With energy prices soaring, rents rising and tenants feeling the pinch, a property’s energy efficiency has become so important that it can affect the rental value and desirability of a property.
The government has set ambitious targets that will require landlords to improve the energy ratings of their rental homes in the near future… so what can Bath landlords do to get ahead of these incoming regulations? What makes a good and bad EPC? And what can landlords do to improve their properties?
We have assembled a panel of expert speakers to discuss this hot topic at our second Bath Landlord Forum event. There will be a chance to put your questions to the panel and speak with fellow landlords.
We have the following speakers:
Oliver Meyer, of Meyer Energy, is a government-approved and accredited Domestic Energy Assessor operating in Bath. He will explain how property EPCs are compiled, and what constitutes a good or bad EPC.
Sonia Pruzinsky, of the Centre for Sustainable Energy, will discuss the options and funding available to landlords who wish to increase the energy efficiency of their property.
Toby Martin, of Reside Bath & ARLA Propertymark, will summarise current and upcoming EPC regulations, and other recent changes to landlord legislation.
We want to help Bath landlords to stay compliant with ever-changing lettings legislation, and provide support to make the most of your property investments.
So join us at The Francis Hotel, Queen Square on Wednesday 15th March 2023 from 18:00.
Reside is an award-winning independent letting agent in Bath. Please get in touch if you would like to discuss any aspect of letting or managing your property; we would love to hear from you.
The autumn of 2022 saw economic and political instability with the resignation of Boris Johnson as Prime Minister and the ill-fated Liz Truss 44-day premiership. Now as we go into 2023, the economic and political turmoil has subdued, offering a greater feeling of stability in money markets.
So on the back of that, what is the expectation for the British (and Bath) housing market as we go into the new year?
The biggest issue is inflation. Low steady inflation of around 2% a year is good for the economy, yet the high levels we are experiencing now isn’t. It affects the spending power of the pound in your pocket, and it alters the way people spend their money (including buying and selling property).
So where has this inflation come from?
Many blame it on inflated gas prices because of the Ukraine situation (however, it is believed by most economists only around 4% of the current 10.7% inflation figure is because of the fuel crisis).
UK inflation was already running at 6.2% when the Russian tanks rolled into Ukraine in February 2022 which created that energy price shock. Therefore, where has the rest of the inflation come from?
The catalyst of inflation started in 2020 with the Bank of England’s Quantitative Easing (QE). This pumped £450m new money into the economy at a time when the future looked bleak. The problem was, people had nothing to spend that money on, so when things started to get going after the lockdowns, there was a mis-match of too much demand for goods (as people had that money) and a lack of goods and services (because there wasn’t enough supply of those goods and services with the supply chain issues).
This all meant prices went up (i.e. inflation). The catalyst of this inflation was the Bank of England printed too much money in 2020 with QE and the supply chain issues (all easy to say with hindsight!).
Too much inflation is bad for the economy and therefore, ultimately the property market.
Two things will reduce inflation.
One is a recession and the other is increased interest rates.
Many find it fascinating that the Bank of England were talking the UK economy into a shallow recession in the autumn. Yet there was method in their madness. It was because they didn’t want to rely solely on the second method of increasing interest rates.
Better for the economy to have a shallow mild recession and interest rates rising to say 4.5% by the middle of 2023 to reduce inflation, than placing the whole job of reducing inflation on interest rates.
If that had been the case, interest rates would need to rise to say 7% (or more), causing the economy (and property market) to stall… and thus create a subsequent deep and long recession.
Therefore, with the Bank of England having recently increased its base rate to 3.5%, with more interest rate rises to come in 2023, what does this and the mild recession mean for the Bath property market?
A recession will increase unemployment levels, which have been comparatively low in the last few years. Depending on the type of roles/jobs that are made redundant, will determine the effect on the property market. Until that happens, we won’t know.
Everyone is suffering from higher gas, electric, shopping bills, yet with interest rates rising, this will increase the pressure on household budgets. Higher interest rates mean higher mortgage payments if the homeowner/landlord is on a variable rate mortgage (17 out of 20 homeowners with a mortgage are on a fixed rate).
It’s these two factors of recession and interest rates that will place negative pressure on Bath house prices.
Yet let us not forget this pressure is coming off the back of two of the strongest years on record in terms of house prices and transaction levels.
