House prices soared 14% in the last 12 months, how far will they fall?

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With inflation now into double figures, with all the financial shenanigans over the mini budget, the 10 year risk free bond yield at around 5 percent, it’s sending mortgages rates above 6 per cent, so how low will house prices go?

It seems inevitable prices will fall, but by how much? UK house price growth has seen an unbroken steady rise over many years, with the ONS recording a month by month increase since May 2012.

The steady growth has underwritten the success of buy-to-let investing, even though income yields have generally come down, this comforting capital growth has ensured a solid total return.

Neither Brexit nor the pandemic managed to derail this comfort zone for the average buy-to-let investor who saw the sector, a safe secure asset class, ideal for providing their pension nest egg. But all good things financial have a habit of coming to an end, and this time it took Kwasi Kwarteng’s mini-budget to finish off the rises, though things had been heading in that direction in any case.

Of course this was inevitable. Inflation had been rising steadily, accelerated by Putin’s invasion of Ukraine, a steady fall in the stock markets, and the value of the pound collapsing, especially against the US dollar. Much of UK imports are priced in the USDs, so oil, and a good deal of food and consumer durables become much more expensive to import. The country is so much poorer that it was just two years ago, so the question is, how far will UK property prices fall and for how long?

Housing shortages

Generally house prices are well supported by a shortage of housing and particularly in the private rented sector, so the slow down and fall may be tempered by that, but most property experts are predicting a price drop of between 5 and 15 per cent.

What the experts think

Knight Frank have come out with a forecast of a double-digit downturn, the property agent is predicting that house prices will fall by around 10 per cent over the next two years.

Although 2022 will see prices to have risen by 6 per cent, the agency thinks they will fall 5 per cent in 2023 and another 5 per cent in 2024 – a two year decline triggered by the spike in mortgage interest rates.

Senior personal finance analyst at interactive investor, Myron Jobson, has been quoted as saying:

“There is a clear and obvious lag between the latest official data on house prices and what is happening in the property market at present.

“More up-to-date house price indices paint a picture of a housing market that is running out steam, with rising mortgage rates and the escalating cost-of-living crisis cooling demand for homes.”

And head of UK residential research at Knight Frank, Tom Bill, has said:

“It’s a fairly safe bet that UK house prices have now peaked.

“The impact of rising mortgage rates will begin to hit demand and spending power in coming months, which we believe will lead to a fall of 10% over the next two years for UK prices.

“We may see mortgage rates fall to some extent if financial markets become more reassured by the government’s economic plan but the events of the last fortnight have been a reminder that the era of ultra-low rates is coming to an end.”

Credit Suisse and Capital Economics agree: both are forecasting a fall of between 10 per cent and 15 per cent, though property agents’ multi-franchise operator Belvoir (BLV), has said that although the combination of rising interest rates and the rising cost of living will put pressure on personal budgets, current mortgage levels were not high enough to reduce prices at all.

But, “If interest rates continue to rise, it is likely that asking prices may fall by between 5 and 10 per cent next year,” a Belvoir spokesperson told Investors’ Chronicle. “If, however, interest rates on fixed-term mortgages remain at their current levels, it is likely that prices will remain static and may even increase by 2 to 3 per cent.”

Meanwhile enquires by the Investors Chronicle found Savills (SVS) saying there will be “downward pressure” on house prices but wouldn’t be drawn to a figure until after the Bank of England’s (BoE) rates meeting on 3 November, and likewise property agents CBRE would not commit to a figure, though it “expect[s] the UK residential market to slow in 2023”.

Property agents JLL predict that house prices will drop over the course of next year and that it will come out with a number “in a week or two”. It thought that transactions are likely to drop 30 per cent in the short term. “The basket of properties that does transact will include a higher proportion of motivated sellers interacting with opportunistic buyers,” said JLL’s head of residential and living research, Nick Whitten.

Risk of recession

Interest rates coupled rising inflation, and sky high energy prices are the drivers of this decline leading to the risk of a recession are. Home buyers and home movers as well as potential new buy-to-let investors will find it increasingly difficult to finance new purchases.

Conversely, whereas most homebuyers and many buy-to-let investors use mortgages to buy homes, the decline could be a major buying opportunity for cash buyers, given the buoyancy of demand for rentals.

Experts are predicting that the Bank of England will continue to raise interest rates in a bid to kill off persistent inflation, where the bank base rate could increase from its present 2.25 per cent to as high as 6 per cent next year.

Consumer price index (CPI) inflation has now reached 10.1% for the 12 months to September 2022, the highest level for 40 years. It will take time to tame the beast with higher interest rates, and in the meantime one group of workers after another will strive to maintain their standard of living at the expense of the rest, fighting for a share of an ever decreasing pie.

