Brexit: Buyer Caution and Belt Tightening - January 2019
01/02/2019
149
8 min read
- London's sales volumes remain on life support
- England & Wales volumes are little better than the capital's
- All forms of mortgage lending down
- Is it the time of the 10-year fix?
- Northern Ireland is the most affordable region for First Time Buyers in terms of first time buyer deposits and income multipliers
[All statistics which follow are the most recently available figures from the Land Registry and the Bank of England unless otherwise stated.]
The run-up to Brexit sadly brings with it the all-too-familiar tale of bottom-of-the-barrel-scraping sales volumes in the UK housing market with the capital posting its worst year-on-year figures for the month since the last property crash.
The most recently available figures from the Land Registry, the Bank of England and Office for Nationals Statistics provide very little respite at all, with all property-related loans down and inflation outstripping wage increases meaning that the average worker is becoming worse off.
London's sales volumes continue to plummet
In the capital, homes sales fell by 26.2% month-on-month, the biggest fall since April 2016 (204.6%) when 2nd home stamp duty came on stream, and by 21.9% year-on-year, the biggest fall since March 2017's 50.4% and a fall for the 13th consecutive month. At 6,438 for September, for which the most recent data is available, this is the lowest recorded figure for a September since the credit crunch-related crash of 2008 (5,191).
Prices fall further
Prices have fallen month-on-month in London by 1.2%; year-on-year, prices have fallen by 0.7% and for the 5th month in a row. The average price is now £472,901, just under £16,000 below July 2017's £488,527 peak.
England and Wales's sales volumes fare little better than the metropolis
Sales volumes in England and Wales fell by 31.2% month-on-month, the biggest fall since January 2017's 39% fall and by 23.4% year-on-year, the biggest fall since March 2017's 37.4% and a fall for the 10th consecutive month. At 63,185 for September, for which the most recent data is available, only 2 months had lower volumes in the last 18 months. This is the lowest volume for a September since 2012.
England and Wales prices: slight rise year-on-year
Prices in England and Wales fell month-on-month for the third month in a row and by 0.1%; year-on-year, prices have risen by 2.8%, slightly larger than last months' rise (2.4%), however average prices have fallen to £242,471.
'Double whammy' on mortgage lending
Mortgages fell both month-on-month and year-on-year for November, when 63,793 were approved. This was the worst performance for a November since 2014 (59,441).
We've frequently concluded that falling mortgage approvals are a clear sign of sluggish sales volumes however this was also the first month since December 2017 when remortgages also fell both year-on-year and month-on-month, to 47,902.
However, one alternative explanation for falling approvals, for both purchase loans and remortgages, might be take-up of longer-period fixed term loans. Given the overall uncertainty in the market - 'the quiet before the storm' - and any number of indications that interest rates are set to be ratcheted up gradually, there is increasing evidence that people are taking out longer period fixed mortgage deals. We examine the appeal of 10-year fixed rate deals below.
Taking an overview of all the data, the evidence points to pre-Brexit buyer caution and belt-tightening in the run up to the withdrawal, the nature of which, amazingly, is still unclear with all options, even one to remain in the EU, staying open.
A further question has to be asked, however. Brexit or no Brexit, what is it about the UK housing market that prices do not readily fall to correct the market when sales volumes become sluggish? Our recent article, which took a comprehensive look at Brexit and compared current data to the events surrounding the 2008 property crash, highlighted that there is more than a little 'previous form' on prices being sticking downwards in the UK, particularly if you look at the case for 2005.
Is it only overwhelming external activities, such as the credit crunch and (the coming) Brexit which precipitate a reasonable market correction?
Has the 10-year fix come of age?
According to many current media reports, it has rarely been cheaper to get a 10-year fixed rate mortgage, this becoming increasingly so if you're borrowing less than 60% of your home's value.
Equably, however, the downside must be stated: you face hefty early repayment charges, typically 5% of the total sum borrowed during the first two years then 3% of the total after that. That said, most deals allow you to port your mortgage if you move house if the purchase is on the same terms, however, the terms can often vary meaning there's no guaranteed safeguard.
NAEA: supply and demand up, sales - predictably - ailing badly
The National Association of Estate Agents' most recent housing market report noted that supply increased month-on-month by 20%, from 35 to 42 for November and to the highest level seen in a December since 2014.
Demand rose by 8%, from 282 house hunters per branch to 304. This was a 13% year-on-year increase (268 for December 2017).
Sales
First time buyer sales increased marginally, from 23% of overall sales in November to 24% in December; but year-on-year, sales fell from 31% overall in December 2017.