Bath house prices have experienced 32.7% price growth since the pandemic started in March 2020.
This is interesting when compared to the UK average, where average house prices have risen by 27.4% or £44,700 since March 2020.
Before I tackle the issue of house prices in 2023, I would like to look at the number of transactions.
To many the number of properties selling is irrelevant, yet I believe it is as important, if not more important, than house prices. I believe the best way to judge the health of the Bath property market is the number of people moving home (i.e. housing transactions).
You could ask yourself why Bathonians should be more concerned about the number of property transactions and not the change in property values.
Many economists believe the number of property transactions is a better judge of the health and virality of a housing market. The higher the number of people moving home the better for the whole economy than a smaller number of property transactions, whilst the same can’t be said for higher house prices.
Transactions levels have been quite high in the last couple of years.
1,191 households per year have moved home in Bath since lockdown, compared to the long-term 27-year average of 991 per year.
Looking at the stats coming through in the last couple of months, maybe we will settle for a figure somewhere between the two figures above, yet nowhere near the sub-800 annual figure of homeowners moving in the Credit Crunch years in the 2008/9/10 time frame.
Finally, let’s look at Bath house prices in 2023.
A good place to start to judge house prices is how many reductions are taking place on the properties that are already on the market.
In the last 3 years, the average number of price reductions for the properties for sale in the Bath area (BA1/2) has been 70.7 reductions per month.
In October there were 120 price reductions and in November 122 reductions.
Homeowners are being more realistic with their pricing and the price that one will achieve for their Bath home today and the rest of 2023 will be lower than one would have achieved in the spring of 2022.
Yet, as most Bath people buy another property when they sell (and most of the time move up market) the price you would have had to pay on the next purchase would have been even more.
Yes, the price of Bath property will be lower in 2023 by between 5% to 10%, yet these are only levels that were being achieved in the spring of 2022 – and nobody was complaining about those!
Final thoughts.
Several economic commentators are preaching doom and gloom for the property market in 2023, yet things are very different than the Credit Crunch years of 2008/9.
The property market crashed in 2008/9 mainly because the banks and building societies stopped lending money i.e., credit (that is why it was called the Credit Crunch).
There are two large differences this time round.
The first is the introduction of Mortgage Market Review mortgage stress testing instigated in 2014.
Homebuyers taking out a mortgage must have undergone a stress test on interest rates to obtain a mortgage since 2014. These stress tests are a safeguard to ensure that if their household income continued to be the same, the homeowner could afford higher mortgage rates.
The second is the banks and building societies have much higher cash reserves. Higher reserves will ensure they can continue to lend money and so more mortgages are available, although at a slightly higher interest rate than a year ago.
With mortgage rates falling back, with some very attractive fixed-rate deals knocking on the door of 5%, this is a development that may continue into 2023 as banks and building societies obtain cheaper funding sources and then compete for business by driving down the price of mortgages – which would only be good news for the Bath property market. These are my thoughts – what are yours?
Reside is an award-winning independent letting agent in Bath. Please get in touch if you would like to discuss any aspect of letting or managing your property; we would love to hear from you.
Being a Bath landlord is undoubtedly a challenge. The glory years of making money from ‘any old property’ are certainly in the past. With increased legislation and taxation from Government and the cost-of-living crisis (which will result in some Bath tenants struggling to pay their rent), times are challenging for many landlords.
Then newspapers are full of stories of landlords being pushed into the red as mortgage rates continue to rise. A landlord last summer could have fixed their 5-year buy-to-let rate with a 25% deposit at 1.86%, whilst today the best 5-year deal is with Barclays at 4.36%. This increase will add more than £246 per month to the landlord’s mortgage bill for the average UK buy-to-let property.
Landlords’ mortgages stand at £237.81bn, meaning collectively, landlords could have to pay an additional £7.11 billion per year in mortgage interest payments.
Next, the press is reporting in Q2 2022 (when compared to Q2 2021), landlord possession claims for arrears increased from 6,997 to 18,201 properties (a rise of 160%), property orders from 5,431 to 14,319 (an increase of 164%), warrants from 3,786 to 7,728 (a rise of 104%) and landlord repossessions from 1,582 to 4,900 (a rise of 210%).
