Negative equity concerns explained
Summer was nice while it lasted… Very worrying that I found myself some solace in the rain ‘as the garden really needed it’… how very middle class I have become.
I won’t bang on about how hard it is to deal with lenders at present, as I have banged that drum aplenty in recent weeks. Anyone with an active application and targeting the Stamp Duty deadline at the end of month knows all about that. No shortage of other topics to get my teeth into this week, so lets get straight into it.
Negative Equity Concerns
It does seem strange that in the context of house prices reaching record levels, that there is now a growing debate and concern around the return of negative equity. I understand why this debate may rear its head as the main stamp duty deadline is nearly upon us.
I happen to have quite strong feelings on negative equity, so lets break down the reason why I don’t think we’ll be seeing that anytime soon:
Pent Up Demand Since 2016
- If you look at house prices in isolation within 2021, with some areas in the UK seeing nearly 20% annualised growth, I can understand why there may be some nervousness around house prices falling. However, you can never look at any major market in such a narrow context and expect a full picture of the real situation. One of the very real issues on house prices in London and the South East in particular, was the result of the referendum back in 2016 and what the ensuing Brexit may look like, which dampened demand for property considerably. So much so, that from Q1 2016 to Q1 in 2020, house prices only rose by 0.94% in Greater London according to the Nationwide House Price Index. If you add in growth from 2016 to 2021, it still only comes out at 5.83%.
- To put those figures into context, if you look at house price growth from 2011 to 2016, so the same period prior, London House Prices had grown by 59.07% and that was a period which was still recovering from the Credit Crunch!
Lender Criteria Easing
- On that note, lending conditions have been pretty tough since 2008. High Loan to Value mortgages and loan for anyone with over complex situations or poor credit histories were very hard to come by. That has slowly eased since about 2010, but still (thankfully) a long way off what we saw in 2007. At the onset of Covid, criteria tightened up again, which are only just starting to see ease up. The Government backed 95% mortgages which were announced in the budget in March, only started to trickle in from April and as recently as this month, some major lenders have only just introduced products at this end of the market. So we haven’t even seen the impact of that yet on the market, which I personally feel will stimulate a lot activity in the second half of this year.
- I am not exaggerating when I say that week on week, lenders are loosening credit policy and even new lenders entering the market now. This greater level of competition will not only keep prices low, but also increase risk appetites as lenders vie for market share. Just to allay any concerns, we aren’t close to anything we saw back in 2007, but simply put – if more people can access the market in 2021, that couldn’t have done in any period from 2016 to now, that again will keep fuelling demand.
International Buyers resurfacing
With the house price rises we have seen in 2021, that is almost entirely domestic demand. International buyers have largely been out of the London market since 2016 for the reasons mentioned above. So as Brexit is now done, and we know where we stand with that (in theory anyway, as we haven’t actually tested what Brexit actually is yet, but it is certainly way better than the ‘crashing out’ fears as we ran up to the final, no I mean this time final, ok, really, this is the last time, we can’t keep doing this, final deadline) and as travel restrictions ease, don’t be surprised to see this market spark into life again, which again, fuels demand.
Lack of available housing stock
As touched on last week, RICS (the Royal Institute of Chartered Surveyors) reported the biggest disparity in supply and demand in the UK market in 7 years. With such limited stock, and crazy levels of demand, you don’t have to be Warren Buffett to guess which way prices will go. The supply issue won’t just go away on the 1st July and is a very long term issue and why it is such a surprise house prices in London have been so flat for so long. I expect this debate to really heat up as we realise we just haven’t been building the right types of homes for about 30 years…
Simple Practicalities of negative equity
- Lets just do some maths on negative equity. For example, say you buy at 95% now. House prices don’t just reverse trends month on month (and certainly not if you factor in the points above), so we’ll still see quite strong growth the remainder of the year, but lets be conservative, and say house prices go up just 2.5% for the rest of the year. Your LTV is now 92.5%, meaning house prices need to go down 7.5% next year for you to factor in negative equity. We haven’t seen house prices falls like that since 2008-2010. So it would take a ‘Credit Crunch’ size economic event for that to happen. Granted, that can happen as Covid proved you can just never second guess what the future holds, but it would need to be something so big, your house price would be quite a long way down the pecking order of your day to day concerns.
