We’ve been enjoying a solid property in Leicester for some time now and many are happy with the way things are going. However, could potentially dark clouds be gathering on the horizon?
One thing that many investors hold true is that property prices always climb as a matter of nature. However a quick look through the ages proves this isn’t always true. Remember the 1990’s when property prices fell by 40% in four years just after the ’89 market crash? Or more recently in 2009 when prices fell by 19%? It really does happen, especially during recessions which was why house prices were predicted to fall during a global pandemic. But as we know they didn’t. In fact they hit a high not seen since 2014 due to pent up demand during lockdown, bounce back loans, grants and furloughs (that helped mitigate the impact) and the ultra low Bank of England interest rates that kept borrowing affordable.
However affording to actually purchase a property is still a big issue. The national ratio of average property values to earnings has in recent years been rising fast with the recent demand for property. The average person’s earnings is now 9 times smaller than the average property value, which prompts many to believe that a house price crash could be waiting for us over the horizon.
This could very well be true and could very well not be. An additional tell tale sign of the property market is mortgage affordability. This measures the proportion of mortgage payments to average incomes. For the entry of mortgage holders in 2015 this equated to 24.13% and currently it rests just above the national long-term average of 25%, proving that local property is still affordable.
However one vital aspect of the property market lays with first time buyers. The long-term average percentage of income which goes on mortgage payments for first-time buyers is 33%. Preceding the property crash at the end of the 80’s this figure stood at 54%, at the start of the 2008 property crash it was 49%, currently it stands at 31%. This is largely down to low interest rates which allows first time buyers to purchase larger mortgages, coupled with help from government at the tune of 95% and this trend is probably going to continue.
So, we’re in the clear then? Champagne and caviar from now on? Well not quite. The secret sauce in all this is the national interest rate which as we know controls currency and inflation. As we emerge out of isolation and start buying again we can expect prices to go up which could very well trigger a rise in interest rates to curb the resultant inflation.
This is almost guaranteed to happen in the next 24-36 months so investors and buy-to-let landlords should start considering fixed rate mortgages from now on.