This is on the back of the Section 24 tax changes made a few years ago and ahead of expensive energy efficiency upgrades that the Government is expected to legislate for in the coming 12 months.
Doesn’t sound good for landlords.
Until you look past the headlines and look at the actual detail.
79.93% of UK buy-to-let (BTL) mortgages are interest-only mortgages (compared to 12.29% of homebuyers), meaning the repayments are considerably lower than typical homebuyer mortgages. Therefore, the rise in interest rates won’t hit landlords’ profitability as much as many thought initially.
93.21% of all new BTL mortgages agreed in the last two years have been on a fixed rate mortgage, and 73.27% of all existing BTL mortgages are on a fixed rate. So, the increase in mortgage payments will only affect one in four landlords on variable-rate mortgages.
Let us not forget that less than one in three landlords have a BTL mortgage, meaning two out of three landlords aren’t affected by these interest rate rises.
The average rent of a Bath property is now £2,065 per month, an impressive rise of 11.5% compared to a year ago.
Those possession orders mentioned above look high until you realise that there are 4.4 million properties in the private rented sector. That means only 2.04% of UK rental properties had arrears bad enough for landlords (or agents) to start possession proceedings to evict the tenant. Also, only 0.045% of tenants were evicted through the courts in a calendar year.
Talking of arrears, recent studies using statistics from the Government and other letting industry sources show that …
landlords who didn’t use a letting agent to manage their property were 272.5% more likely to be two months or more in rent arrears in 2021. It pays to use a letting agent!
Next, the potential cost of upgrading rental properties’ energy efficiency.
The proposed changes in the MEES regulations require a minimum energy efficiency (measured by its Energy Performance Certificate (EPC)) to a ‘C’ rating on new tenancies from 2025 and existing tenancies by 2028. That will cost, on average, £10,000+ per property.
Yet it cannot be forgotten when the rules changed in 2018 properties had to have a minimum EPC rating of E in England and Wales to be legally compliant. If a landlord of an ‘F’ or ‘G’ rated rental property could prove that it would cost more than £3,500 to make those improvements to their EPC rating, then that was the most the landlord had to pay. No doubt something similar will take place in the future proposed legislation.
Then there is the profitability of renting. Rental yields are the primary guide to profitability in buy-to-let.
Yields are starting to rise as Bath rental growth is beginningto outstrip Bath house price growth.
The average yields being achieved in Bath today are …
1 bed – 4.5% yield
2 bed – 4.0% yield
3 bed – 4.1% yield
4 bed – 3.7% yield
5 bed – 3.0% yield
Yet investing in buy-to-let isn’t just about the yield.
Demand from tenants plays a massive part in the success or failure of your buy-to-let investment, so other yardsticks, such as void periods, should be considered. There is no point in securing a higher-yielding rental property if that buy-to-let investment remains empty.
My research has found that the Bath overall void period average so far is 41.4% lower than 18 months ago, reducing from 29 days in April 2021 to 17 days in September 2022 (the void period being the time it takes from the date of an old tenant moving out until the new tenant moves in).
Finally, buy-to-let investment is also an excellent hedge against inflation compared to other investments. If you would like more information on that, drop me a line, as it’s too long to post here.
In conclusion, the days of buying any old Bath buy-to-let property at any price and making loads of money from it as easy as falling off a log are gone!
The next few years will be challenging for everyone. Still, with the advice and opinion of a decent Bath letting agent to guide and support you on your buy-to-let journey, buy-to-let will continue to be a profitable investment.
You need to review your rental portfolio regularly. See how your portfolio measures up against yield vs capital growth see-saw. Review your mortgage financing and EPC status of your portfolio.
If you would like a no-obligation chat with me to discuss your options as a new potential landlord or an existing landlord with a rental portfolio, then let’s talk.
Reside is an award-winning independent letting agent in Bath. Please get in touch if you would like to discuss any aspect of letting or managing your property; we would love to hear from you.
Everything you need to know about the rental market in Bath & beyond during September 2022.
This month, Toby talks about the practice of offering over asking rent, and looks at some recently introduced landlord legislation.
Reside is an award-winning independent letting agent in Bath. Please get in touch if you would like to discuss any aspect of letting or managing your property; we would love to hear from you.
