Has the Royal Tunbridge Wells Property Market Peaked?

Should you buy now or wait for the bargains?

 

• Many commentators believe we have seen the peak of the Tunbridge Wells property market.

• So, should savvy bargain hunters wait for Tunbridge Wells house prices to fall?

• Or could postponing your house buying for any anticipated Tunbridge Wells house price drop be a costly mistake?

Over the last two years, the Tunbridge Wells property market has been a rollercoaster ride of hyperactive demand together with the new sport of getting your offer accepted when you compete with 30 other bidders. 

Yet there are clouds on the horizon that the

Tunbridge Wells property market could be at its peak.

Bank of England interest rates have increased four times in the last few months to try and combat inflation. Meanwhile many Tunbridge Wells households are finding it tough to counter the most significant drop in real incomes in a single year since records began in the mid-1950s, all at the same time as gas, heating oil and electricity prices are predicted to rise again in the autumn. 

Hence why some economists are predicting house price drops in the coming 18 to 24 months of 3% to 5%.

So, surely this is not the best time to buy a Tunbridge Wells property – and surely savvy buyers should wait for Tunbridge Wells house values to fall?

Is it realistic to see double-digit national house price growth? Certainly not.

The question is how far the Tunbridge Wells property market will slow and whether the slowing will drop into modest falls.

Let me look at household income first.

At best, the outlook is gloomy as real household disposable income is set to drop by 2.4% in 2022/23, the largest drop since records began in 1956. This is despite the £17.6 billion of financial support for British households revealed in Rishi Sunak’s Spring 2022 Statement with the National Insurance thresholds, energy bill support package and duty cut on petrol. Without these changes announced by the Chancellor, real household disposable income would have fallen by an additional 1% in 2022/23.

Second, as interest rates increase, mortgage rates will increase in line, increasing mortgage costs, so surely that will curtail demand, meaning Tunbridge Wells house prices will drop, and buyers should wait to catch a bargain?

Finally, with inflation on the rise, the real value of people’s savings will decrease quicker, and the value of their deposits will diminish, meaning Tunbridge Wells prices will surely drop, and people should wait to buy? 

Surely the Tunbridge Wells property market has peaked and

buyers should wait for the bargains?

Well, I don't think so, and these are the reasons why I say that: 

I believe, subject to no significant shocks in the world economy, Tunbridge Wells house price growth will be very slow in the next 18/24 months and go into low single digits (even the odd month dipping ever so slightly into the red), but not the 16% to 19% annual drop we saw in 2008/9. 

Let me look at real household income. Every economist predicts growth in real household income in 2023/24 by around 1%.

If the two years are combined, the predicted effect on real household income in the next two years (2022/23/24) is a net loss of 1.4%, whilst in the credit crunch years 2010/11/12, the net loss was 2.7%. 

I was looking at the increase in mortgage rates. 79% of owner-occupiers have fixed their mortgage costs and had their affordability stress-tested to Bank of England interest rates of 3% to 4% under the Mortgage Market Review rule changes in 2014. I believe the most significant impact of increasing interest rates will be at the point of taking on a new mortgage by first-time buyers (as opposed to servicing or the porting of an existing mortgage from one house to the next house).

The four successive Bank of England base rate rises, inflation and the rising cost of living are likely to bring more cautiousness over summer and autumn when it comes to people buying a property. Yet, there is still a massive imbalance of demand for property over the number of properties for sale to quench that demand. 

The potency of the job market and the ongoing mismatch between the supply of properties on the market and demand for those properties will support property values. 

Finally, the by-product of increasing inflation is that it makes buy-to-let more attractive. If there is a reduction in first-time buyers, this will be counterweighted by more landlords buying again, supporting the current level of Tunbridge Wells properties. 

But what if Tunbridge Wells house prices do drop significantly?

So let’s assume that Tunbridge Wells house prices do fall, irrespective of the reasons above, it will not inevitably help Tunbridge Wells buyers.

If we have a house price crash, people tend to find their careers are at risk, and their salaries don’t rise as much. The younger generation (i.e. first-time buyers age range) often gets hit the toughest by recessions.

If first-time buyers wait until 2024 to buy and Tunbridge Wells property values drop by 10%, that will prove more expensive.  

In the last 2008/09 crash, lenders weren't offering 5% deposit mortgages. The lowest deposit mortgage that first-time buyers could get was with a 10% deposit and even then, they were hard to come by.

When writing this article, first-time buyers can obtain a 5% deposit mortgage for a fixed rate of 2.66% for five years. 

The typical first-time buyer terraced house in Tunbridge Wells

sells for £429,700.

So, if they were to buy now, on this mortgage deal, the first-time buyer would have to stump up a £21,485 deposit and their mortgage payments would be £1,494.59 per month. 

