Thursday, 26 January 2023

Thatcher’s Dream Alive as Homeownership in Royal Tunbridge Wells Increases

In her first conference speech as the Tory's new leader in 1975, the grocer’s daughter from Grantham, Margaret Thatcher, asserted her conviction in a ‘property-owning democracy’. 


Although Thatcher didn't conceive the saying – (that credit belonged to Conservative MP Noel Skelton in 1923), it encapsulated what she thought Britain should be.


Through prudence, saving and hard work, she believed that everyday British families should be able to purchase their own homes. Thus, giving them security, self-esteem and independence and freeing them from the nanny state of local authority landlords.


Although that idea was a Labour idea initially in the mid-1970s, Margaret Thatcher introduced legislation (Right-To-Buy) in 1980 to allow local authority tenants to buy their own council homes at significant discounts. In the 1980s, homeownership boomed (although it had been on the increase for the previous two decades), and she led the country in an economy with which house buying became a national passion.


Between 1981 and 1990, home ownership went up from 11.88m to 15.47m.


The other lesser-known fact of the Right-to-Buy legislation in 1980 was it stopped local authorities from building new council houses. 


Fundamental to her idea was that government (central or local), which had built between 30% and 45% of all homes in the 1950s, 60s and 70s, should stop providing homes and let the market provide them.


The proportion of homes owned rose from 55.4% in 1980 to 65.7% during Thatcher's reign as PM.


A few days ago, the housing element of the 2021 Census was released, and it has shown the proportion of home ownership in Britain had fallen to its lowest level since 1985


The proportion of households owned in the country fell from 64.1% to 62.5% between 2011 and 2021the lowest level forthe past 37 years, when the figure was 61.6%.


In the meantime, the proportion of privately rented households has surged to its highest since the late 1960s, with 20.4% of households renting from a private buy-to-let landlord. 


This means the proportion of British households in private rented accommodation has more than doubled in the past two decades, from the 9.5% recorded in the 2001 census.


So, let’s look at the local stats for the Tunbridge Wells councilarea.


The percentage of households owned in Tunbridge Wells has increased from 65.7%in 2011 to 66.2% in 2021

(bucking the national trend).


Let’s look at the actual number of households.


The number of owned households in Tunbridge Wells has grown from 30,999 in 2011 to 31,914 in 2021, a rise of 3.0%.


Next, looking at the private rental sector, the number of privately rented accommodation has grown as well!


The number of privately rented households in Tunbridge Wells has grown from 8,651 in 2011 to 9,281 in 2021, a rise of 7.3%.




Over the coming weeks and months, I intend to drill down further into these stats nationally and locally.


Even though homeownership nationally has increased in terms of pure numbers, the proportion of homeowners with a mortgage has dropped.


Just some headlines to whet your appetite.


As I said above, 64.1% of householders in Britain owned their own home in 2021 (of which 30.8% owned their home outright and 33.3% with a mortgage).


In 2021, of the 62.5% of homeowner households, those without a mortgage has increased to 32.8%, and those with a mortgage has dropped to 29.7%.


So, has Thatcher's dream been smashed?


Of course, nationally, home ownership is at the lowest level in many decades due to several factors, including the late 1980s and 2008 housing crash, negative equity, the credit crunch and increased mortgage regulation. 


Yet, at the same time, as every single local authority in Britainhas seen an increase in the number and proportion of private renters over the past 20 years, the entrepreneurial property-owning spirit has moved into the ownership of private buy-to-let property. The market has undoubtedly filled the housing gap that the councils and local authorities left in the 1980s.


These are interesting times, and I shall share more insights in the coming weeks and months. 


Let me know your thoughts on the information above.

Thursday, 12 January 2023

What Will Happen to the Royal Tunbridge Wells Property Market in 2023?

The autumn of 2022 saw economic and political instability with the resignation of Boris Johnson as Prime Minister and the ill-fated Liz Truss 44-day premiership. Now as we go into 2023, the economic and political turmoil has subduedoffering a greater feeling of stability in money markets. 

 So, on the back of that, what is the expectation for the British (and Tunbridge Wells) housing market as we go into the new year?

The biggest issue is inflation. Low steady inflation of around 2% a year is good for the economy, yet the high levels we are experiencing now isn’t. It affects the spending power of the pound in your pocket, and it alters the way people spend their money (including buying and selling property).

So where has this inflation come from?

Many blame it on inflated gas prices because of the Ukraine issue(however, it is believed by most economists only around 4% of the current 10.7% inflation figure is because of the fuel crisis). 

UK inflation was already running at 6.2% when the Russian tanks rolled into Ukraine in February 2022 which created that energy price shockTherefore, where has the rest of the inflation come from?

The catalyst of inflation started in 2020 with the Bank of England’s Quantitative Easing (QE). This pumped £450m new money into the economy at a time when the future looked bleak. The problem was, people had nothing to spend that money on, so when things started to get going after the lockdowns, there was a mis-match of too much demand for goods (as people had that money) and a lack of goods and services (because there wasn’t enough supply of those goods and services with the supply chain issues).

