Rugby Homeowners and their £1.37 billion Debt

Over the last 12 months, the UK has decided to leave the EU, have a General Election with a result that didn’t go to plan for Mrs May and to add insult to injury, our American cousins elected Donald Trump as the 45th President of the United States. It could be said this should have caused some unnecessary unpredictability into the UK property market.

The reality is that the housing and mortgage market (for the time being) has shown a noteworthy resilience. Indeed on the back of the Monetary Policy pursued by the Bank of England there has been a notable improvement of macro-economic conditions! In July for example it was announced that we are witness to the lowest levels of unemployment for nearly 50 years. Furthermore, despite the UK construction industry building 21% more properties than same time the previous year, there has still been a disproportionate increase in demand for housing, particularly in the most thriving areas of the Country. Repossessions too are also at an all-time low at 3,985 for the last Quarter (Q1 2017) from a high of 29,145 in Q1 2009. All these things have resulted in…

Property values in Rugby according to the

Land Registry are 9.59% higher than a year ago

So, what does all this mean for the homeowners and landlords of Rugby, especially in relation to property prices moving forward?

One vital bellwether of the property market (and property values) is the mortgage market. The UK mortgage market is worth £961,653,701,493 (that’s £961bn) and it representative of 13,314,512 mortgages (interestingly, the UK’s mortgage market is the largest in Europe in terms of amount lent per year and the total value of outstanding loans). Uncertainty causes banks to stop lending – look what happened in the credit crunch and that seriously affects property prices.

Roll the clock back to 2007, and nobody had heard of the term ‘credit crunch’, but now the expression has entered our everyday language.  It took a few months throughout the autumn of 2007, before the crunch started to hit the Rugby property market, but in late 2007, and for the following year and half, Rugby property values dropped each month like the notorious heavy lead balloon, meaning …

The credit crunch caused Rugby property values to drop by 20.6%

Under the sustained pressure of the Credit Crunch, the Bank of England realised that the UK economy was stalling in the early autumn of 2008. Loan book lending (sub-prime phenomenon) in the US and across the world was the trigger for this pressure. In a bid to stimulate the British economy there were six successive interest rates drops between October 2008 and March 2009; this resulted in interest rates falling from 5% to 0.5%!

Thankfully, after a period of stagnation, the Rugby property market started to recover slowly in 2011 as certainty returned to the economy as a whole and Rugby property values really took off in 2013 as the economy sped upwards. Thankfully, the ‘fire’ was taken out of the property market in Spring 2015 (otherwise we could have had another boom and bust scenario like we had in the 1960’s, 70’s and 80’s), with new mortgage lending rules. Throughout 2016, we saw a return to more realistic and stable medium term property price growth. Interestingly, property prices recovered in Rugby from the post Credit Crunch 2009 dip and are now 52.5% higher than they were in 2009.

Now, as we enter the summer of 2017, with the Conservatives having been re-elected on their slender majority, the Rugby property market has recouped its composure and in fact, there has been some aggressive competition among mortgage lenders, which has driven mortgage rates down to record lows. This is good news for Rugby homeowners and landlords, over the last few months a mortgage price war has broken out between lenders, with many slashing the rates on their deals to the lowest they have ever offered.  For example, last month, HSBC launched a 1.69% five-year fixed mortgage!

Interestingly, according to the Council of Mortgage Lenders, the level of mortgage lending had soared to an all-time high in the UK.

In the Rugby postcodes of CV21, CV22, CV23, if you added up everyone’s mortgage, it would total £1,372,395,129!

Since 1977, the average Bank of England interest rate has been 6.65%, making the current 323 year all time low rate of 0.25% very low indeed. Thankfully, the proportion of borrowers fixing their mortgage rate has gone from 31.52% in the autumn of 2012 to the current 59.3%. If you haven’t fixed – maybe you should follow the majority?

In my modest opinion, especially if things do get a little rocky and uncertainty seeps back in the coming years (and nobody knows what will happen on that front), one thing I know is for certain, interest rates can only go one way from their 300 year ultra 0.25% low level … and that is why I consider it important to highlight this to all the homeowners and landlords of Rugby. Maybe, just maybe, you might want to consider taking some advice from a qualified mortgage adviser? There are plenty of them in Rugby.