One of our landlords recently completed a refurb on a cottage that has been used as a workshop / storage space since the 70s, and had fallen into disrepair. I have to share the before & after pics with you – it’s a real success story! They have done such a complete job of turning the property into a modern, stylish home, and it was a complete joy to find a new tenant for them.
In their own words: “As you will see, the renovations really have been a labour of love! Willow Tree Cottage was originally a home with the most recent known tenant being a Mr Cheeseman, in the 1960s, we think. From around the 1970s, the cottage was used as a garage, workshop and storage rooms. It was very run down when we bought the place. Now we have undertaken the job of turning it back into a warm, inviting and comfortable home again.
“Every part of the house, from the roof down, has been painstakingly repaired, restored or replaced. This included full reconstruction of the roof, new windows, putting in water and electricity connections where there previously were none, new heating and hot water systems, two new bathrooms and a kitchen, replastering including repairing the original lime plaster in many places, full redecoration using specialist paints in Farrow & Ball colours, repointing of the original stonework, structurally reinforcing the old floors, replacing old, rotten lintels. You name it… we did it.
“Although the cottage is fortunately not Listed, our aim was always to enable it to be a comfortable home, with modern conveniences whilst still maintaining its character and beautiful period features such as the fire places, exposed stone walls and original quarry tiled and flagstone floors.
“To help make the cottage as energy efficient as possible, we included a 2.5kw solar pv installation, double glazing, state of the art individually thermostatically controlled clay core radiators, a solar heated water system (that stores excess energy from the solar PV not being used by the electrics in the cottage!) and lots of loft and roof insulation, to the standards of a new build house or above!”
Reside is an award-winning independent letting agent in Bath. Please get in touch if you would like to discuss any aspect of letting or managing your property; we would love to hear from you.
The inaugural Bath Landlord Forum event promises important updates for landlords, with particular focus on tax, mortgages and legislation.
With more than 170 different pieces of tenancy legislation to keep on top of (and more on the way!) how are landlords meant to keep up to date? The seminar will help Bath landlords to stay compliant with ever-changing regulations, and provide support to make the most of their property investments.
So join us at The Francis Hotel, Queen Square on Wednesday 19th October from 18:00.
Well, what a weekend that was. Street parties, gatherings in the park, the purple bunting, egg and cress sandwiches, union jack flags, cheese and pineapple on cocktail sticks, and let’s not forget the trifle – the Platinum Jubilee Party. And no decent party is worth its salt without a game or a quiz.
So, if you have post-Jubilee blues, let me ask you, how much was the average Bath house worth in 1952?
To start with, let me look at what a property is worth today in Bath.
The average price paid for a property in the Bath areain the last 12 months was £497,590.
Now, let’s go back to 1952. Sir Winston Churchill was the Prime Minister, Newcastle won the FA Cup, London was covered in the Great Smog, free prescriptions on the NHS ended (it cost 1 shilling or 5p in new money), and King George IV, at the age of 56 passed away on the 6th February, meaning Princess Elizabeth became the Queen. As for housing …
The average price of a Bath home in 1952 was £4,063.
This means Bath house prices are 121 times higher since 1952.
Yet over the last 70 years, the country has been subjected to 4.5% per annum inflation.
The 1952 Bath home is equivalent to £78,133 todaywhen adjusted for inflation.
This means Bath house prices have increased by 504.8% in real terms since 1952.
So, does that mean house prices are more expensive today compared to 1952?
In 1952, the average annual male wage was £452, 8 shillings and 1 pence, meaning the average Bath house was 8.98 times the average value of a wage. Today the average home is 8.85 times the average wage.
Yet let us not forget the average mortgage payment in 1952 was £11 per month. The average Brit earned £34 per month, meaning 32.3% of the household income was going on mortgage payments, whilst nationally today, according to Nationwide, it stands at 28%.
It’s cheaper, in real terms, to buy a property in 2022 than in 1952.
And that’s the point, some things in ‘real terms’ (real terms being true spending power of the money after taking into account wages, costs and inflation) were more expensive and some cheaper 70 years ago. For example, in 1952, petrol was equivalent (in today’s inflation-adjusted prices) to £1.02 per litre, a pint of beer £2, half a dozen eggs £2.20, cheddar cheese £2.40 per 500g, a basic radio £430, a Hoover £530 and a 12-inch TV £1,600.