This all meant prices went up (i.e., inflation)The catalyst of this inflation was the Bank of England printed too much money in 2020 with QE and the supply chain issues (all easy to say with hindsight!).

Too much inflation is bad for the economy and therefore, ultimately the property market.

Two things will reduce inflation. 

One is a recession and the other is increased interest rates.

Many find it fascinating that the Bank of England were talking the UK economy into a shallow recession in the autumn. Yet there was method in their madness. It was because they didn’t want to rely solely on the second method of increasing interest rates.

Better for the economy to have a shallow mild recession and interest rates rising to say 4.5% by the middle of 2023 to reduce inflation, than placing the whole job of reducing inflation on interest rates.

If that had been the case, interest rates would need to rise to say 7% (or more), causing the economy (and property market) to stall ... and thus create a subsequent deep and long recession.

Therefore, with the Bank of England having recently increased itsbase rate to 3.5%, with more interest rate rises to come in 2023, what does this and the mild recession mean for the Tunbridge Wells property market?

A recession will increase unemployment levels, which have been comparatively low in the last few years. Depending on the type of roles/jobs that are made redundant, will determine the effect on the property market. Until that happens, we won’t know.

Everyone is suffering from higher gas, electric and shopping billsyet with interest rates rising, this will increase the pressure on household budgets. Higher interest rates mean higher mortgage payments if the homeowner/landlord is on a variable rate mortgage(17 out of 20 homeowners with a mortgage are on a fixed rate).

Its these two factors of recession and interest rates that will place negative pressure on Tunbridge Wells house prices. 

Yet let us not forget this pressure is coming off the back of two of the strongest years on record in terms of house prices and transaction levels

 Tunbridge Wells house prices have experienced 29.4% price growth since the pandemic started in March 2020.

 This is interesting when compared to the UK average, where average house prices have risen by 27.4% or £44,700 since March 2020.

Before I tackle the issue of house prices in 2023, I would like to look at the number of transactions. 

To many the number of properties selling is irrelevant, yet I believe it is as important, if not more important, than house prices. I believe the best way to judge the health of the local property market is the number of people moving home (i.e.housing transactions).

You could ask yourself why Tunbridge Wells people should be more concerned about the number of property transactions and not the change in Tunbridge Wells property values.

Many economists believe the number of property transactions is a better judge of the health and vitality of housing market. The higher the number of people moving home is better for the whole economy than a smaller number of property transactions, whilst the same can’t be said for higher house prices.

Transactions levels have been quite high in the last couple of years.

1,191 households per year have moved home in Tunbridge Wells since lockdown, compared to the long-term 27-year average of 811 per year.

Looking at the stats coming through in the last couple of months, maybe we will settle for a figure somewhere between the two figures above, yet nowhere near the sub-650 annual figure of homeowners moving in the Credit Crunch years in the 2008/9/10 time frame.

Finally, let’s look at Tunbridge Wells house prices in 2023.

A good place to start to judge house prices is how many reductions are taking place on the properties that are already on the market.

In the last 3 years, the average number of price reductions for the properties for sale in the Tunbridge Wells area (TN1/2/3/4) has been 73reductions per month.  

In October there were 109 price reductions and in November 113 reductions.

Homeowners are being more realistic with their pricing and the price that one will achieve for their Tunbridge Wells home today and the rest of 2023 will be lower than one would have achieved in the spring of 2022.

Yet, as most Tunbridge Wells people buy another property when they sell (and most of the time move up market) the price you would have had to pay on the next purchase would have been even more.

Yes, the price of Tunbridge Wells property will be lower in 2023 by between 5% to 10%, yet these are only levels that were being achieved in the spring of 2022 – and nobody was complaining about those!

Final thoughts. 

Several economic commentators are preaching doom and gloom for the property market in 2023, yet things are very different than the Credit Crunch years of 2008/9.

The property market crashed in 2008/9 mainly because the banks and building societies stopped lending money i.e., credit (that is why it was called the Credit Crunch). 

There are two large differences this time round.

The first is the introduction of Mortgage Market Review mortgage stress testing instigated in 2014.

Homebuyers taking out a mortgage must have undergone a stress test on interest rates to obtain a mortgage since 2014. These stress tests are a safeguard to ensure that if their household income continued to be the same, the homeowner could afford higher mortgage rates. 

The second is the banks and building societies have much higher cash reservesHigher reserves will ensure they can continue to lend money and so more mortgages are available, although at a slightly higher interest rate than a year ago. 

With mortgage rates falling back, with some very attractive fixed-rate deals knocking on the door of 5%, this is a development that may continue into 2023 as banks and building societies obtain cheaper funding sources and then compete for business by driving down the price of mortgages - which would only be good news for the Tunbridge Wells property market. 

These are my thoughts - what are yours?

Thursday, 8 December 2022

Inflation - Every Royal Tunbridge Wells Landlords’ Saviour

Some of you reading this will be old enough to remember the 1970s – the bell-bottom trousers, the huge collars, frayed jeans, disco glitter balls, maxi dresses, midi skirts but above everything else - HYPER-INFLATION.

