest rates soar, inflation rises, and labour shortages continue, homeowners are left wondering what the future holds. Property consultant, Eyeedul Haque, reveals the data behind the headlines about the state of the housing market and the impending mortgage payment increases.

"What has actually happened is the rate of growth has slowed but it's nowhere near the Knight Frank’s and the Savill’s with their very negative forecasts; that's a huge positive."

In this episode, we:

·      Delve into the complexities of the housing market and who is actually impacted by mortgage rate increases.
·       Discuss the climb in interest rates and impact on inflation.
·       Dissect the mismatch between market data and realistic pricing, its significance, and repercussions.
·       Predict future investment opportunities and the course of house prices and rents.

The key moments in this episode are:

00:00:00 - Impact of Mortgage Rate Increase
00:02:34 - Effectiveness of Monetary Policy
00:05:09 - Labour Shortage and Inflation
00:07:43 - Future Interest Rate Increases
00:16:11 - The Housing Market and Lenders' Urgency
00:17:27 - Discrepancy Between Rightmove and ONS Data
00:19:27 - Realistic Asking Prices and Commercial Market
00:22:06 - Market Stability and Opportunities
00:25:04 - Landlords and Long-Term Investments

My special guest is Eyeedul Haque, a seasoned expert on housing economics and  an insightful commentator on the trends shaping the current housing market. As an experienced property consultant, he has a steady finger on the pulse of market fluctuations and how they impact homeowners, particularly in relation to mortgage payments. His approach is rooted in real-time data analysis and clear, understandable insights, making him a trusted voice on promptly evolving economic scenarios. He applies this passion in guiding property buyers through the intricacies of market trends and property management.

The resources mentioned in this episode are:

·       Consult with a reputable mortgage broker or lender to explore the best rates available for your fixed rate mortgage. Take advantage of the competitive mortgage market and book a rate before your fixed rate period ends. 

·       If you have a property portfolio or are a buy-to-let investor, explore the best mortgage rates for landlords. The best available rates for two-year fixed-rate buy-to-let mortgages are currently 4.7%, the best five-year fixed-rate is 5.35%, and the best tracker rate is 4.54%. 

·       Review your budget and consider ways to mitigate the impact of mortgage rate rises. Look for areas where you can reduce expenses or increase income to offset any increase in mortgage payments. 

·       Stay informed about the housing market.

Join us live every month as Eyeedul Haque of My Property Consultant and I crunch the data behind the UK house price headlines.  

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Disclaimer: The views and opinions expressed in this podcast belong solely to the host and guest speakers. The view and opinions of the guest speakers do not represent that of the host. Always do your own research. 

Transcript

00:00:00: You, Nicole. Good morning. Very timely indeed. BBC Headline has just come out. 15 minutes ago, mortgage payments set to jump by 500 pounds for 1 million households.         

00:00:14
             

So that is news as it came in just now on BBC Co UK. And that's the 12 July that we're recording this at about ten 04:00 A.m.. So that's really timely because welcome back to the podcast. It's been a while. What I noticed is that since our last podcast in December, my podcast was being downloaded hundreds of times and it was this particular one that people were interested in.         

00:00:44
             

What is going on with UK property prices? So it's interesting that News Flash has just come out. Do we have any idea of what proportion of the market that 2 million mortgages represents? Yeah, again, the source of data is straight from the bank of England. So the devil is always in a detail.         

00:01:06
             

What is happening is there's 2.4 million householders or people with mortgages, which their fixed rate period is going to end by the end of 2024, and that equates to 800,000 people for the remainder of 2023. Quite interestingly. I did some research in terms of what number of people does this actually represent? In the UK, they're just shy of 25 million homes, or what they call individual dwellings, and 32% of those are owned with people with no mortgage. And then 28% of those actually have a mortgage, of which 86% of those opt for a fixed interest rate of two year, three year or five year, as they're the most popular options you then have.        

