Why waiting for the St Neots Property Market to crash could cost you up to £39,864
If you read the news, it seems like it’s all doom and gloom in the British property market.
Newspapers and clickbait 24-7 news websites seem to be only featuring stories about the crisis the UK Property Market faces and the rising interest rates, stories that are scaring the heck out of us all!
Are they right though? Will British house prices drop?
Yes - St Neots house prices will lower in the next 24 months.
However, we think that what a property will sell for in the next couple of years and what is being reported, are very different.
The current situation is being likened to the property crash of 1988 and 2008. We disagree. There is a difference between previous house price crashes and now:
1.56.25% of homeowners don’t have a mortgage, whilst in 1988, that was 35.8%. These people are shielded from the interest rate rises.
2. Negative equity.
Negative equity was an issue after 1988 when everyone had an endowment mortgage, so they never paid any of the capital off their mortgage. Therefore, when house prices dropped, negative equity was a massive issue as people owed more than what their house was worth.
By 2008, nobody was taking out endowment mortgages, yet still, 1 in 2 were interest-only mortgages (meaning the capital wasn’t being paid off). Today, 17 out of 20 homeowners are on repayment mortgages - so they have more home equity, so negative equity isn't so much an issue.
3. Rising interest rates
Yes, they are rising … albeit from artificially low rates.
In 1988, nearly everyone was on a variable rate mortgage and an average mortgage interest rate was 10.8%, and they rose to 16.4% by 1990. That hurt, yet most survived.
In 2008, 6 out of 10 homeowners had learned their lesson and were on fixed rates at an average rate of 6.07%. Today 17 out of 20 homeowners have long-term fixed rates with an average of 2.14%.
Also, it must be noted that homebuyers have been stress tested for 6% to 7% mortgage rates since 2014 because of the Bank of England MMR rule changes. It will be challenging, and lifestyle choices will need to be made, yet we shouldn’t see the dumping of houses on the market as we did in 2008/9.
4. Mortgages being pulled
The next issue is the number of mortgages being pulled. We think around 1,000 mortgage deals have been removed recently - yet there are still over 3,000 deals out there … and most are still fixed rates.
Also, 1 in 5 people rent today and are protected from all this, yet in 1988, only 1 in 14 rented.
In summary, the economic conditions surrounding the house price crash in 1988 and 2008 are not the same as now.
Don’t get us wrong, those homeowners coming off their fixed rates of around 2% in the coming years will have to make tough choices as they will see their monthly mortgage payments rise substantially.
There are things you can do to mitigate that specific problem in the coming years, we’d suggest talking to an Impartial Mortgage Advisor like Assured Mortgage Advice to find out more.
Should you wait to move? And what will happen to St Neots property prices?
We think that subject to nothing seismic happening in the world (fingers crossed!), St Neots property values will be broadly neutral and slowly drift downwards over the next 24 months.
We believe they will drift downwards, probably between 4% to 6% lower, because of rising inflation and mortgage affordability, but not a crash.
This means if we achieve prices of 4% to 6% less, homeowners will still be getting the same prices the property market was getting in the summer of 2021, which no one was complaining about.
If we do see a significant house price crash; what then?
The housing crash of 1988 saw the average house in the UK drop from £63,784 to £50,167, a reduction of 20.09%.
The housing crash of 2008 saw the average house in the UK drop from £184,132 to £154,065, a reduction of 16.33%.
Let’s assume that St Neots house prices fall by an average of 18% - surprisingly, it will not help St Neots buyers.
It’s usually the younger generation who get hit the toughest by recessions like this. If St Neots first-time buyers wait until 2024 to buy their first home and St Neots property values drop by 18%, it could have proved more expensive to wait.
In the last property crash of 2008, lenders withdrew 5% deposit mortgages. The smallest mortgage that first-time buyers could obtain was with a 10% deposit, and even those were hard to come by.
When writing this article, first-time buyers could obtain a 5% deposit mortgage for a fixed rate of 3.92% for five years.
The typical first-time buyer terraced house in St Neots sells for £274,213.
If first-time buyers were to buy now, on this mortgage deal, they would have to find a £13,711 deposit, and their monthly mortgage payments would be £1,140.97 per month.
So, let’s say property values in St Neots do drop by 18% in the next 24 months; the terraced house would now be worth £224,855, a significant saving in the purchase price.
Or is it?
Everyone believes the Bank of England will raise interest rates further, so let's assume they go to 5.5% by the autumn of 2024. That will mean the rate for a 10% deposit first-time buyer mortgage will be in the early 7%’s, so let’s assume 7.19% (because the lenders have in the past increased the gap between the Bank of England base rate and the mortgage rate in more challenging economic times to allow for the extra risk).
The monthly mortgage payment in two years on the 7.19% mortgage would be £1,319.90 per month, and in those two years, you would have had to have saved an additional £8,775 to make up your 10% deposit of £22,485.
So even if St Neots' house prices did drop by 18%, the first-time buyer would be £2,147 worse off a year in mortgage payments
(and would have to save many thousands extra for their deposit)
... and then there is the other cost of waiting.
You have two years’ worth of rent to pay. The average rent for a St Neots property is £1,027 per month.
If you waited a couple of years for St Neots house prices to drop by 18%, you would spend £24,648 in rent plus have higher mortgage payments in 2024/5/6 and with the extra deposit mentioned above it would add up to an additional £39,864 over the next five years.
Yes, the price you paid for your St Neots home would be lower if you waited two years. Yet, you would only benefit from that when you sold on versus the economic pain of two years of extra renting, the higher deposit and higher mortgage payments in a couple of years.
This doesn't even consider the emotional cost of putting your life on hold for two years, and there is no guarantee that the mortgage lending criteria in two years would allow you to step onto the property ladder.
St Neots house prices will drop, yet did you realise it will cost you more, even if house prices are falling?
Don’t forget, George Osbourne said house prices would drop by 18% in May 2016 if we voted to leave the European Union, whilst many economists said house prices would fall by 5% to 10% when Covid hit in March 2020.
And we all know what happened to those predictions.
If you believe you will be better off owning your own St Neots home rather than renting one, don't bother to wait for the suggested house price crash that may never happen.