I think everyone will remember the meteoric rise in house price prior to the collapse of the financial markets worldwide. I recall that I was probably one of the few that benefited from this phenomenon, since I was lucky enough to sell my house almost at the top of the market, producing an overall profit in excess of 300%. During the same period, exceedingly high mortgages were being granted by banks, sometimes up to 150% of the actual value of the house. The “feel-good factor” led everyone to believe that property prices will continue to go up, yet those same people forgot several essential points namely:
Now there has been an abundance of stories in the press recently which have once again indicated vast increases in property values in certain areas of the UK. The most prolific of these is in the south of England and it is forecast that before the end of 2014, the average price of a house in London will be in excess of £500,000! Therefore the question has to be asked, how the average man can afford such prices, particularly since there has not been any significant rise in wages, yet the cost of living in general has increased by some 7% since the collapse of the financial markets.
We all have to understand that inflation in property prices is directly related to the interest rates charged on mortgages. This rate is also directly related to the Bank of England Base Rate, which is significantly below that charged by the mortgagors. Now I do not want to get too complicated in the interrelationship between prime interest rates, interbank lending rates, futures rates and similar monetary terminology. To be quite honest, my own belief is that very few bankers understand the working of these various rates and are just used by the bankers to confuse the public. What we do know is this. The cost of living has risen whilst wages have failed to keep in line with the increase, which ultimately means that people have less money to spend. This is where forecasting the cost of houses for the next three years or so becomes a matter of guesswork. Not surprisingly, there is wide disparity between property prices in various parts of the country.
Month by month, property prices in London have increased, yet in the north-east of England for example, the price rise has been hardly significant. In Northern Ireland, the cost of property is still 41% below prices during the boom period and it is considered that this is unlikely to change in the foreseeable future. The current Bank of England interest rate is 0.5% but following a meeting by the board of the Bank in early July 2014, rumours started to circulate the money markets that over the next couple of months, interest rates could very well increase to 1.5%. As I mentioned earlier, property prices have a direct relationship to interest rates. If interest rates are high, then a fewer number of people are in the market to purchase a new house. Thus it follows that property prices at best will remain the same, but are more likely to fall as vendors still wish to sell, as do estate agents who live off the commission earned from selling a property.
So how does anyone forecast the way property prices are going to react in the future? I have recently read a number of financial reports with particular regards to this aspect and there does not seem to be any continuity or agreement in this subject. I have read some reports that have indicated property prices will continue to boom by up to 8.5% over the next couple of years and then start to even out around 2017. The view of other reports would lead us to believe that there will be significant increases in property prices throughout the remainder of this year through to the end of 2015. At that stage, they will even out and remain static after into the foreseeable future, even as far as 2019! The main factor here is what will happen to interest rates and this is the big question that nobody can forecast! Similarly, if the cost of living continues to rise yet wages remain almost static, then it follows that our disposable income will decrease, resulting in us being unable to pay higher mortgage rates.
Overall, the general consensus of opinion seems to be twofold. With regards to a change in overall interest rates, opinion is and general indications are that the Bank of England Base Rate will increase from 0.5% up to as much as 1.5% within the next 12 months. This means that mortgage interest rates will similarly increase but it may very well take up to one year for the effect of these interest rate increases to be felt by house owners and potential purchasers. For this reason, it is obvious that property prices will increase over the next 12 months by an average of 7% but after that will flatten out to around 1% per annum up until 2018/19. Of course everything is relative to which part of the UK you either reside or wish to buy a new property. As we all know, an increase in the mortgage interest rate ultimately results in the cost of a mortgage becoming more expensive. Since disposable income has not increased in line with inflation and is unlikely to do so in the foreseeable future, then the cost of mortgage repayments is going to become somewhat prohibitive for a number of people.
Please understand I am not a financial expert and therefore I am only giving you my personal opinion. If I wished to purchase a new property, always providing I can sell my present one, I would wait as long as possible, preferably over 12 months, before even considering a new purchase, when it is predicted that price will remain somewhat static. However, you must never forget that your current mortgage repayments will increase in the future, yet your disposable income will inevitably remain the same as it is at present.
The secret to any good house move is being able to sell your current property before purchasing another. Always remember, if you are planning an immediate move for whatever reason, particularly since house prices are most likely to increase over the next 12 months, then it is often beneficial to sell your house immediately for cash rather than go through the long drawn-out affair of placing it on the estate agent market. It never does any harm to give us a call and see if we are able to help.