- That is also if you buy at 95%, the larger deposit you put down, the lower the risk. You will most likely be on a repayment mortgage at this end of the market as well, which means your mortgage also decreases over time which again, lessens the risk. On average, our clients put down just under a 30% deposit, so the risk of negative equity there is very, very small.
- That said, I would be a tad nervous if I had upped sticks to Liverpool, geared up to a 95% mortgage, and come September my boss decides they want me back in the office 3-5 days a week. Regional and behavioural factors will definitely play a role for the remainder of the year, and ‘hybrid’ working I am sure will be a real talking point, but for clients in London and the South East, which is over 90% of our clients, I think you can sleep easy.
Cast off capitalism?
Finally, and I appreciate this may be overdoing it a touch, but for house prices to fall in real terms, over an extended period of time, we would probably need to see the end of capitalism. There is a big clue that the Bank of England TARGETS inflation at 2%. The reason being if something is more expensive tomorrow, we buy it today, hence the modern capitalist way. If things stay the same, or even get cheaper in the future, why act now? That certainly won’t fuel a consumerist economy.
Even if you put all of that to one side, it just doesn’t matter anyway. We have a very perverse relationship with house prices in this country. In nearly no other context would you be happy about something you buy, and take a massive debt on to acquire, starts to raise in value, which means your only option is to then have to stomach inflated prices when you move, as a good thing?! It’s not like the stock market or BitCoin, where you can play the market. This is your home! The only time this works to your benefit is if you plan to live around London while you work and return ‘home’ when you stop working, and ‘home’ is much cheaper than where you are currently.
We live in a clickbait era, and scare stories around house prices will always get great click-through rates. So I apologise for giving measured, sensible, researched views, I know that isn’t cool to do these days, but I am a financial advisor by trade, and boring by nature… (unless I am on a night out, that is a very different story and again, just shows it is all about context).
Inflation On The Rise
This is the big one for us boring Financial Advisors, Inflation report time sets the pulse racing! With lockdown extended yet again, you have to get your kicks where you can…
As expected, Inflation in the UK is on the rise, and now above the Bank of England’s 2% target at 2.1%. That figure is higher than many experts had predicted and may also go higher. The Bank of England, certainly for the moment, is playing it cool and not talking about changing their plans or considering interest rate rises just yet.
In ‘normal’ times, when inflation goes above the target level, raising interest rates is normally the way to bring inflation down. However the BoE are not minded to do so as the noises coming out of them at present are to keep calm and carry on. That is sensible as comparisons to a year ago don’t really mean much as we were deep in lockdown with no end in sight to Covid at that point.
Even though that is the case, this is something to keep a very close eye on as inflation in the USA and elsewhere is very much on the rise, if that trend continues central banks may have no choice but to raise interest rates from rock bottom levels we are currently seeing.
Money markets pretty much reversed the moves they had made last week, but seem to be back on an upward trajectory again. Take in context of the above, it could signal the end of the lowest mortgage rates in history.
Therefore, our default position stands, unless you have any specific needs, we would most likely recommend a longer term fixed rate if you have a 25% + deposit, but keep it short term or flexible if less than that figure.
In the last week:
3 Month Sterling Libor = down 0.001% at 0.082%
2 Year SWAP = up by 0.045% at 0.3361%
5 Year SWAP = up by 0.082% to 0.744%
Bank of England Base Rate = Held at 0.10%
2 Year Variable from 0.99%
2 Year Fixed Rates from 0.95%
5 Year Fixed Rates from 1.14%
BTL Rates from 1.19%
The actual rate you will be offered will be dependent on your personal circumstance and deposit level. Please speak to one of our advisers so that they can guide you through this process
Source: Twenty7Tec June 2021
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