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?

Would You Re-Mortgage Your Royal Tunbridge Wells Home to Help Your Child onto the Property Ladder?

How far would you go to help your child get on in the world?

Many Tunbridge Wells parents move area to ensure their child gets into the best primary school or fund their university costs. Many of you reading this have even helped your children with the deposit for their first home from savings.

However, I have come across many Tunbridge Wells people in their 50’s and 60’s, who have good jobs and incomes, yet don’t have the savings to give to their children to help them buy their first home. It doesn’t help when you consider …

The average value of a Tunbridge Wells home has risen by 12.1%

in the last 5 years, from £468,635 to £525,200.

I am therefore seeing increasing numbers of parents who are willing to re-mortgage their own Tunbridge Wells home or start a new mortgage (when they own their home outright) — to get their children onto the Tunbridge Wells property ladder.

So, whilst the Government is trying to turn Britain’s 20 and 30 somethings from ‘Generation Rent’ into ‘Generation Buy’, the Bank of Mum and Dad are mortgaging their retirement to pay for it all. Yet it need not be cost prohibitive borrowing the deposit as you still have access to interest only mortgages.

With an interest only mortgage, your monthly mortgage payment covers only the interest on your mortgage, not any of the original capital borrowed. This means your mortgage payments will be lower than on a repayment mortgage, remembering though at the end of the term you will still owe the original amount you borrowed from the mortgage provider.

1 in 14 new mortgages are interest only and 1 in 5.5 existing mortgages are interest only mortgages, they are very popular.

Anyway, many Tunbridge Wells homeowners might be worried about having that level of debt in their golden years. However, many plan to pay off the mortgage when they downsize as they get into their 60’s and 70’s.

I talk to many Tunbridge Wells homeowners, who are asset rich but cash poor and desire to help their children onto the Tunbridge Wells property ladder. Their attitude is their children will inherit their property when they pass away, so it seems practical to give them that money to work harder for them earlier in their life when they need it to buy their first home.

Can you get a mortgage, even if you are retired?

A lot is dependent upon your age and financial position. The mortgage companies will see if you have adequate funds for your retirement and emergencies plus leaving enough equity in the property to enable you to downsize in the future. Like all things, you need to take advice from a qualified mortgage arranger.

So, that then begs the question, is there enough equity in Tunbridge Wells homes to borrow against?

In the late 1980s and again in the early 2000s, many Brits saw their homes as a cash machine. Numerous homeowners re-mortgaging at the end of their mortgage’s preliminary term (usually after the initial 2, 3 or 5 years), but when doing so increased their mortgage to enable them to buy a nice car or fancy holiday. Yet, by increasing the borrowing, it created negative equity in the early 1990s and stopped many homeowners moving home between 2009 and 2013 because of their lack of equity.

Therefore, I have to ask, have we borrowed too much this time round?

Looking at Tunbridge Wells and the specific postcodes TN1, TN2, TN3 and TN4 combined ...

In 2016, the average Tunbridge Wells homeowner had a mortgage of £169,506 and today it is £213,789, a rise of £44,283.

Looking at these numbers, one might think we are again over-extending ourselves, yet as regular readers of my blog about the Tunbridge Wells property market will know – I like to drill down and look at all the figures.

Initially, I was worried about these stats, until I considered the equity Tunbridge Wells people have amassed over the same 5 years.

In 2016, the average equity held in a Tunbridge Wells homeowners’ property (whilst still having a mortgage) was £299,129, yet today that stands at £311,411, a rise of £12,282.

Even though mortgages have increased, Tunbridge Wells homeowner’s equity has risen even more, meaning as we stand today, mortgaged and owned-outright properties, there is …

£15,936,969,530 of equity held in all Tunbridge Wells homes.

Whilst the total value of mortgages has increased slightly since 2016, as a percentage, this has gone down meaning Tunbridge Wells homeowners and Tunbridge Wells landlords have increased their equity in the last five years.

It can quite clearly be seen that the financial insecurity sparked by the Credit Crunch crisis of 2008/9 has created a generation of Tunbridge Wells homeowners and landlords who are savers and improvers rather than movers and excessive borrowers, using excess cash to invest in their property and pay down debt or to excessively borrow on their equity growth.

Only 15.85% of the total value of Tunbridge Wells property

is borrowed money with a mortgage.

This is great news for every Tunbridge Wells homeowner and landlord because irrespective of whether the ‘Post Lockdown Bounce’ is short or long-lived, it shows the Tunbridge Wells property market is in a better state to ride out any storm that it might encounter than ever before because less people will be in negative equity or have prohibitively high mortgages.

Before I finish, I fully appreciate money and inheritance is a sensitive subject for many families.

My message to all the Tunbridge Wells parents is, just because your children aren’t talking about the subject, it doesn’t mean it’s not on their mind.

The lead has to come from you, as a Tunbridge Wells parent, to ensure the wealth held in your bricks and mortar can be used to your family’s advantage, when they need it most.

