3 Key Reasons why the North Devon property market is NOT going to CRASH in 2022 or 2023
As we enter the autumn/winter period, many so called ‘property pundits’ and newspapers are claiming that the pressure on homeowners, coupled with inflation and high energy prices means we are heading for a crash in 2022/23.
Whilst this makes great headlines to sell newspapers or to serve as ‘click bait’ online, the reality so far is very, very different. I should point out that this article is really an update on the same issues that were touted as the reasons for an impending crash back in May/June 2022. Whilst we have seen a further cooling off of the market there has not been a crash in prices or selling activity as a result. Most property insiders with any real knowledge of the fundamentals are not predicting anything near a crash but certainly a relatively mild correction in house prices spread over the
next year or two potentially.
Whilst interest rates are still set to rise, this is likely to be more moderate now as the Bank of England will have reduced concerns over accelerating inflation as a result of the governments U turn on their ‘mini budget’. This will have a knock-on effect on mortgage interest rates, with many lenders revising their rates and re-introducing products previously withdrawn.
In North Devon the fundamentals of the market are still VERY strong, particularly compared to the last and previous crashes.
The fundamentals are:
High demand – There are still high levels of local and national buyers with a long standing, pent up need to move or buy. Whilst some may have revised their budgets and taken a ‘wait and see’ approach the announcements today from the new Chancellor should reinvigorate these buyers into action.
Low supply – There is still historically low volumes of property available across all price ranges. Supply and demand are the main drivers for price sustainability and, dare I say it, continued growth.
Very good financial health – High numbers of cash buyers and relatively low risk mortgage buyers, albeit as previously mentioned many have revised their budgets and also therefore
their criteria. This is particularly the case in the top end of the market where buyers and sellers are actually much less likely to be impacted by the current economic pressures. Pressure on cost of living and increased interest rates are going to affect the lower income population much more than any other group. More affluent segments of the population are actually likely to benefit from the current economic conditions.
Over the last 15-20 years more people have shifted away from holding cash in bank accounts and interest rate based investments as the interest levels dropped literally through the floor. These are on the rise again but it will be sometime before they rival the returns from other investments. One area investors have favoured is investment in property, as residential and holiday rental
demand increased along with rental rates. The recent boom in house prices has meant that many have been able to ‘cash in’ by selling or re-mortgaging these assets and are now well set
to reinvest these dividends into a relatively low stock market or high yielding property portfolio. Rents will continue to rise for the foreseeable future. If house prices stabilise in the
next 12-24 months this only serves to improve yields for many buy to let investors. Those that have some significant savings in bank accounts will see a slight improvement in
their savings due to the moderate increases in interest rates. However, predictions for interest rate rises are relatively modest with rates predicted to rise up to perhaps 5% over the next 24
months – this being the case PRIOR to the recent mini-budget and subsequent reports of doom and gloom. This serves to persuade many that property is still the best investment with continuing price rises in the medium to long term and strong rental yields.
So let’s look at the fundamentals in more detail and how the risks associated with the last property crash compare with what’s happening right now. These are the 3 key reasons the north Devon property market isn’t going to crash
1. Proportion of Homeowners affected by increased Mortgage rates – Interest rates are going up, fact, but currently 56.25% of homeowner don’t have a mortgage (In 1988 it was just 35.8%) and so won’t be affected by rises. This leaves 43.75% of homeowners who might be affected, depending on their circumstances. Currently 85% of those homeowners with mortgages are on fixed rate deals the average rate being at a rate of 2.17%. Granted a small proportion of these will be ending soon and therefore the owners will face higher costs but this can be mitigated too. Read on to find out how.
Conclusion: For the next 2-5 years, the majority of homeowners won’t see increased costs due to mortgage rate rises and so this won’t be as significant an issue as it was in 2008.
IN ADDITION – Ah, but some might say higher interest rates combined with cost of living will create affordability issues! Well, yes and no. The mortgage lending rules changed in 2014 and became much more stringent. As a result, borrowers are stress tested against rates of 5%-6% not the 2%-3% they will be paying right now. Even if mortgage rates rise to around 5%-6%, this is well within the range that borrowers have been stress tested at. So whilst there will be some challenges there is enough wiggle room there to reduce the impact that might have otherwise been the case.
2. Negative Equity – In 1988 house prices crashed by 20% and in 2008 by 16%. The average predictions of a price correction now are about 5-8% over 2 years. In the 1980’s many homeowners had endowment mortgages which meant they weren’t paying off the loan but had an endowment policy which ran alongside their mortgage and was intended to be worth enough to clear the mortgage at the end of the term. This meant many home owners had very low levels of equity to start with. Since then this has been reversed, by 2008 85% of homeowners were on repayment mortgages which pay down the level of the loan and increase their equity over time. In addition, since 2008 the levels of 100% or 95% mortgage lending has vastly reduced meaning those that can afford to buy homes need to have greater equity or deposit payments in order to fund the purchase in the first place.
Conclusion: Negative equity will not be a major area of concern but will be used as an attention grabbing headline for the newspapers or click bait online as it generates high levels of fear or anxiety.
3. Abnormal rise in Supply combined with a dramatic reduction in Demand – Following on from the point above, a distinct feature of the global crash in 2008 was some of the reckless lending activities of the international and national financial institutions that led up to that crisis. For example, self-certified mortgages, which is when a lender does not require proof of
income from the borrower, effectively they certify themselves as being able to afford the loan. Sounds like madness to anyone now, doesn’t it!?
In 2007 a quarter of the new mortgage market were self-certified mortgages, which were popular with self-employed people and small business owners. So, when the economy became very difficult and their income dropped or was going to drop, they had a difficult choice to make. Either hold on and risk defaulting on their mortgage or promptly put their property on the market and sell. This additional supply contributed to falling prices in the early stages of the property price crash.
In addition, the banks were also lending huge proportions of the value of the property, for example, 95% mortgages were common. Worst still, many were borrowing 100% of the value and Northern Rock were infamously lending 125% in 2005, 2006 and 2007. This meant that negative equity, when the value of the property is lower than the loan/mortgage taken on the property, was a real and very scary possibility. This added more fuel to the panic for many homeowners, leading to even more properties flooding the market, with homeowners trying to sell their property before it was too late.
Last year (2021) only 2.4% of mortgages were 95%, and 0.2% of mortgages were 100%. This is because the mortgage lending rules were tightened in 2014.
Conclusion: So why did North Devon house prices drop so much in 2008? Well, a lot more North Devon properties came onto the market at the same time. Meanwhile,
mortgages became a lot harder to obtain as the financial meltdown kicked in and the ‘Credit Crunch’ was born. This massively reduced demand from buyers in the market.
Prices will drop when we have an oversupply and reduced demand, prices will crash when this happens very quickly, normally in a matter of months. This is something we
are not likely to see.
So where do we stand right now? We are in the middle of November 2022 and it is yet to be seen, but our prediction is that we are likely to see a more normal housing market over the next 2 years with prices perhaps cooling off in the short term, stabilising again into the middle of next year and then eventually rising into the second half of the year. Buyer demand will remain relatively strong and supply will increase slightly into the Spring of next year. The reality is that there is still a strong level of unsatisfied demand which will take some time to work through the market perhaps as long as another few years.
But based on the completely unforeseeable events that have unfolded since the pandemic, no one can really say. As always, our advice it to get the best advice you can based on your personal circumstances and work out a strategy that suits your needs.
If you have any questions about this article, please feel free to get in touch on 01271 410108 or email at email@example.com. I am always happy to help and offer free advice where I can!