Are we in for a property crash?
February 1, 2022
Gatehouse bank foreign national 65% LTV £75,000 mortgages
February 9, 2022What about those higher interest rates?
Does it mean a market slowdown?
It’s a huge topic, but broadly…
– 1940’s UK is fairly similar to today. A period of huge government debt, massive social change, lack of housing supply, bouts of inflation and rising house prices.
Similar to the 1940’s I think we are in for 10 years of:
— Nationwide reorganisation due to Brexit
— The rise of on shoring as opposed to globalisation
— Massive government debt which has to be ‘watered down’ with high levels of inflation for at least 10 years
— Constraints on maximum interest rates, because interest rates also affect the cost of government debt.
Inflation
Research shows that generally speaking, in periods of high inflation money moves out of stock markets and ‘cash’ and into real estate.
Ref: https://web.stanford.edu/~piazzesi/inflationAP.pdf
If you look at the 1970s it was a period of high house price inflation and high inflation
It was also period of massive wealth destruction, so overall if one could hedge against inflation, one would end up being strongest once inflation stabilises.
Property price inflation over time
UK inflation rate over time
Ref: https://www.macrotrends.net/countries/GBR/united-kingdom/inflation-rate-cpi
Short-term interest rate rises
I refer to Bridgewater associates research: Based on historic analysis, they predict maximum base interest rates might go up to 2.5%. I think their predictions make sense.
For a £160,000 property at 75% loan to value:
Assuming 6% gross yield and a foreign national limited company buy to let purchaser:
The best deal available at the moment is Gatehouse at 4.29% = £5148 interest cost PA. Net after tax profit PA £1180
Assuming interest rates rise by another 0.5% bringing this Gatehouse deal up to 4.79% = £5748 interest cost PA. et after tax profit PA £580 after tax
Assuming interest rates rise by another 1% bringing this Gatehouse deal up to 45.29% = £6,348 interest cost PA. et after tax profit PA -£20 after tax (minus £20)
BUT… If interest rates rose, so would rents. You’re able to raise rents by 5% under each tenancy agreement. So reality is one would have to you have a new tenancy agreement each year and raise rents in line with increased interest and inflation.
That’s why real estate is a good hedge, because rents go up in line with inflation.
Is the UK market going to ‘slow down’ with increased interest rates?
As ever definitions are important. When we say slowdown, were generally talking about prices, market supply. I don’t see market supply increasing that much unless the UK government cuts stamp duty and allows the market to flow without so much resistance.
Assuming very little supply and a large unsatisfied demand, I expect buyers will continue pushing price of desirable property upwards. For some more fragile markets, perhaps there will be a cool off. However, base interest rates would have to be 2.5% or higher in order to drive a massive slowdown in the market. I.e. it would become so prohibitively expensive to purchase property that buyers would fall away from the market.
But if base interest rates are high, so is the cost of government debt and governments do not want that. So you’re left with competition from homebuyers and now investors trying to get out of cash. This can only lead to house prices rising in line with inflation. And if you buy the right areas, house prices will rise above inflation. Of course, the wrong areas and you’ll see house prices decline relative to inflation.
My conclusion:
- It’s inevitable we are all going to be poorer at the end of this decade. The only question is how much poorer…relatively speaking.
- Is the UK market going to slow down? Probably not.
- Does it make sense to buy real estate? Yes.
Nick
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Addendum:
Interesting article looking at whether property or shares the best investment:
https://www.moneynest.co.uk/property-vs-shares/