00:01:54
             

20% of those homes are actually in the rental sector and 17% of the homes are what they classify as social housing, so they're owned by local authorities. So in terms of the 86% of people which are on fixed rate mortgages, that is 7 million people across all households. And what the Bank's latest figures are, because all the kind of lenders have to return their annual returns to the bank of England is yeah, there's 2.4 million people which will be affected by the end of 2024. So that's about a third off the top of my head. Yeah.         

00:02:34
             

Okay, that's interesting. And we're seeing this in a backdrop whereby interest rates have hit a 15 year high, isn't that correct? That is correct. So interest rates, as you know, they've increased consecutively for 13 times. So interest rates now stand, or the bank of England rate stands at 5%, which is the highest it's been for 15 years.         

00:02:58
             

And when that translates to mortgage rates, mortgage rates are slightly higher on two year and five year fixed rate deals. But lenders do try to anticipate what the bank of England is going to do next. And the bank what they're trying to do is to gain grip on inflation, which currently stands at 8.7%, and the government and the bank of England are trying to reach the target of 2%. No matter what that's a big jump, isn't it? And how effective do you think that this monetary policy is in dampening inflation?         

00:03:35
             

Monetary policy is actually working. If anything, my personal opinion is it's actually creating inflationary pressure across the economy by interest rates actually going up. If you look at the rental market, for example, interest rates actually increase on buy to let mortgages. Other costs in the economy are also rising. Landlords are forced to increase their rents that they actually charge tenants.        

00:04:04
             

Similarly, people with mortgages, if their mortgage rates are increasing. The BBC is saying that monthly repayments on the average mortgage will increase by 500 pounds a month. Naturally, people's costs are increasing. Contractors, employees will go to employer and say we need a pay rise to cover some of these costs. So it kind of creates a perverse situation where costs in economy will actually increase and most employers, businesses will put this cost onto the end consumer.         

00:04:35
             

So the monetary policy here I don't think is working. It's a very blunt instrument and it will take about 18 months to two years to find out is it actually working in terms of slowing down the rate of inflation. And the main reason is this time around is the inflation isn't caused by consumer spending. It was caused this is the kind of the fallout of the quantitative easing caused by COVID. It's the increase in fuel prices, the war and what we might call external factors rather than people like you and I going out and shopping and having home extensions.        

00:05:09
             

So I do feel it's a bit unfair towards the end consumer and time will tell. But I think it's too late for the bank of England to increase rates by what they have to try and curb inflation. What they could have done is started a whole six months or twelve months earlier rather than creating this knee jerk reaction, which they seem to be doing now. We have another factor within all of this too and that is a labor shortage and a strong labor market. And I know that was one of the comments that the head of, I think it was nationwide, commented on the fact that unlike in other recessions where the market was shedding jobs, we're actually in a very strong market where we have a labor shortage.         

00:05:54
             

And so it does mean that, as you say, this contributes to inflation because employees have the power to go to their employers and say you've got to make this right for me, my cost of living, my mortgage is doubled. So what are you going to do about it? Or I'm going to go elsewhere. And that seems to be an added impact at this time that's unique to this particular situation. Yeah, it's totally that in terms of costs are increasing and wage demands will be increasing.        

00:06:23
             

I'll go back to the rental market as well because the figures at the beginning of the year in January were rents nationwide were increasing by 10% and then in London they're increasing by 14.6%. So that is just rents in London increasing, rents nationally increasing. And even when you look at the June figures. So six months on national rents in the residential market have increased by 10% and 9.3% in London. And this is the fact of increased costs in the economy will result in increase in the cost of renting and this will also affect commercial rents as well.         

00:07:02
             

And as a result, there's extra cost in the economy that's got to be paid for by somebody. So again, there's lots of different factors at play, but costs are increasing, so monetary policy may not be the only tool that should be used. So the big question now is how much further do interest rates have to go? Now, I note that in your recent note you said that you think maybe one more increase. I looked at the forecast, the blended forecast is about 5.96 across all the economists in the market, which would suggest maybe another two increases.         

00:07:43
             

What's your view and why? What did happen last month when interest rates increased is the forecasters and the lenders were expecting interest rates to increase by zero point 25%. And actually what did happen is the bank of England made a step change and increased it by 0.5% in one go. Hence the interest rates are now at 5%. So there's potential for another two interest rates to actually hit the economy before the end of the year.         