View Full Article: House prices soared 14% in the last 12 months, how far will they fall?

Some Private Landlords Will Pay More Income Tax Than They Make In Profit

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Is it any wonder that so many landlords are selling some of their properties to pay down debt at the same time as restructuring the ownership of their rental property businesses?

At the foot of this article, I have shared a fantastic video interview where two Letting Agents from Christopher Shaw Residential Lettings interview Alex Norian

View Full Article: Some Private Landlords Will Pay More Income Tax Than They Make In Profit

Prominent landlord tells BBC how his mortgage payments now outstrip rental income

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A prominent landlord in the North East has told the BBC’s Newsnight programme that unless variable mortgage rates reduce he will have to start ‘handing the keys back’ to the ten or so properties within his portfolio.

Talking to reporter Sam Gruet (pictured), landlord Colin Campbell (main image), who is also chairman of the South Tyneside Landlords Association, said his income from rent was now outstripped by his rising mortgage payments.

“My market is the people who are on Housing Benefit or Universal Credit and I’m usually paid their rent direct by the Government,” he said.

“But now the interest rates is so high that the rent coming in from the Government, which here is £475 a month per tenant, is less than I’m having to pay the building society for the next two years.

“So if I’m ‘Joe average’ landlord in a very short time I’ll have to hand the keys back.”

Campbell went on to say that given his experience, the private rented sector is set to shrink significantly and that, consequently, unless local and national governments start building council houses in greater numbers, “the place is going to be full of desperate people in guest houses and hotels because there will be nowhere for them to live,” he said.

The 75-year-old landlord, who in the past has also criticised selective licensing in Tyneside, appeared alongside a local letting agent who recounted examples of tenants competing more and more for a shrinking number of properties, and a student tenant priced out of Newcastle city centre.

Watch the interviews in full.

View Full Article: Prominent landlord tells BBC how his mortgage payments now outstrip rental income

Mortgage rate rises major threat to London landlord profitability, says Moody’s

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More than a third of landlords (38%) with fixed-rate mortgages due to end between now and the end of 2024 will end up with loss-making properties if rates rise four percentage points higher than their current deals.

According to credit ratings agency Moody’s, as interest rates rise, these investors face taking a big hit because their interest coverage ratios (ICR) – the ratio of the gross rental income to mortgage payments – will fall below 110%. Two-thirds of landlords on fixed-rate mortgages will come to the end of their deals in the next two years.

Half of the nation’s worst-performing investment properties are in the capital where landlords would have to raise rents by 37% to keep them solvent.

Loss-making

More than a fifth (22%) of the buy-to-let properties at risk of becoming loss-making are in the Southeast where landlords will need to hike rents by 28% to make their properties mortgageable and profitable, while across the rest of the UK, rents would need to be raised by 24%.

Moody’s analyst Alexis Rivet (pictured) told The Telegraph that London will be home to the largest share of landlords falling below the 110% ICR benchmark because rental growth in the capital has lagged behind the rest of the country during the pandemic. Rents on newly-let properties in London are soaring at a record rate, but the measure that matters for landlords is the average rent across all rental properties. 

“Those landlords whose ICR falls below 110% have three options,” says Rivet. “They can increase the rent, they can reduce the amount they can borrow, or they can sell the property.”

However, many would struggle to make such sizeable rent increases during the cost-of-living crisis while tenants are being hit by energy price rises and a record drop in real earnings.

View Full Article: Mortgage rate rises major threat to London landlord profitability, says Moody’s

Research reveals cost benefits to tenants of living in an HMO

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Renters living in a one-bedroom flat can combat the cost of living by moving into an affordable shared house, while HMOs provide landlords with a confidence-building financial buffer against increasing portfolio expenses.

We recently conducted an analysis which revealed that renting a high-quality room in an HMO is more than 50% cheaper compared to single-tenancy letting.

View Full Article: Research reveals cost benefits to tenants of living in an HMO

Selective licensing for landlords is a massive rip-off

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Let’s call selective licensing for landlords what it is: an unfair mandatory tax that is a massive rip-off.

Sure, council officers and councillors will tell everyone how they are going to crack down on rogue landlords, but they don’t actually do that.

View Full Article: Selective licensing for landlords is a massive rip-off

LATEST: Savills predicts 8% of all rented homes will be build-to-rent by 2032

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The number of build-to-rent (BTR) homes is set to increase five-fold in the next decade – from 76,800 to more than 380,000 – according to research from the British Property Federation and Savills.