If you are interested in the Rugby Property Market, you might learn something by visiting http://www.rugbypropertyblog.wordpress.com

 

Iain Havell

Rugby Buy-To-Let Predictions up to 2037

On several occasions over the last few months, in my Rugby Property Blog, I predicted that the rate of rental inflation (i.e. how much rents are rising by) had eased over the last year. At the same time I felt that in some parts of the UK rents had actually dropped for the first time in over eight years. Recent research backs up this prediction.

Rents in Rugby for new tenancies only grew by 0.4% in the last 12 months (i.e. not existing tenants experiencing rental increases from their existing landlord). When we compare that current rate with the historical rental inflation in Rugby, an interesting pattern emerges ..

  • 2016 – Rental Inflation in Rugby was 2.2%
  • 2015 – Rental Inflation in Rugby was 6.9%
  • 2014 – Rental Inflation in Rugby was 0.7%

The reason behind this change depends on which side of the demand/supply equation you are looking from. On the demand side (from the tenants point of view) there is the uncertainty of Brexit and the fact that salaries are not keeping up with inflation for the first time in three years. Critically this means tenants have less disposable income to pay their rent. As an aside, it is interesting to note that nationally, rent accounts for 29% of a tenant’s take home pay (Denton House).

On the supply side of the equation (landlords point of view) Brexit also creates uncertainty. However, the biggest issue was a massive upsurge of new rental properties coming on to the market in late 2016, caused by George Osborne’s new 3% stamp duty tax for landlords in the first part of 2016. This meant a lot of new rental properties were ‘dropped’ on to the rental market all at the same time. The greater choice of rental properties for tenants curtailed rental growth/inflation. A slight softening of Rugby property prices has compounded this.  Figures from The Bank of England suggested that first time buyers rose over the last 12 months as some were more inclined to buy instead of rent. Together, these factors played a part in the ongoing moderation of rental growth.

The lead up to the General Election in May didn’t help: after all people don’t like doubt and uncertainty. So now that we have a mandate for going forward over the next 5 years hopefully that has removed any stumbling blocks stopping tenants making the decision to move home.

Whether it be ‘hard’ or ‘soft’ Brexit negotiations (and with the Election result the Tory’s might have to be ‘softer’ on those negotiations) the simple fact is, we aren’t building enough properties for us to live in. Both in Rugby, the West Midlands and the wider UK, long-term population trends imply that rents will soon be growing faster than inflation again. Look at the projections by the Office of National Statistics.

Population Estimates for Rugby Borough Council over the next 20 years
2016 (actual) 2021 2026 2031 2036
104,241 108,797 112,917 116,361 119,665

Tenants will still require a vibrant and growing rental sector to deliver them housing options in a timely manner. As the population grows in Rugby, and wider afield, any restriction to the supply of rental properties (brought about by poor returns for landlords) cannot be in the long-term best interest of tenants. Simply put rents must go up!

The fact is that I see this as a short-term blip and rents will continue to grow in the coming years. With rents only accounting for 29% of a tenants’ disposable income, the ability for most tenants to absorb a rent increase does exist.

 

Iain Havell

Rugby Baby Boomers vs. Rugby Millennials (Part 2)

Well last week’s article “The Unfairness of the Rugby Baby Boomer’s £2,891,690,000 windfall?” caused a stir. In it we looked at a young family member of mine who was arguing the case that Millennials (those born after 1985) were suffering on the back of the older generation in Rugby. They claimed the older generation had seen the benefit of the cumulative value of Rugby properties significantly increasing over the last 25/30 years (which I calculated at  £2.89bn since 1990). In addition many of the older generation (the baby boomers) had fantastic pensions, which meant the younger generation were priced out of the Rugby housing market.