The number of sales agreed, however, continued to fall, to 5 per branch, which was the figure last year; month-on-month, sales have been falling steadily since September (9 per branch).
Some 78% of properties sold for less than asking price during the month, slightly less than the 81% for November; this might represent a tentative step towards more realistic pricing from the off.
First Time Buyers: Northern Ireland is most affordable region
Below is a table which, according to recent estimates from a large high street lender quoted in media reports, lists the current average size of first time buyer deposits in the UK in different regions.
We've added a representative estimate of regional average salaries for comparison.
What's notable is that average salaries are, in the majority of cases, larger than the average first time buyer deposit required for a region, with the notable exceptions of:
East of England (deposit is 1.27x higher)
South West (deposit is 1.34x higher)
South East (deposit is 1.7x higher) and, predictably,
London (deposit is a whopping 2.97x higher).
Purely in terms of average salaries exceeding the average first time buyer deposit, buyer power is greatest in Wales, where average salaries are 1.59x average first time buyer deposits.
However the deposit is normally only half of the affordability calculation. If we take the assumptions that a first time buyer has managed to save the average first time buyer deposit sum for a particular region and that they're on an average salary and offered a mortgage of 4.5x their salary, an averagely priced property is only affordable in three of the regions under consideration.
Of these, the first time buyer on average income in Northern Ireland would find buying the average property there most affordable. We've included this calculation in our table, and the larger the shortfall amount represents how much greater their salary would have to be to be successful, all other things being equal.
UK Region | Average size of first time buyer deposit | Average salary(aggregated (x52) from ONS weekly wage data from April 2018) | Average property price | Average property affordable?(assume deposit achieved and 4.5x income multiplier) |
|---|---|---|---|---|
| North East | £17,085 | £26,354 | £132,257 | Yes, by £3,421 |
| Yorkshire & Humberside | £19,871 | £27,082 | £160,155 | No, by -£18,415 |
| North West | £21,495 | £27,539 | £162,717 | No, by -£17,297 |
| East Midlands | £24,853 | £26,827 | £192,061 | No, by -£46,487 |
| West Midlands | £26,494 | £27,903 | £184,772 | No, by -£32,715 |
| East of England | £36,714 | £29,021 | £294,530 | No, by -£127,222 |
| Wales | £16,638 | £26,468 | £161,499 | No, by -£25,755 |
| South West | £37,060 | £27,622 | £260,177 | No, by -£98,818 |
| South East | £52,204 | £30,638 | £323,876 | No, by -£133,801 |
| London | £110,182 | £37,086 | £472,901 | No, by -£195,832 |
| Northern Ireland | £17,925 | £27,102 | £135,060 | Yes, by £4,824 |
| Scotland | £19,877 | £29,286 | £150,638 | Yes, by £1,026 |
Lower interest rates make overpayments a good strategy?
With interest payments remaining comparatively - and historically - low, some experts are positing that mortgage holders should take advantage by making overpayments on their mortgages.
While the vast majority of people use the extra repayment to reduce the length of the mortgage, a small number keep the same term, but reduce the amount they have to pay in the future. This gives homeowners some flexibility.
Normally however you can't repay an unlimited amount of your mortgage in any one year: many lenders limit the amount to 10% a year. When you exceed this figure, fees may apply, defeating the object of the strategy.
Additionally, repaying early doesn't suit everyone's lifestyles - debts should always be prioritised and those with high interest rates – credit cards, store cards and personal loans amongst others – should always be dealt with first. Borrowers must always ensure that they have enough funds to cover the extra repayment without sacrificing other savings, such as money for an emergency.
Andrew Boast, co-founder of SAM Conveyancing, said:
"We're now into the quiet before the Brexit storm, albeit that the mishandling of the whole affair by our elected representatives is such that no-one knows exactly yet what form the storm - if there is in fact to be one - will actually take."
"Unsurprisingly the UK housing market continues to suffer from historically low volumes exacerbated by understandable buyer caution, even if there are the slightest signs of some correction happening in terms of asking prices."
"There are still far too few first time buyers but those that are in the market, as our figures show, should make themselves aware of the considerable regional differences in buying power."
"Should prices fall and cause negative equity, it's a reasonable strategy to 'stay put'; those home owners who've decided to dig in might wish to consider overpaying on their mortgages and possibly taking out longer fixed mortgages to take advantage of lower interest rates."
" The credit crunch was followed by house price falls of around 20% however prices do - and will - recover and the same also applies to wages, albeit after a longer period in the latter case."
"The Government must steer people's expectations more clearly regarding the UK withdrawal from the EU and then devote considerably more focus to what remains, for so many, a dysfunctional housing market. "
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