00:08:14
             

So I believe interest rates will probably hit 6% by the end of this year and that's the bank of England rate. Also, some of the Islam commentators within the industry are saying interest rates may hit 6.5%, but what they are doing is looking at various different economic models and looking at the key factors that come out in terms of the inflation figures, unemployment figures to work out different scenarios. But our in house view is, yeah, rates will peak at 6% by the end of this year and hoping they're not going too much higher than that as well. That seems to be the consensus from what I've seen. And that will lead to even further pressures on household incomes, which again, we'll see how that will play out.         

00:09:01
             

So let's move on to your monthly update and house prices themselves. It's not all doom and gloom, is it? It's not doom and gloom at all. And what I like to do is take us back to the beginning of the year so that's when we did our last catch up and what was quite interesting is all these kind of the Knight Francs, the Savvy, the OBR came out with different predictions of which not really any of them have come true. And I'm ever the optimist in terms of glass half full, but when we look at Savills, savills were saying prices would come down 10% nationally by the end of 2024.         

00:09:38
             

Knight Frank was saying they'd come down 5% in 2023. Cattle Economics they said prices come down 8.5% this year. What has actually happened when you look at the annual figures, when we look at the nationwide nationwide is saying the annual rate of growth has slowed and they're saying prices have come down 3.4% consecutively over the last three months. Halifax they've gone down at -1.1% but the previous two months they still were positive right move is reporting house price growth of 1.1%. The ons which are the government figures are saying that prices have increased year on year 3.5% and London they've increased at 2.4% over the last twelve months compared to the January figures.         

00:10:28
             

Ons were saying nationally prices were still increasing at 10% a year, in London 6.3% a year. My view at the beginning of the year was we'd enter a flat market for the rest of 2023. And I think that is what actually has happened so far. Because again, we have to go with the official figures, which are the actual land registry data, and they're still saying prices have increased 3.5% over the last twelve months. What has happened is the rate of growth has slowed but it's nowhere near the night francs and the Savilles with their very negative forecasts, that's a huge positive.         

00:11:09
             

And whenever we talk about news headlines like I know for example, the BBC headline today, that is an attention grabbing headline. To put a bit of fear into all of us, there are mitigators which we can all do as mortgage holders in terms of reducing the impact of mortgage rate rises because it will affect everyone with a mortgage. But the situation in the housing market is not as severe as the headlines would suggest. And the main reason was I was saying 32.6% of people do not have a mortgage, some people are on longer term fixed rate mortgages. So if we're saying 2.4 million people will end their fixed rate mortgage by the end of next year, others have just recently taken out fixes considerably higher than when they initially took out a mortgage.         

00:11:55
             

They might be paying 4%, but it's a lot lower than the average fixed rate, which is about 6% today. Yeah. So as we said right at the beginning, it's about a third of the mortgage holder market which makes up a smaller percentage of the actual homeowner. We don't think about that, do we? We tend to think, well, I do at least that the majority of the market are home mortgage holders, but that's not the case.         

00:12:27
             

And so these headlines only do pertain to a very small part of that market and we need to keep that in mind when it comes to the stability of the housing market. Were there anything within your report that stood out as something you weren't expecting? No, the only thing that did come out was the bank increasing the rate by more than zero point 25%. Normally lenders price that into their mortgage products. So a 0.5% increase did take some of the market by shock and the reason was the inflation rate for the month before.         

00:13:07
             

So in April, I believe inflation in UK hit 8.7% and they're expecting inflation in May to drop. What did happen is came out exactly the same as 8.7%, which is why England chose to go for a slightly larger increase than was predicted. You got to bear in mind the lenders will have a pot of money which they are seeking to lend to existing people with mortgages and also new applicants as well. But what they will try and do is now they'll probably factor in rates may hit 6.5% by the end of the year, but the mortgage market is still competitive. Which is why I say those with a mortgage up to six months before the end of a fixed rate period, you should consult your lender or mortgage broker and see what rates are available and you can book that rate.         