I replied there should be no surprise though that the older members of our society hold considerably more of our country’s wealth than the younger generation. This wealth is accrued and saved across someone’s life, and reaches it’s peak about the time of retirement. If we are to comprehend differing wealth levels between generations we need to compare ‘apples with apples’. It is much more important to track the wealth held by different generations at the same age, i.e. what was ‘real’ wealth of the 30-something couple in the 1960’s compared to a 30-something couple say in the 1980’s or 2010’s?

Looking back over the last 120 years at various economic studies, this growth in wealth from one generation to the next (at the age range), only happened over a 30 year period of between 1960 and late 1980’s. Since the 1990’s, wealth has not improved across the generations, in the same age range.

So could it be all about these people saving? The fact is, in the last 10 years, UK households have saved on average 7.5% to 8% of the household income into savings accounts, compared to an average of 6% to 7% in the late 1960’s and 1970’s. The baby boomers haven’t been actively squirreling away their cash for the last 30 or 40 years in savings accounts to accumulate their wealth. Most of their gains have been passive, lucky bonuses gained on the back of things out of their control (unanticipated and massive property value rises or people living longer making final salary pensions more valuable) – it’s not their fault!

…and herein lies the issue … it is assumed that these Millennials aren’t buying property in the same numbers like the older generation did in the past (because most of their wealth has come from house price inflation). The Millennials have often been described as ‘Generation Rent’, because they rent as opposed to buying property – because we are told they cant buy.

However, when Rugby mortgage payments are measured against monthly income, home ownership is affordable by historic standards because mortgage rates are currently so low. As you can see, the ratio of average house price to average earnings in Rugby hasn’t vastly changed over the last decade …

  • 2008 average house price to average earnings of a single person in Rugby 5.98 to 1
  • 2017 average house price to average earnings of a single person in Rugby 6.52 to 1

(i.e. in 2008, the average house price in Rugby was 5.98 times more than the average person’s salary in Rugby and this has only risen to 6.52 in 2017 – and all this off the property boom of the early 2010’s)

95% first-time buyer mortgages were reintroduced in 2010. The average interest rate charged for those 95% FTB mortgages has slowly dropped from around 5.5% in 2009 to the current 4% rate. Back in the 1980’s/1990’s mortgage interest rates were between 8% and 10%, and one time in the early 1990’s, reached 15%! The main difference between the two periods was the absolute borrowing relative to income is greater now than in the 1980’s. They call this the ‘mortgage to joint household income ratio’. In the 1980’s the mortgage was between 1.8x to 2x joint income; today it is 3.4x to 3.6x salary.

The simple fact is, in the majority of cases, it is still cheaper for a first-time buyer to buy a property with a 95% mortgage, than it is rent it. The barrier for these Millennials, has to be finding the 5% mortgage deposit – instead of being able to afford monthly mortgage outgoings at the current 95% mortgage rates?

Millennials make up 6,825 households in the Rugby Borough Council area (or 16.2% of all households in the area).  However, behind the doom and gloom, surprisingly, 39.6% did save up the 5% deposit and do in fact own their own home (that surprised you didn’t it!)

Nonetheless, the majority of Millennials in the area still do rent from a landlord (2,678 Millennial households to be exact). Yet, they have a choice. Buckle down and do what their parents did and go without the nice things in life for a couple of years i.e. the holidays, out on the town two times a week, the annual upgraded mobile phones, the £100 a month Satellite packages and save for a 5% mortgage deposit … or live in a lovely rented house or apartment (because they are nowadays), without any maintenance bills and live a life with no intention of buying (because renting doesn’t have a stigma anymore like it did in the 1960’s/70’s secretly hoping their parents don’t spend all their inheritance so they can buy a property later in life – like they do in central Europe.

Neither decision is right or wrong – although it is still a choice. Until Millennials decide to change their choices – that is the reason why the country’s private rental sector will continue to grow for the next 30 years – meaning happy tenants and happy landlords.

Iain Havell

The Unfairness of the Rugby Baby Boomer’s £2,891,690,000 Windfall? (Part 1)

Recently I was having a chat with one of my second cousins at a big family get-together. The last time I had seen them their children were in their early teens. Now their children are all grown up, have partners, dogs and children. Wow – how time flies!