So back to property… The Queen’s reign has seen some amazing house price rises in the UK, yet that growth hasn’t always been in a constant upward direction, as we have had a couple of dips along the way.
We had a house price crash in 1990, when the average value of a Bath property dropped from £122,264 to £101,259 in 1996, only for them to start rising again.
Bath saw another house price crash between 2008 and 2009, when the average house price dropped from £365,746 to £311,803 in a year.
What else has changed about property and housing since the Queen came onto the throne?
In 1952, only 32% of people owned their own home, whilst 50% of people rented from a private landlord and 18% rented a council house.
By the time of the Silver Jubilee in 1977, 56% of people owned their own home, with 12% of people privately renting and 32% rented from the council.
Come the Golden Jubilee in 2002, 70% of people owned their own home, with 11% of people privately renting and 19% rented from the council.
Today, 63% of people own their own home, 20% of peopleprivately rent and 17% rent from the council.
I am sure the property market will be totally different again in another 70 years!
I hope you enjoyed reading this article and do share it with your friends if you find it interesting.
P.S. For all you Rightmove fans, the average Bath terraced home in 1952 was worth £3,959, and a semi in Bath could be bought for, on average, £3,608.
Reside is an award-winning independent letting agent in Bath. Please get in touch if you would like to discuss any aspect of letting or managing your property; we would love to hear from you.
Inflation (and recessions) can be nerve racking for people and their hard-earned savings and wealth.
Yet there are six reasons which make investing in private rental properties a potentially wise investment in these changeable times.
This article looks at how investing in Bath property could help you ‘hedge’ against inflation and protect your savings and wealth against the possible recession.
The cost-of-living predicament is threatening the budgets of many Bath households.
Inflation is running at 7.8%, yet the best savings rates in the market are only 2.75% (because of low Bank of England interest rates). This means that the value of people’s savings is falling fast.
To add insult to injury, the possibility of a recession on the horizon could add another nail in the coffin of people’s wealth and savings.
Looking back at the last recession (ignoring the 2020 Covid recession), the Stock Market (FTSE index) dropped 40.1% during the Credit Crunch (2008/9) — scarcely a soothing thought if you worry about a recession looming in the next couple of years.
A recession can have a catastrophic impact on household budgets, as a weaker economy characteristically means that salaries drop, and people get made redundant.
So, why do I suggest Bath rental properties will help to protect your wealth and hedge against inflation?
Bath rentals aren’t perfect, yet in many ways, they go a long way to help – let me tell you why.
1. One of the most significant benefits of investing in residential property is to hedge against inflation. An ‘inflation hedge’ is an investment that defends against the decreased purchasing power of your money that results from the loss of its worth/value due to inflation.
The last time the UK suffered high and persistent inflation was the 1970s.
In 1973, the average British house was worth £9,942. In 1980, that same house was worth £23,287. If the same £9,942 had been invested instead in the stock market in 1973, it would have been worth £19,384 in 1980.
So how did that compare to inflation?
Neither property nor the stock market beat inflation in those seven years (as the goods and services of that £9,942 in 1973 had risen to £25,897 by 1980).
But investing in the stock market between 1973 and 1980, that stock market investor would have lost 25.2% of their investment in ‘real terms’, compared with only 10.1% for property investors.
However, there was the bonus of seven years’ worth of rent!
To give you some idea of what that would be worth in today’s figures (even if the rent didn’t go up during that time frame) …
The average Bath landlord will earn £136,332 in rent over seven years.
2. Rental properties have repetitive, regular monthly income, whilst dividends from the stock market are dependent on there being profits which, in a recession, can be hit and miss.
3. Existing Bath landlords know that the rents their rental properties achieve don’t historically decline during recessions in the medium term.
In 2008, Bath rents dipped by 5.2%, yet they soon bounced back a year later.
And even if average rents do go down, every rent is fixed at the start of the tenancy. Also, it is infrequent for a tenant to negotiate a reduction in rent mid-tenancy even if average rents did drop.
4. Property prices sometimes fall during recessions.
In the 2008 Credit Crunch recession, Bath and North East Somerset property values dropped 19.34%.
Dropping from £253,777 at the peak in September 2007 to £204,700 in May 2009 (before they started to rise again).
