House prices and stuff

The lack of housing supply, super low borrowing costs and demand for outside space has led to fast-paced growth in property prices. It is hard to see how there will be a property crash when in real terms, prices are in line with inflation, and the shortfall in property stock remains a constant problem. Though rising interest rates are tempering buyers. enthusiasm,, in historic terms, borrowing costs still present reasonable value. Looking forward to 2023, should inflation not fall and interest rates continue to rise, property values may see a correction to compensate for additional finance costs. However, this may not be the case if inflation eases and interest rates remain relatively attractive. We may see short-term corrections in regional locations, where buyers fought over idyllic property and areas during the pandemic. Second homes being costly to run and office routines back in full swing may cause a slump in demand for the country and holiday home market. A compensating factor for the market in general may be the relatively weak pound and the international appeal of London which may entice foreign property investment into the capital. The supply of property is also affecting the rental market. Landlords have faced increased tax bills and now higher mortgage costs, which will mean higher rents are necessary for them to trade. Many landlords have restructured their properties to HMOs to realise better returns, increasing the number of bedrooms and letting to students or professional sharers over families. The losers are families who suffer as a result of diminished housing stock, and of the available property, asking rents will be higher.

House prices are long overdue a correction, and I think they'll fall in the second half of the year. That said, the government, FCA and Bank of England are all desperate to prevent this, almost at any cost it seems. Hence why the FCA have just announced the removal of the scrap the affordability stress test, why Rishi Sunak introduced the stamp duty holiday, and why the Bank of England seem petrified about raising the base rate too far. The housing market is a house of cards which could soon collapse.

The Bank of England scrapping affordability stress tests will do very little for the average person. The reason for this is that most lenders have amended their affordability calculators to factor in higher costs of living and therefore giving clients less disposable income to go towards a mortgage payment. In addition the loan to income cap which limits your loan to income ratio to 4.5x income for most lenders (although some will go higher) is still in place and this is a much more significant driver of affordability for most. Given the current situation with cost of living affordability should be top of all advisers conversations at the moment.

With all the financial headwinds the housing market is facing, it really should have slowed down months ago. No one seems to have told the housing market this, though, and it's busy writing its own economic rules. My best guess would be a slowdown in house price growth over the course of the next year, maybe even to low single digits with some localised negative growth numbers. Do I see a nationwide fall in house prices and negative equity? robably not, as long as the flow of mortgage funds remains then enough people will still want and need to move home. That flow of mortgage money could be helped by the Bank of England's decision to remove its rules around the stress testing of mortgage affordability models. A lot has been said about this being a really bad time to do this and a return to 'the bad old days', but the Bank's stress test being removed does not remove the Financial Conduct Authority's rules around responsible lending, so lenders will still be stress testing mortgage applications; the difference is now they have the ability to choose the level of that stress test, as opposed to having it dictated it to them by Threadneedle Street. It has been said many times before that we are not building enough homes, this being the primary cause of rocketing house price inflation over the decades. So, why aren't we? The first issue is that there is no commercial desire to - if you were one of the (very few) large National house builders, would you be in a rush to build lots of new houses and slash your profit per unit? Probably not. The other issue is planning and NIMBYism. We all want more houses, just so long as they're built somewhere else.

Scrapping affordability tests now, just at the point they are most needed, is a bit like chucking the parachute out as your plane engine stops. The argument is that multiples of earning are perfectly fine, just as they were during the credit crunch. Affordability calculations were introduced post credit crunch because part of the failure in the mortgage market was down to just looking at mortgage multiples. Affordability calculations take into account the other myriad expenditures a household may have. This is especially relevant now as we know that everything from household utilities to the cost of school uniforms is going up. This will increasingly squeeze family budgets and make income multiples less and less accurate as a measure of risk and affordability. Welcome to the lending Wild West, where Banks are once again able to police themselves. Higher risk business is profitable business, as it carries a higher interest rate. Those who believe that relaxing regulatory rules for lenders at this point is a good idea have very short memories. Who would want to be a valuer currently? With home buyers having to watch their budgets diminishing daily due to the cost of living crisis and few people looking to sell as they bunker down for the coming storm, this has all the making of a stagnant morass. The most likely change to this unfortunately appears to be the risk of defaults if we see people start to be made redundant. Fortunately that seems to be a little way off for now but Winter may be the crunch point.