Yet, let’s say property values in Tunbridge Wells do drop by 10% in the next 18 months, the terraced house would now be worth £386,730, so a significant saving. Or is it? 

Everyone believes interest rates will rise further, so let’s assume they go to 3% by the autumn of 2023. That means the mortgage rate for a 10% deposit mortgage will be in the early 5%’s, so let me assume 5.29% (because the banks tend to increase the gap between the base rate and the mortgage rate in recessions to allow for the extra risk).

The monthly mortgage payment on the 5.29% mortgage would be £1,821.49 per month, and you would need to double your deposit to £38,673.

So even if Tunbridge Wells' house prices did drop by 10%, the first-time buyer would be £3,920 worse off a year in mortgage payments and would have to find double the deposit.

...and then there is the other cost of waiting.

You have two years’ worth of rent to pay. The average rent for a Tunbridge Wells property is £1,332 per month.

If you waited a couple of years for Tunbridge Wells house prices to drop by 10%, you would spend £31,968 in rent.

Choosing to buy a Tunbridge Wells property makes even more economic sense if it is a long-term choice, as homeowners can ride out any house price drops. 

Homeowners who plan to stay in a property can generally rely on getting their money back within six to ten years whilst not paying any rent.

Will Tunbridge Wells prices go up, or will they go down?

Remember, George Osbourne said house prices would drop by 18% in May 2016 if we voted to leave the EU, whilst many economists said they would drop by 5% to 10% when Covid hit in March 2020.

And we all know what happened.

If you think you will be better off owning your own Tunbridge Wells home rather than renting one, don't bother to wait for the suggested house price drop that may never happen.  

These are my thoughts, what are yours? Let me know in the comments.

How Will Rising Inflation Affect the Tunbridge Wells Property Market in 2022?

 

The UK is currently experiencing its highest inflation rate since the early 1990s. This increase in prices has primally come about by the combination of an increase in demand for goods and services from consumers following lockdown last year together with global supply chain disruptions.

Most economists weren't too concerned about this increase in the inflation rate as the very same thing happened in the early 1990s following the Credit Crunch with a similar rise in demand and supply chain issues. Thankfully, back in the early 1990s, inflation returned to lower levels quite quickly. However, the situation in Eastern Europe now could change matters.

So, let me look at all the factors and what it means for the Tunbridge Wells property market.

The crisis in Eastern Europe has sparked even further rises in crude oil, (which diesel and petrol are made from) gas and grain prices as pressure on supply chains around the world increases.

In my previous articles, I suggested UK inflation would rise to around 7% in the spring and drop back to 5% in the autumn and as we entered 2023, be approximately 3% to 4%.

Yet, with these issues, inflation could rise to 8% to 9% by late spring and still be around 6% to 7% in autumn, well above the Bank of England's target of 2%.

With Tunbridge Wells wages rising at only 3% to 4% and inflation at 7%+,

Tunbridge Wells household incomes, in real terms, will fall.

This is because ‘real’ UK household incomes characteristically have been the most consistent lead indicator of growth (or a drop) in house prices. This is because growing inflation erodes the value of money you earn, which reduces its buying power. When the cash in your pocket has a lower spending power, people tend to spend less when they buy (and rent) a home (and vice versa).

Next month, Income Tax thresholds will be frozen, and National Insurance contributions are increasing. Collectively, all these issues will create a drop of around 2% to 2.5% in the real disposable incomes of Britain's households in 2022 (real disposable income - somebody's take-home wages after tax and then the effects of inflation are considered).

Will Tunbridge Wells people be more anxious to spend their money?

With less money in people's pockets, people's inclination to spend the money they do have could also be curtailed. People's savings are at an all-time high, yet many will decide to sit on the cash, instead of spending it, especially as consumer confidence has dropped to minus 26 on the GfK index (whatever that means – but in all seriousness though - more on that below).

All this can only mean there is going to be a house price crash.

It’s all doom and gloom! … Or is it?

My heart goes out to people caught up in the awful humanitarian crisis in Eastern Europe. Yet, I respectfully need to put that to one side for just a moment for the purpose of this article.

This blog is about the Tunbridge Wells property market, and Tunbridge Wells people want to know what will happen to the Tunbridge Wells property market.

In the first half of the article, I looked at the impending fall in real disposable incomes of 2% to 2.5% in 2022. I appreciate it's going to be tough for many families in Tunbridge Wells. Yet, it is always important to consider what has happened in previous times.

1982 – a drop of 2.3% in real disposable income

1992 – a drop of 3.7% in real disposable income

2008 – a drop of 5.8% in real disposable income

Yes, it's going to be tough, yet we got through 1982, 1992 and 2008 – and so we shall in 2022/23.

Next, the price of petrol is very high compared to a year ago.