00:13:59
             

So when your fixed rate does end, you can then get the best rate available under today's market. And it's quite interesting that when we do look at mortgages, I have written these down just before we join the call. Although the average two year fixed rate is in a region of 6%, the best available rate on two years is 5.49%, the best five year fix is 4.99% and a two year tracker is 4.7%. So all three of those are considerably well below the 6% average, which is quoted in the media when you look at landlords. As you know, my property consultant, we advise on people with property portfolios, people looking to generate wealth with vitalette.         

00:14:42
             

The best vitalette rate on two years is 4.7%, the best five year fix is 5.35% and the best tracker is 4.54%. So again, all of those are well below the average rate, which is touted around in media which is 6%. The caveat will be it depends on the size of your portfolio, decides on the size of your deposit and also your credit rating as well. But the advice is, yes, always speak to a reputable mortgage broker when selecting which product to select going forwards. That's a very interesting downward slope to the yield curve, isn't it?         

00:15:22
             

So that demonstrates that these banks that are offering the fix, the two year fix was it for four point something percent, they're expecting a very dramatic drop within the yield curve over the next couple of years. So that's really interesting given the forecast. And I guess what we've got to also remember is that what you mentioned in passing in that these lenders have got, they're sitting on cash and like us, if we're sitting on cash in the bank at the moment, it's being eroded in real terms by interest and they also want to get that money lended out. So there is competition within the market. An interesting point that was raised in your report is that I believe, from memory, the number of mortgages being approved is down considerably as well.         

00:16:11
             

So that will then increase the urgency of lenders to get their money working for them, which may mean that they're being more competitive. Is this right? Yeah, it is right. The level of Hrmrc transactions recorded, so this is people buying or selling houses is 25% lower than this time last year. So, yeah, the housing market is slowing down, which basically means that the banks will remain competitive and each of them, to be frank, are fighting for market share.         

00:16:40
             

Other news headlines we've seen this week is the government and the watchdogs are speaking to the banks why they're not passing on interest rate rises to savers. So the banks could be accused of profiteering in terms of charging relatively high amounts for the mortgages, but not passing on the interest rate rises to their savers. So there will be excess capital that these lenders have and they're ready to deploy to ensure that the mortgage market or remains buoyant. Yeah, that's right. One interesting point I noticed, and perhaps this is something for your report going forward, Edel, is the gap between the right move data and the ons data.         

00:17:27
             

Now, we know that there's about a three month lag, so it'd be interesting to look at that lined up. So may to may, for example. But what I noticed is that currently there's a 90,000 pound gap between the right move asking prices and the ons data, or roughly a 30% difference. It'd be interesting to see how that tracks over time and whether in times of very buoyant house prices, such as in 2015, for example, if the right move data and the ons was closer together, or if the gap was even wider based on expectations. Have you noticed anything about that?         

00:18:15
             

The only thing we've noticed as a property buying agent is that the right move data, we all know, is recording something very different to O and S data. So right move is actually displaying the advertised sales price of these properties. We don't know what each property actually sold for. We have to then wait probably two to three months for it to filter through to nethouse prices. Co UK, which takes data from the ons data or land registry data, but we will see the gap shortening between the two.         

00:18:48
             

But what we've actually seen in London and the southeast of England is house prices are being priced more competitively. So in terms of as a buying agent, I can't go into an estate agent and buy a property with a 10% discount. What has been happening is motivated sellers are pricing their properties in a correct fashion, so they still attract interest from the market. And I've actually seen that prices are looking more realistic now, so they probably have come down, the asking price has been come down about 5%, which makes it more attractive to people which are looking to purchase those properties. So you're right.         

00:19:27
             

Nicole, over time it'd be interesting to see does the gap between the two figures ons and right move close between which I suspect that will happen over the next twelve months? Yeah, especially if you bring back the right move data so that it marries up with the exact timestamp of the ons with the three month lag. It'd be interesting to see where that hits. Obviously there are a lot of factors. Sometimes it takes months for a sale to go through once the asking price has been struck.        