The Bank of England scrapping stress testing on mortgages is just like a mirage in the desert for many potential house buyers. It looks promising from a distance but when you get up close it's just an illusion. With the average house price being over 9x the average sole income, unless lenders' income multipliers increase, it will make very little difference to the average housebuyer. New homes sadly aren't being built quick enough and the proposed quota is never achieved. Many developments get stuck in planning for years and until there is a quicker process to get sites approved the ambitious plans for a certain number of new homes won't ever materialise. We could be close to the top of the rollercoaster with regards to house prices, although the market still feels busy. We're seeing an influx of customers who have been searching for houses for over six months finally secure a home. Only a few months ago, these people were continuously being outbid.

We don’t see prices falling, simple economics would suggest with lowering supply and a frustrated pool of demanding buyers, prices are likely to continue to grow. It feels like it will be a while before the demand is satisfied. I think it waits to be seen if buyers have “paid over the odds.” It was clearly necessary to secure the house they wanted. Chances are, they could currently sell their house for more. If the market does cool and buyers have no need to sell, time should auto-correct any negative equity.

Rates are almost certainly set to increase, but we don't need to panic as they are still low historically. The lack of stock will continue to support prices through the cost of living crisis, even if they come off the boil a little. What we desperately need is more affordable housing stock, not stock that is snapped up by landlords or builders to make a fortune on. Reliable, affordable housing for everyday people.

The unsettling combination of Inflation, rate rises and the war in Ukraine certainly suggests we are heading towards a concerning climax but the property market has continuously shone through the face of uncertainty and my prediction is that we will see more of the same. I do think we will see adaptive behaviour from homeowners as many have borrowed to their maximum capacity on the lowest interest rates in our history so they may start to struggle with increased payments on rates, which have since doubled. One particular change I think we may see is borrowers asking to lengthen their mortgage terms to reduce the monthly payments. I also think we may see an increased number of owners requesting consent to let their property and moving back in with family, rather than climbing the property ladder as they would have done previously.

Insatiable demand from an ever-growing population, coupled with a limited supply of housing and a slowing production line of new build development will see a continued upward path of house prices. Whilst pockets of the UK will see peaks and troughs, a steady and continued climb upwards is most likely, even with interest rates expected to rise to 3% in the short term. It is highly unlikely we will see major issues with negative equity even if house prices stand still or momentarily drop. Mortgage lenders are still cautious, with 90% LTV and lower providing an adequate protective buffer for lenders and homeowners alike. Scrapping affordability tests is a daft move indeed, as without stringent checks on the ability of the borrower to make payments under pressure all parties are being set up for a fall. It is irresponsible for any lending but for first-time buyers making the biggest purchase of their life it is absolute madness. Rental demand and competition levels are insane at the moment. 30 plus viewings on the day of launch, over asking offers and six months rent in advance are commonplace. If we don’t build affordable, low cost, new homes for 18 to 35 year olds we are effectively sending the message that we don’t care about homeownership for all. We aren't building anywhere near enough new homes, the planning system is an absolute mess, and political infighting and populist political games from central government down to local councils are perpetuating a housing crisis in waiting. It is imperative for a sustainable future for the UK that we do exactly what has been set out by Central Government and that is to build back better in order to meet the key Government policy targets of 300,000 new homes a year and a net zero carbon-efficient economy. New build development provide good quality, affordable housing that require minimal maintenance and refurbishment costs in the critical first five-year period of homeownership. Additional benefits range from local employment and apprenticeships to tax revenues and improved amenities. Government backed schemes designed to help first-time buyers are all focused on new build stock. We need smaller town centre-based units in good areas that provide affordable and accessible homes for first-time buyers and young people.