With inflation currently standing at 11.1%, many of us envy the last few years when we have been lucky to experience sub 2% inflation.

But in the 1970s, the UK had proper and persistent double-digit inflation for seven of the ten years of that decade.

The average annual UK inflation rate for the 1970s was 12.3% per
year, with prices rising by 25% in 1975 alone.

The inflation was caused by several things, including oil prices quadrupling in the 1973 Oil Crisis (sounds familiar, doesn't it?), powerful unions, a high level of growth and investment in the 1950s and 60s, meaning it was easier for the British economy to experience inflationary pressures in the 1970s and the property market then was not immune to these inflationary pressures.

The average Tunbridge Wells house rose from £8,352 to £43,263
between the start of 1970 and the end of 1979.

That would be the equivalent of an average local house going from today’s price of £521,091 to £2,698,807 in 2032.

The existing climate of rising prices (inflation) is affecting everyone, from filling up the car with petrol to doing the weekly ‘big shop’. Looking specifically at the buy-to-let market, Tunbridge Wells landlords are suffering from rising costs and prices like everyone else, including a substantial increase in labour price inflation as skill shortages have pushed up the cost of using all the trades.

Other worries include whether tenants can pay their rent with the cost-of-living crisis. Also, there is a rise in interest rates which increases landlords' mortgage payments and professional fees, including accountants, and landlord insurance rates continue to climb.

So, is inflation all bad for Tunbridge Wells landlords?

Most economists say that inflation is bad for the economy. 

The absence of steady and stable prices makes consumers and businesses hold off making decisions to buy things, and when that happens, the economy stalls. Look at what happened in Germany in 1923, where you needed a carrier bag of cash to purchase a loaf of bread. Today, Zimbabwe has annual inflation of 269% a year, and Venezuela has 156% annual inflation, meaning their economies are on their uppers.

Thankfully, nobody is predicting British inflation will reach those levels.

Yet would it surprise you that inflation can be good news for landlords?

Property has grown above the rate of inflation over the last 50 years. It means that your hard-earned savings invested in property will increase in value over and above the inflation rate, which will safeguard your wealth during these periods of high inflation.

However, knowing where we are on the economic cycle makes it easy to spot when house prices are lower in the short term (in real terms), thus buying yourself long-term 'extra' profit.

The average Tunbridge Wells property today is worth £521,091. Roll the clock back to the autumn of 2007, and it was £351,287.

Quite a gain (and no profit) until you look at inflation.

It appears people who bought in 2007 have made money when they have lost it in 'real terms.

What do I mean by that? What exactly does ‘real terms’ mean?

Everyone knows that £100 today doesn't buy what £100 could have bought you ten years ago and much less than 20 years ago … that's the effect of inflation.

‘Real terms' means the price value after adjusting for inflation and expressed in constant Pound Sterling, reflecting buying power relative to another year. For example, the ‘actual’ price of a Mars bar in 2000 was 26p, yet its ‘real price’ (expressed in today's prices) is 74p. Why 74p? Because 74p is what a Mars Bar costs today. 

What price in the past has the same spending power today? So, looking at the £351,287 average price for a local house in autumn 2007 (as mentioned above), one would need £585,172 today to buy the same amount of ‘retail goods and services’ (e.g., cars, food, Mars Bars, holidays etc.) - that is what 'real terms' mean.

That means even without any house price falls (which many are predicting),

average house prices in Tunbridge Wells are £64,081 cheaper in ‘real terms’ today than in 2007.

Calculation: £585,172 (autumn 2007 Tunbridge Wells house price expressed in today's spending power terms – i.e., in 'real terms') less £521,091 (today's average actual house price in Tunbridge Wells) equals £64,081.

The other significant advantage of inflation for landlords is buy-to-let mortgages. Most landlords use a buy-to-let mortgage to buy their property investment. Let me give you some scenarios which explain why this is the case.

Firstly, let's assume there was no inflation (like in Japan in the last couple of decades). If a landlord took out an interest-only buy-to-let loan of £200,000 10 years ago, then in 10 years, that buy-to-let mortgage, which would need to be paid off, would still have a ‘real value’ of £200,000.

Secondly, let’s assume the same landlord took out an interest-only buy-to-let loan of £200,000 10 years ago (2012). In the last decade, there has been 31.4% inflation, so that buy-to-let mortgage would have a ‘real value’ of only £137,200.

Now inflation won’t be in double digits for the long term in the UK (higher interest rates and a recession will put pay to that), yet let's say the inflation rate for the next ten years was 4% per annum.

In this scenario, the ‘real value’ of the £200,000 buy-to-let mortgage falls to less than half its original real value of £91,278.

So, if one thinks about it, inflation could be just the thing that landlords need to shrink the ‘real value’ of their buy-to-let mortgage. As the saying goes, every cloud has a silver lining.

On the back of double-digit percentages, growth rises in rents, and everything stated in this article, inflation could be the silver lining!