If you do, your children will thank you for it and they may even do exactly the same for their children, then, they will do the same for their children’s children ... creating a legacy that will go on for generations.

Royal Tunbridge Wells Buy-to-Let Landlords Owed £1,336,805 in Unpaid Rent. Rogues or Saviours?

There is no getting away from the fact that the rise in the number of buy-to-let properties in Tunbridge Wells has been nothing short of astonishing over the last twenty years. As a result, many in the press have said Britain is a broken nation, with many twenty and thirty-somethings unable to buy their first home. The press has named this group ‘Generation Rent.’ 

Tunbridge Wells landlords have been accused of scooping up all the smaller Tunbridge Wells properties for their buy-to-let property empires. Others blamed the Government (of both persuasions) for pouring petrol on the buy-to-let fire for giving landlords an unfair advantage with the way buy-to-let has been taxed in the past. Many have said these landlords have priced out Tunbridge Wells' 'Generation Rent'. Many say they are rogues, and you can see why there is little sympathy for landlords, especially as …

Tunbridge Wells landlords receive £72,586,680 a year in rent
– easy money or what?

So, as we come out of lockdown, I want to make a stand for Tunbridge Wells landlords and talk about the great work they have been doing during the pandemic. 

Since lockdown, it has been (almost) illegal to evict a tenant from private rented property. Yet, in the last few weeks, this ‘ban on evictions’ has begun to be eased, making some commentators forecast a ‘tsunami of homelessness’ as landlords ready themselves to kick out the tenants who cannot pay their rent. 

You might say they can afford it, yet I need to highlight an often-untold story in the massive numbers of Tunbridge Wells landlords who have co-operated with their tenants to evade eviction. 

The personal finances of some Tunbridge Wells landlords and tenants have been ruthlessly strained during the last 16 months — something that is going to have ramifications on the back pockets of both landlords and tenants, as well as the attraction of being a buy-to-let landlord (more of that later).

482 Tunbridge Wells tenants are in arrears with their rent
to the tune of £1,336,805.

That's money these landlords need to pay their mortgages with and even to live off themselves.

The eviction ban was imposed in March 2020 and the Government has expected private landlords to stand the cost of their tenants’ rent if they could no longer pay. It was estimated over 1 in 5 landlords with mortgages had requested a mortgage payment holiday in 2020. Thankfully, that now stands at 1 in 100 as most local landlords with shortfalls in rent have been using their own personal savings to cover the mortgage payments.

I have seen so many landlords giving their tenants rent breaks and discounts to help them through these times. However, most landlords I talk to acknowledge that it is better to have a tenant paying something rather than a tenant paying nothing, hoping that total rent will start flowing as the economy recovers. 

Going into the pandemic, 1 in 25 Tunbridge Wells tenants were in arrears, yet that now stands at 1 in 11.

So, are we going to see lots of evictions? I would go as far as to rebuff the idea that we will see a rush to the courts of landlords to obtain possession orders now the eviction ban has been lifted. I have always viewed evictions as a last resort.  

Before the pandemic, it took about 12 months for courts to hear rental repossession cases, so this backlog will be nearer two years (if not more). Nonetheless, the threat of a County Court Judgement (CCJ) often makes tenants pay up as it will demolish their credit rating, making it very challenging for them to rent another home. 

I feel for those tenants under furlough or reduced hours as they have the quandary of wanting to reduce their outgoings by moving to a cheaper rental property, yet whose rental deposits will be sacrificed to cover their rent arrears. However, some have said that because house prices have exploded during the last 16 months, landlords should write off their tenants’ arrears as a goodwill gesture. 

The issue is, 858 Tunbridge Wells landlords only have a single property for rent, so the arrears would have to be funded by their personal savings.

For them, the pandemic experience could be the incentive to sell up for good. 

A National Residential Landlords Association survey found around a third of all landlords were now more likely to sell their buy-to-let properties altogether or sell some of them. This would mean fewer properties for tenants to rent, thus driving up the rent.

According to government and industry data, evidence suggests that a tenant who rents a property directly through a landlord and not through a letting agent is between two and three times more likely to go into arrears of 2 months or more. Is this because tenants know that private landlords who advertise directly for tenants on Gumtree and other platforms don't carry out the checks letting agents do on them?

Many of those landlords are switching the management of their property to an agent, and for those landlords sticking with self-management of their property, there is circumstantial evidence they are starting to become a lot pickier when starting new tenancies. Even though illegal, spurning tenants on benefits is woefully all too common. I also worry there could be a stigma about renting properties to self-employed people because of the erratic nature of their income. 

Looking into the future, I envisage a growth in the use of ‘rent guarantor contracts’, whereby the tenant is called upon to provide a 3rd party person to pay the rent if the tenant doesn’t. These are pretty common for student lets and those on certain benefits, and it wouldn't surprise me if these are used more often for self-employed tenants and regular professional lets.

That is why I believe Tunbridge Wells landlords should be celebrated .. most of them have been saviours.  These are my thoughts - what are yours?