00:19:57
             

But it would just be an interesting exercise I think, just to see to gauge the difference between the optimistic asking price and the realistic sales prices. So it's interesting that you're talking there about more realistic asking prices by vendors and that's something that people have complained about for a very long time, that the reason the market isn't moving is because vendors are just unrealistic about the actual price, the value of their property, which is probably fueled by overly optimistic estate agents. Also, do you know if this is happening within the commercial market as well? I believe the commercial market is still very buoyant, wouldn't have any data at hand to prove that point. But again, if you get drive down any high street across the UK, there are kind of a lot of shops becoming vacant.         

00:20:51
             

Again, landlords wanting to fill those shops will offer incentives for new shopkeepers, bars, restaurants to take over those premises. For example, six months rent free. When they sign a five year lease, there'll be other incentives so the market is still active. But I do notice that there will be a lot more commercial properties in terms of shops available for rentals. So yeah, it is interesting to watch and I think we just have to watch that in terms of the state of the economy over the next twelve months because that will affect consumer spending and then will affect the high street at the end of the chain.         

00:21:30
             

Yeah. So the key takeaways for me from the monthly report that you've produced is that the market, we're not heading for a hard landing or a free fall in property prices. We perhaps are seeing a bottoming out of those prices. Rents still continue to rise at a very rapid rate, fueled by increases in interest rates and inflation should slowly start to decline and therefore interest rate increases should stabilize and should peak. So they're my three takeaways, what are yours and more importantly, what are your predictions?         

00:22:06
             

Right. Yeah, so I with your sentiments. I believe prices, house prices, will now flatline for the remainder of the year and that's also backed up over the last six months. You may have read about new lenders coming into the market with something which was around in the mortgage. So this is where it's aimed at first time buyers that may not have a deposit and the skipton has launched 100% mortgage product.         

00:22:38
             

It's not available to everyone. It has to be first time buyers that have been renting for twelve months and have not defaulted on a rent payment within that twelve month period. But if the skipton and other banks are launching such products, there's definitely a gap in the market for renters that don't have that deposit. But if the banks are lending 100% of the money, they're quite bullish about what they think is going to happen to house prices over the next five years, because they would not lend on a property if they know that price is going to slide over the next five years. That's some evidence to why I say I think we're in for soft landing and house prices.         

00:23:14
             

The second thing which acts as evidence in terms of house prices is the supply and demand. So in London and the Southeast, there's an acute shortage of new homes coming onto the sales market. So where we operate in central London and the Greater London area, there are still between five and ten people looking at each property when they're kind of launched onto right move or the other portals with estate agents. So there is a market out there we're in the process of just completing of two purchases in southwest London for clients, albeit one is using a cash purchase and one is using a 50% loan to value. So they know that interest rates are relatively high, they have the means to put down a bigger cash deposit and they'll refinance the property in two years time.         

00:24:04
             

So there is a shortage of properties coming onto the market which will artificially hold the prices relatively stable. Hence that's why we believe house prices will just level off the remainder of the year. And with that comes opportunities. So if those people have cash or they can put down bigger deposits, people that want to move, and my advice is, if you are going to move home, you got to think in long term cycles. So five to ten years, if you need to move home, you want to upsize downsize, you should continue and there will be opportunities to be had because in the buyer's market, it just means there's less buyers competing for the same number of houses available.         

00:24:43
             

So you'll see, there are positive attributes of what's going on in the economy. It's just a shame that they're not highlighted. Yeah, that's right. Are you seeing much of the, I guess the tenants? Sorry, the landlords, the flight from property by landlords that we're often told about.         

00:25:04
             

In the press, I've heard murmurs or people considering should they exit the landlord arena. So we manage between 75 and 100 properties, all for private individual landlords. And not one of our clients have actually said, we're selling up, we've had enough of being a landlord. What has been happening is costs have been increasing and that's throughout the economy, landlord's costs have also increased in terms of the mortgage interest they're paying. Around the corner, there's EPC regulations coming in in 2028 where landlords will have to invest in their properties and just items such as gas, safety certificates, contract rates, all been increasing.         