Yet as I stated above, the Stock Market dropped 40.1% with the Credit Crunch. Also previously, the Stock Market dropped 36% on Black Monday before the early 1990’s recession and 55.3% in 1974.
Which sort of drop would you prefer?
5. (Almost) guaranteed rental payments. Insurance can be taken out for rental payments (you can’t get that on stocks and shares). Also, the government will cover most (or all) of the rent when someone is made redundant and needs to apply for social security.
6. For those Bath landlords who take a mortgage, inflation can be a benefit. The first is the effect of inflation on mortgage debt. As Bath house prices rise over time, it reduces the loan to value percentage of your mortgage debt and increases your equity. You will receive a lower interest rate when you re-mortgage in the future because of the lower loan to value percentage.
Also, as the equity in your Bath rental property increases, assuming you fix your mortgage, your payments stay the same.
Finally, inflation also helps Bath buy-to-let landlords because rents tend to increase with inflation. So as rents go up, your fixed-rate buy-to-let mortgage payments stay the same, creating the prospect of more significant profit from your buy-to-let investment.
Yet, there are downsides to renting.
Rent arrears can be a worry. However, during 2021, landlords who used a letting agent were, according to an investigation from Denton House Research, 272.5% less likely to be in arrears of two months or more.
One of the biggest reasons is the more stringent tenant referencing that letting agents tend to do compared to landlords who do it themselves. At our agency, we like to reference tenants carefully for job security, stability, and any history of non-payment on rents, always liaising with previous landlords/agents to see they were a good tenant.
That is why many tenants with a poor tenancy record are attracted to properties that are not through agents, as they know most (not all) DIY landlords don’t reference their tenants as thoroughly as letting agents do. Solid referencing is not a 100% guarantee you won’t get rent arrears or have your rental property trashed, yet it will go a long way to mitigate it.
One of the things about investing in Bath rental properties is that buy-to-let investors have more control over their returns than stock market investors do. Buy-to-let provides long-term stability and constant income to counterweight the massive swings seen in the FTSE stock market.
There is something reassuring about touching and feeling your investment – the ‘bricks and mortar’.
You must make your own decision when investing in the private rental market in Bath. If you’d like to chat over the phone for five or ten minutes to discuss where I would be investing in the Bath property market, don’t hesitate to send me a message or pick up the phone.
How are you planning for the spectre of a potential recession?
Reside is an award-winning independent letting agent in Bath. Please get in touch if you would like to discuss any aspect of letting or managing your property; we would love to hear from you.
Many commentators believe we have seen the peak of the Bath property market.
So, should savvy bargain hunters wait for Bath house prices to fall?
Or could postponing your house buying for any anticipated price drop be a costly mistake?
Over the last two years, the Bath property market has been a rollercoaster ride of hyperactive demand together with the new sport of getting your offer accepted when you compete with 30 other bidders.
Yet there are clouds on the horizon that theBath property market could be at its peak.
Bank of England interest rates have increased four times in the last few months to try and combat inflation. Meanwhile, many Bath households are finding it tough to counter the most significant drop in real incomes in a single year since records began in the mid-1950s, all at the same time as gas, oil and electricity prices are predicted to rise again in the autumn.
Hence why some economists are predicting house price drops in the coming 18 to 24 months of 3% to 5%.
So, surely this is not the best time to buy a Bath property – and surely savvy buyers should wait for Bath house values to fall?
Is it realistic to see double-digit national house price growth? Certainly not.
The question is how far the Bath property market will slow and whether the slowing will drop into modest falls.
Let me look at household income first.
At best, the outlook is gloomy as real household disposable income is set to drop by 2.4% in 2022/23, the largest drop since records began in 1956 this is despite the £17.6 billion of financial support for British households revealed in Rishi Sunak’s Spring 2022 Statement with the National Insurance thresholds, energy bill support package and duty cut on petrol. Without these changes announced by the Chancellor, real household disposable income would have fallen by an additional 1% in 2022/23.
Click to enlarge
Secondly, as interest rates increase, mortgage rates will increase in line, increasing mortgage costs, so surely that will curtail demand, meaning Bath house prices will drop, and buyers should wait to catch a bargain?
Finally, with inflation on the rise, the real value of people’s savings will decrease quicker, and the value of their deposits will diminish meaning Bath prices will surely drop, and people should wait to buy?