So, I got talking over a glass of lemonade with my 2nd cousins and a couple of their children, about the times of 15% interest rates and how the more mature members of our family had to endure the 3 day week, 20% inflation and the threat of nuclear annihilation in 4 minutes .. so, foolishly, I said what with all the opportunities youngsters had today, they had never had it so good!

Trust one of my cousin’s children to have gained some financial/economics qualifications before going to Law School, as they debated with me the genuine economic predicament of Millennials and how a combination of student debt, unemployment, global proliferation, EU migration and rising house values is reducing the salaries and outlook of masses of the UK’s younger generation, causing an unparalleled disparity of wealth between the generations. So of course I asked why that was?

They said Millennials were paying the price for the UK’s most spectacular bookkeeping catastrophe to date (bigger than the Bank bailout after the Credit Crunch). Back in the 1950’s and 1960’s, nobody predicted us Brit’s would live as long as we do today, and in such abundant numbers. The OAP pensions that were promised in the past (be that Government State Pension or Company Final Salary Schemes) which appeared to be nothing fancy at the time, are now burdensomely over-lavish, and that is hurting the Millennials of today and will do so for years to come.

Bringing it back to property, the young 2nd cousin once removed ‘soon to be’ lawyer, stated that baby boomers born between 1945 and 1965 have been big recipients of the vast rising house prices over the 1970’s/80’s/90’s and 2000’s. Add to that their decent pensions, meaning cumulatively, their wealth has grown exponentially through no skill of their own.

This disparity of wealth between the older and younger generations could have unparalleled consequences for the living standards of younger Millennials…. So Houston Rugby – do we have a problem??

Well Rugby Property Blog readers, you know I like a challenge. I can’t disagree with some of what the younger family member said, but there are always two sides to every story, so I thought I would do some homework on the matter ..

Since 1990, the average value of a property in Rugby has risen from £84,700 to its current level of £246,500. As there are a total of 17,872 homeowners aged over 50 in Rugby; that means there has been a £2.89bn windfall for those Rugby homeowners fortunate enough to own their own homes during the property boom of the 1990s and early 2000’s.

I must admit that the growth in property values in the 1990’s and 2000’s certainly helped many of Rugby’s baby boomers. The figures do appear to put into reverse gear the perceived wisdom that each generation gets wealthier than the previous one  … and so with all this wealth, the figures do back up the youngsters argument that Millennials are being priced out of home ownership.

Or do they? Are they?

Next week, I will carry on this discussion where I will give the Baby Boomer’s defence to the prosecution’s case!

Stamp Duty Hike Means Act Fast for Investment Buyers!

The Chancellor of the Exchequer announced a 3% hike in Stamp Duty Land Tax (SDLT) on buy-to-let properties and second homes in the 2016 Autumn Statement. This was met with “outrage” from various quarters, such as the Association of Residential Letting Agents (ARLA) and others who describe it as “the nail in the coffin of the buy-to-let and holiday home market. Shares in some major estate and letting agency firms fell on the news.

Certainly if you are in a fortunate enough position to be able to buy an investment property or second home, then yes, an average £250,000 purchase will cost you an extra £7,500. This additional expense might ultimately have to be absorbed by the vendor, who may have to accept a lower offer than expected, as the investment buyer will have less in their pocket.

Nevertheless, a further frustration for investors is that the extra money may have to be found in cash if the additional amount pushes the buyer over their Loan-to-Value ratio as purchase “costs” may not be included in any mortgage borrowing.

The upside is that first time buyers – who often have to compete with the spending power of buy-to-let investors, will find themselves in a much stronger relative buying position, which is generally regarded as good for the economy as well as socially. Indeed, a recent study discovered that people in their 30’s who cannot get a foot on the property ladder are more likely to delay starting a family.

Investors have been hard hit recently as the increase in SDLT follows on the heals of the staged reduction in mortgage tax relief on investment properties. The old adage of “not letting the tax tail wag the investment dog” is probably worth recalling as property nevertheless remains one of the most reliable investments available.