Hello Readers,
With us coming towards the end of 2023, I have been looking into what house prices have been doing over the past 12 months and with the eye watering price rises caused by a surge in demand during the pandemic, it’s probably no surprise there has been a correction.
According to data from Zoopla, this correction has, so far, been at an average of 2.2% for the south east of England, which is pretty much in line with the conversations I am having with investors.
For those who hold property for the long term (or purchased before 2020) should be ok, but there was a problem of over-optimism pre-pandemic where landlords had put themselves at risk by over-leveraging and now they are having difficulties remortgaging.
For those who purchased during the pandemic (including a couple of investors I have spoken with), there is a real risk of negative equity. Whilst this is not too much of a problem for those with a five-year fixed mortgage, those who took out a two-year fix in 2021 or 2022 for example, could find their property worth less than they paid for it.
If we look at data from the land registry (which is always a little behind Zoopla), you will see how Medway is performing slightly better than the south east average, but is also on a downwards trajectory with a terraced house dropping in value by an average of £4,610 over the past year.
A huge jump in landlord mortgage arrears
This issue coupled with increased mortgage costs, a higher tax burden and rents that may have not been increased (sometimes for years) has contributed to a significant jump in landlord mortgage arrears.
This is a big concern and something I always warn investors about is being able to afford mortgage repayments should rates increase. Here’s the thing though; landlord mortgage arrears leapt by a staggering 29% in Q3 compared to Q2.
This is not a figure you can overlook and the total number of buy-to-let mortgages in arrears (2.5% or more of the outstanding balance) is 11,540, up from 8,945; a leap of over 2,500!
Things will get worse before they get better
Whilst I think we have seen mortgage rates peak, I certainly think things will continue on the downward trajectory over the coming 12 months with one article from Yahoo Finance quoting data from the OBR and The Telegraph commenting that:
“Property prices will hit a low between December 2024 and early 2025, with the average price falling to £266,000, a drop of 7.6pc from a high in the final quarter of 2022.”
There is light at the end of the tunnel however, as the headline figure is how by 2029, investors can expect house prices to be 6.4% higher than they were in 2022. This would make an average terraced house in Medway valued at £294,209; just over £17,000 up on 2022.
Always remember to be in it for the long term
Apart from learning the lessons of over-leveraging, investors must remember that property is not a short term investment.
Certainly, rental income does not tend to suffer the same fluctuations as a pension and can therefore provide a relatively stable income but to make a decent return I always advise a minimum of 10 years.
I recently came across this fascinating piece of research from Middleton Advisors Managing Director, Mark Parkinson that states how holding for nine years gives enough time for markets to recover from a downward cycle:
“UK residential property is unusual insomuch as — on average — the longer the holding period, the greater the annual capital growth: 7.7% after a 3-year hold, 8.0% after nine years and 8.7% after 20 years…
Nine years is a long-enough time to allow markets to recover from a downward cycle. So, even if you buy at the peak — i.e. right before a price correction — in every housing cycle since December 1962, prices would have recovered sufficiently after nine years to give you a positive nominal return.”
This is a fascinating quote and certainly gives food for thought in the current tough times. It’s important to compare the property market to a pension, where the average pot has, globally, lost around 13% this year.
Compared to a £300k property with a 75% loan to value mortgage that had an initial investment of £75,000 equity, this £75,000 would have dropped in value by around £6,600 compared to £9,750 from a pension. If we assume a property makes £250 profit after costs per month, that would technically bring the lost investment down from £6,600 to £3,600 – I know what I would prefer!
In these challenging economic times, taking a step back really can do wonders to how we approach and view our strategy!
Hasan