Surely the Bath property market has peaked andbuyers should wait for the bargains?
Well, I don’t think so.
I believe, subject to no significant shocks in the world economy, Bath house price growth will be very slow in the next 18/24 months and go into low single digits (even the odd month dipping ever so slightly into the red), but not the 16% to 19% annual drop we saw in 2008/9.
Let me look at real household income. Every economist predicts growth in real household income in 2023/24 by around 1%.
If the two years are combined, the predicted effect on real household income in the next two years (2022/23/24) is a net loss of 1.4%, whilst in the credit crunch years 2010/11/12, the net loss was 2.7%.
I was looking at the increase in mortgage rates. 79% of owner-occupiers have fixed their mortgage costs and had their affordability stress-tested to Bank of England interest rates of 3% to 4% under the Mortgage Market Review rule changes in 2014. I believe the most significant impact of increasing interest rates will be at the point of taking on a new mortgage by first-time buyers (as opposed to servicing or the porting of an existing mortgage from one house to the next house).
The four successive Bank of England base rate rises, inflation and the rising cost of living are likely to bring more cautiousness over summer and autumn when it comes to people buying a property. Yet, there is still a massive imbalance of demand for property over the number of properties for sale to quench that demand.
The potency of the job market and the ongoing mismatch between the supply of properties (mentioned in last week’s article on the Bath property market) on the market and demand for those properties will support property values.
Finally, the by-product of increasing inflation is that it makes buy-to-let more attractive. If there is a reduction in first-time buyers, this will be counterweighted by more landlords buying again, supporting the current level of Bath properties.
But what if Bath house prices do drop significantly?
So let’s assume that Bath house prices do fall, irrespective of the reasons above, it will not inevitably help Bath buyers.
If we have a house price crash, people tend to find their careers are at risk, and their salaries don’t rise as much. The younger generation (i.e. first-time buyers) often gets hit the toughest by recessions.
If first-time buyers wait until 2024 to buy and Bath property values drop by 10%, that will prove more expensive.
In the last 2008/09 crash, lenders weren’t offering 5% deposit mortgages. The lowest deposit mortgage that first-time buyers could get was with a 10% deposit and even then, they were hard to come by.
When writing this article, first-time buyers can obtain a 5% deposit mortgage for a fixed rate of 2.66% for five years.
The typical terraced house inBath sells for £485,700.
So, if they were to buy now, on this mortgage deal, the first-time buyer would have to stump up a £24,285 deposit and their mortgage payments would be £1,689.37 per month.
Yet, let’s say property values in Bath do drop by 10% in the next 18 months, the terraced house would now be worth £437,130, so a significant saving. Or is it?
Everyone believes interest rates will rise further, so let’s assume they go to 3% by the autumn of 2023. That means the mortgage rate for a 10% deposit mortgage will be in the early 5%s, so let me assume 5.29% (because the banks tend to increase the gap between the base rate and the mortgage rate in recessions to allow for the extra risk).
The monthly mortgage payment on the 5.29% mortgage would be £2,058.88 per month, and you would need to nearly double your deposit to £43,713.
So even if Bath’s house prices did drop by 10%, the first-time buyer would be £4,430 worse off a year in mortgage payments and would have to find double the deposit.
… and then there is the other cost of waiting.
You have two years’ worth of rent to pay. The average rent for a Bath property is £1,636 per month.
If you waited a couple of years for Bath house pricesto drop by 10%, you would spend £39,264 in rent.
Choosing to buy a Bath property makes even more economic sense if it is a long-term choice, as homeowners can ride out any house price drops.
Homeowners who plan to stay in a property can generally rely on getting their money back within six to ten years whilst not paying any rent.
Will Bath prices go up, or will they go down?
Remember, George Osbourne said house prices would drop by 18% in May 2016 if we voted to leave the EU, whilst many economists said they would drop by 5% to 10% when Covid hit in March 2020.
And we all know what happened.
If you think you will be better off owning your own Bath home rather than renting one, don’t bother to wait for the suggested house price drop that may never happen. These are my thoughts, what are yours? Let me know in the comments.
Reside is an award-winning independent letting agent in Bath. Please get in touch if you would like to discuss any aspect of letting or managing your property; we would love to hear from you.