The average price of unleaded petrol is £1.51/litre today, quite a jump from the £1.21/litre a year ago. But, here is an interesting fact, petrol was a lot more expensive (in real terms) in 2011 than today. In TODAY's money, a litre of unleaded petrol in 2011 would be the equivalent of £1.79/litre.

We have some way to go before we get to those levels – and again, the Tunbridge Wells economy (and property market) kicked on quite nicely after 2011.

What are Tunbridge Wells people spending on their rent and mortgages?

Housing costs - owner occupiers were spending on average 17.3% of their household income on mortgages in 2015, yet in 2021 this had risen, albeit to 17.7% - not a huge increase.

Council house (social) tenants have seen a drop in their rent from 29.2% in 2015 to 26.7% in 2021, whilst private tenants from 36.4% in 2015 to 31.2% in 2021.

Interesting that private tenants are proportionally 14.29% better off in 2021 than in 2015.

How we spend our money - the average UK home spent 4.2% of their household income on energy in 2021, and that is due to rise to 6.3% after April (and probably 7% in October). Yet, as a country, we spend 9% of our income on restaurants and hotels and 8% on recreation and culture. As with all aspects of life, it will mean choices, and maybe we will have to forego some luxuries?

Just before I move on from this aspect of the article, again I appreciate I am talking in averages. Many people with low incomes suffer from fuel poverty and they will find the increases in energy prices hard – my thoughts go out to you.

Interest rates - higher inflation is generally brought under control using higher interest rates, meaning mortgage payments will be higher.

First, 79% of homeowners with a mortgage are on a fixed rate, so any rise won't be instantaneous. Yet, there will be a bizarre side effect from the issues in Eastern Europe. Surprisingly, though the current situation in Eastern Europe, by its very nature, will bring greater UK inflation, it will also probably defer the Bank of England raising interest rates. This means mortgage rates won't increase as much as the bank won't want to exacerbate any pressures to the UK economy in 2023/24 caused by the conflict.

The stock market had priced an interest rate rise to 2% by the end of 2022. I suspect this will now be no more than 1% to 1.25% by Christmas, slowly going up in quarters of one per cent every few months. The crisis in Eastern Europe might even come to be seen as a defence for higher inflation throughout 2022, all meaning everyone's mortgage will be less.

Next, looking at Consumer Confidence Indexes - these indexes are fickle things. I prefer to look at the Organisation for Economic Co-operation and Development Consumer Confidence Index as it has a larger sample range and a longer time frame to compare against. Looking at the data from the mid 1970s, the drop in consumer confidence is big, yet nothing like the drops seen in the Oil Crisis of the mid 1970s, Recession of the early 1980s, ERM crisis of 1992 and the Global Financial Crisis of 2008/09. Also, when compared to the other main economies of the world (G7), the UK has always bounced back much more quickly from recessions when it comes to consumer confidence.

What about house prices in Tunbridge Wells in 2022/23?

Increasing energy prices, rising inflation, an increase of sanctions, and a probable drop in consumer confidence and spending in the aftermath of the conflict will knock the post-pandemic recovery globally, which will lead to a recession around the world, including the UK.

A recession is when a country’s GDP drops in two consecutive quarters. For the last 300 years, there has been a direct link between British house prices and GDP – (i.e. when GDP drops, UK house prices fall). Yet in 2020, the British GDP dropped by nearly 12%, yet house prices went the other way.

But, let’s look at what would happen if Tunbridge Wells’ house prices did drop by the same extent they did in the Global Financial Crisis of 2008/09.

House prices in Tunbridge Wells dropped by 18.1% in the Global Financial Crisis, the biggest drop in house prices over 16 months ever recorded in the UK.

The average value of a property in Tunbridge Wells today is £419,429.

Meaning if Tunbridge Wells' house prices dropped by the same percentage in the next 16 months, an average home locally would only be worth £343,512.

On the face of it, not good – until you realise that it would only take us back to Tunbridge Wells house prices being achieved in April 2016.

Yes, that will mean if they do drop in price, the 8.9% of Tunbridge Wells homeowners who have moved home since April 2016 would lose out if they sold after that price crash. But how many people move home after only being in their home for a few years? Not many!

The simple fact is that 91.1% of Tunbridge Wells homeowners will be better off when they move if house prices crash.

And all this assumes there will be a crash.

The simple fact is, the circumstances of 2009 that caused the property crash are entirely different to 2022 (no lending by the banks, higher interest rates and increasing unemployment compared to today’s increased lending, ultra-low interest rates and low unemployment environment).

I do believe with all that's happening in the world we might see a rebalancing of the Tunbridge Wells property market later in 2022 and could see the odd month with little negative growth in house prices, yet it will be nothing like 2009.

The expected fall in household spending could be counterbalanced by UK businesses’ plans to invest more in their businesses (with last year’s tax breaks on investing), which will create even more jobs.

Who knows what the future holds? These are just my opinions – what are yours?