00:25:46
             

What has happened is these costs, unfortunately, are put onto the increase in the rents. But I think most landlords, if they can stick it out, professional landlords, they will kind of ride the storm over the next five years. And I always go back to the question with my clients is, why are you actually buying property as an investment or for you to live in? And if you take a long term cycle, you should be fine if you're. Modeling out the returns for your clients, what sort of year on year increase do you put in?         

00:26:18
             

So, in terms of the rental increase, we factor in a 5% rental increase per year. And what has been happening is, over the last 18 months, rents have been increasing by about 10%. Our landlords are quite nice people, we kind of have open conversations with our tenants and we'll do a market report at the end of each year when there's a tenancy renewal. And the rents have been increasing by about ten or 15% in areas of London. But a lot of our landlords will accept we're trying to share the burden of increased costs.         

00:26:53
             

So rather than putting on the full 10% onto the tenants, they'd settle for 5%. So we keep an open dialogue with all of the tenants that we look after as well. And what about capital value? What sort of rate do you factor in for a ten year period? Over a ten year period, we'd factor in a 5% growth per year on average.         

00:27:16
             

So we factor in that as our growth and again, we have to look at historic data. So when we look at what happened in 2008, which was the banking crisis, the previous peak was 2007 2008. Prices all over the UK fell by an average of 20%. But in London it only took 18 months for the prices to bounce back to the previous peak of 2007 and they've actually carried on increasing to 75% on average. The actual cost of the property is now 75% more than previous peak of 2007.         

00:27:51
             

So as a homeowner or as an investor, there's still sound investments if you can ride the storm and wait for the long term. And if you look at the house prices, if you go back to the trend in house prices has been upwards throughout, and this cycle will be no different. There will be a persistent upward increase in house price growth. And as I'm saying to house owners, and also for investors, that's why London does make sense in terms of investment properties. I think what will happen is people will choose areas which are more resilient to house price fluctuation.         

00:28:32
             

So we all read about these foreign investors coming into London and buying up the top end of the properties, but again, that represents less than 1% of the market. We are seeing just normal kind of hardworking, professional people. They will be investing in their own properties and rental properties. My advice would be is to choose areas which don't have such fluctuations in property. We also have the argument with our clients about the northern powerhouse, manchester, Liverpool, Leeds versus London.         

00:29:03
             

And the evidence is there. When we look at 2008, if London bounced back within 18 months, the northern powerhouse, it did take between eight and ten years for prices to return to the previous peak of 2007. So if I was advising clients, I'd say, well, let's take a long term review and compare the different cities and where you get the biggest returns on your investment and London wins hands down compared to the northern powerhouse. Well, let's see what our viewers think. If you've got a view on that, my friends up in the north, if you've got a view on that, let us know.         

00:29:37
             

I'd be really curious to get your view. And, IDA, where do people get your monthly house prices report? Yeah, so the tracker we push out on a monthly basis, and it does collect information from right, Move, Halifax, nationwide, ons and also HMIC transactions. The best place to go is go to our website and you can actually press the Contact US button and send us an email. The website is mypropertyconsultant.        

00:30:05
             

London and you'll see there's a Contact US page. Leave us your details and we'll add you onto our monthly mailing list where you'll automatically be sent out, basically a summary from me. And also a one page dashboard, which kind of tracks all the information. We do have trend lines on there as well. And it's completely impartial.         

00:30:24
             

It's just interesting because it does kind of aim to cut through the headlines. So, again, any kind of newsreel can actually choose the figures or statistics to kind of counterbalance their argument. This dashboard aims to have all the information on one page, so at a glance, we can look at it and say what is actually happening within the housing market and compare the various indices and you can make your own informed decision about where we are in the housing market. It is very good. So thank you for putting that out.         

00:30:56
             

I must say, it's free, so there is no charge. It's something that Edel and his team put out on a monthly basis and it's very worth reading. So, edel. Thanks again. You heard it here, house prices have flatlined for the year.         

00:31:10
             

Let's see, we're going to catch up next month and go over the latest st house prices and just see if there's any updates to our view. So thank you again and see you next month.        

00:31:25
             

Bye.