They predict that the sector could be worth £170 billion by 2032 when 8% of UK homes for rent will be purpose-built, up from 1.5% today. Single-family homes are set to make up almost a fifth (18%) of BTR stock in ten years’ time, up from 12%.

Since the UK’s pilot scheme opened at the Stratford Olympic Village in 2012, the neighbourhood has become a BTR success story and home to 7,000 residents. Ten years on, £30 billion has been invested in the sector nationwide, which now has 163,400 homes in the planning and delivery pipeline.

Fans of the model

While developers and investors initially focused on London, since 2017 there has been a shift towards other cities led by Manchester, Birmingham and Leeds. Many local authorities are now fans of the model, with 47% having BTR in their housing pipelines, compared with just 20% five years ago.

Jacqui Daly, director of residential research at Savills, believes that the demand for high-quality, professionally managed homes for rent is only going to increase, not only for the core demographic of graduates and young professionals but also for single families, couples and individuals of all ages.

Ian Fletcher (pictured), British Property Federation’s director of policy, adds: “The current market conditions underline that we must continue to diversify housing supply in order to drive economic growth, and the government must continue to look at how planning reform, more support for local authorities and the release of land for development can enable the sector to continue its upward trajectory.”

View Full Article: LATEST: Savills predicts 8% of all rented homes will be build-to-rent by 2032

LATEST: Letting agents report ‘rapid rise’ in tenants seeking properties to rent

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The number of home-hunting tenants has continued to climb rapidly this year while the number of available homes to rent has come to a standstill.

Propertymark’s latest housing insight report reveals that since February, letting agents have seen an 88% increase in new tenants wanting to register, reaching a new peak of 147 in September, despite rising rents.

In contrast, each member branch reports having just 11 properties available since June. This means an average Propertymark letting agent would have had one property available for 13 new registrants in September – and that’s on top of those already registered.

Rising rents

It found that 74% of agents reported month-on-month rent prices increasing last month, down slightly from 82% in July but still much higher than the pre-pandemic average for September of 34%.

Propertymark CEO Nathan Emerson (pictured) says the UK sector’s reform continues to affect the sentiment of landlords who have also been hit with rising costs, impacting their annual yields. As a result, the trade body believes there will be no end to affordability issues until many more homes are added to the market.

“The pressure is on for private landlords, and the situation is not improving,” adds Emerson. “Raising interest rates, increasing legislation and tax burdens mean that many landlords are faced with increasing their rent to cover their rising costs or to cut their losses and sell.

“Landlords have been demonised recently, but in truth they provide homes for those who can’t be served by social housing or afford to buy.”

Read more: Complete 2022/2023 tax guide for landlords.

Pic credit: TheConnorFinn/Twitter

View Full Article: LATEST: Letting agents report ‘rapid rise’ in tenants seeking properties to rent

Major bank inks deal with Shelter to help customers fight their landlords

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HSBC banking brand First Direct has signed up Shelter to offer its customers living within the private rental sector advice to fight their landlords.

This includes help on how to fend off unaffordable rent increases and eviction notices.

The deal is to last for 12 months and will see tenants offered the service for free via a dedicated team within First Direct who will work alongside experts from Shelter.

First Direct says the backdrop of fast-rising rents within the UK private rental sector and the wider cost-of-living crisis prompted it to set up the partnership with Shelter, which will also offer debt and welfare support as well as housing advice.

Chris Pitt (pictured), CEO of First Direct says: “No-one should face the prospect of homelessness. Our partnership with Shelter aims to support private renters who find themselves in difficulty.

“We believe that our customers should feel they can come to us for help when they need it.  

“Our dedicated team and the experts from Shelter will be taking a hands-on approach to tackling the difficulties many private renters are facing as landlords pass on the costs of rising bills and mortgage payments.

“This is just part of the support we’re offering customers during this difficult time.” 

First Direct is freer than many other banks to sign this sort of deal because it does not offer landlords insurance or buy-to-let mortgages.

Frontline services

Polly Neate, Chief Executive of Shelter, adds: “Our partnership with first direct will help their customers access vital housing advice and support at a time when they need it most.

“It will also help our frontline services continue providing free and expert support to thousands of other people facing homelessness, as well as helping us campaign for lasting change.” 

View Full Article: Major bank inks deal with Shelter to help customers fight their landlords

Rising interest rates and tax changes – finding certainty in uncertain times

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Manoj Varsani, founder and CEO at Hammock, the property finance platform for landlords, looks at the implications of the government’s Making Tax Digital initiative.

Everywhere you look and in everything you do, it’s seemingly impossible to avoid reminders of the wider economic downturn and the likelihood of an upcoming recession.

View Full Article: Rising interest rates and tax changes – finding certainty in uncertain times