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A question of economics

Kate Faulkner asks, will wages, interest rates and unemployment impact less on property prices in today’s market?

Kate Faulkner

Link to Property Prices feature

It’s interesting to read all the investment comments about the property market for 2022, as it’s clear there are some investors that are desperate to latch onto anything that might mean the market goes south and they can ‘bag a bargain’, but will that happen? Will property prices collapse after the rally we’ve seen since the market opened in May 2020?

Having looked at every reason for the market to fall, the only real issue I can see just now which would cause demand to subside in the property market for 2022, is the forecasted rise in interest rates to try and curb inflation. There were rumours this would come as soon as November, but it didn’t happen and as such, rates are likely to rise at the next meeting of the MPC on Thursday 16th December.

The only issue I can see to cause demand to subside, is a rise in interest rates.

However, I am not sure this will have a dramatic effect on the market and certainly not send it into reverse as some are predicting (or hoping for!), and this is because I think the structure of the property market has changed and changed forever.

For example, when affordability was based on 3.5x income levels prior to 2000 and most people owned a home with a mortgage, if property prices went up by more than 3.5x the ‘average income’, then prices would typically fall back.

Affordability, mortgages and cash

But most mortgages are now based on affordability checks and around 30-35% of people buy with cash, so house prices aren’t as tied to wages as they have been in the past. The only exception to this is in expensive areas such as London, the East and South West where the restrictions to the amount that can be lent at 4.5x income has helped keep prices down over the last 18 months where more affordable areas have seen rapid rises.

Secondly, as stated above, 30 per cent of people buying, buy with cash and have no mortgage at all, so they won’t be affected. And when you add to this that over 50 per cent of people that own a home don’t have a mortgage either, it’s less likely that anyone will be forced to move due to a rise in mortgage costs. And for those that do have mortgages, these aren’t the 125% mortgages seen before the last crash and they aren’t paying 5-7% rates. In the main, nearly 80 per cent of those with a mortgage have a fixed rate, many for 5 years, and for ‘newcomers’ to the market, they pay a repayment mortgage which has been assessed for affordability at a higher rate than the few percent many people are paying. So even if mortgage costs do go up a per cent or more, it’s unlikely to have the effect it has had in the past.

Thirdly, we were expecting some pretty awful unemployment figures at the end of furlough, but this is now not on the cards. However, even if it was, the areas that were most likely to suffer were catering, hospitality and eventing and we know that many people in this sector are likely to be renting, not homeowners, reducing the impact of any growth in unemployment affecting house prices and causing people to sell.

Boom, crash?

And finally, when we’ve had ‘crashes’ before, it’s because the market has seen a massive boom beforehand. Although the price rises over the last 18 months could be considered ‘boom’ territory, there are two reasons why it isn’t. The first is that when you look over time, property price rises in the Midlands, North, Scotland and Wales have been ‘subdued’ since 2005 and the recent rises mean that average property prices have only just kept up with inflation, they haven’t ‘runaway’, effectively they have ‘caught up’ with where they should have been.

Secondly, it appears that the double digit ‘average’ rises have been exaggerating actual price growth. This is because in the last 18 months we have seen a change in the mix of houses being sold, versus flats, for example, and when you look at the likes of Hometrack’s index or Reallymoving’s Market Intelligence report, which take this into account, both of these see price rises ‘on average’ in single, not double figures.

Of course, I could be wrong, there may be another ‘shock’ that does reduce demand or force people to sell post the pandemic, but for now, it’s difficult to see what could happen that would send the market into an oversupply versus an undersupply situation.

To be clear, I’m not suggesting this is the end of ‘boom and bust’ in the property market, but if we can reduce the boom and the bust moving forward and have more stable property prices, demand and supply, that would definitely be good news for buyers, sellers and the industry.

January 4, 2022

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