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Nothing says out of touch to the UK electorate more than their leaders having too many houses — and in particular too many expensive houses.
No one was madly impressed when Tony Blair spent £3.65mn on a Georgian townhouse in London when he was still in office. Peter Mandelson was forced to resign over a home loans scandal in 1998 (it might not have not have been such a big deal had it not been an expensive Notting Hill flat).
Then there is Rishi Sunak: his houses probably aren’t top of his worry list this week, but having four houses worth £15mn and being in middle of spending £250,000 upgrading one is not a great look.
It all makes perfect sense as shorthand for out-of-touchness: the price of houses in the UK makes having a property portfolio very much an elite activity. Look at the latest numbers. Average house prices are up 10.9 per cent in the past year to February — to £276,755, according to ONS official data. New-build prices rose 19.3 per cent, detached 14.4 per cent and flats 8.1 per cent (everyone still wants a garden).
Even in the worst-performing region (London!) prices rose 8 per cent. The Halifax numbers out last week showed a similar move in March — with prices up 11 per cent and some 18.2 per cent since the beginning of 2020. This is obviously nuts — average pay is up only 9.9 per cent over the same time period.
The house price-to-earnings ratio on Halifax numbers is now 8.4 times — higher, as Capital Economics, points out than the peak just before the 2008 global financial crisis, when it stood at eight.
These numbers come in the same week as we learned that inflation in the UK is running at 7 per cent and likely to stay above that for some time: it is, say ING bank analysts, “unlikely to fall below 7 per cent this year”.
That means interest rates — and mortgage rates — are on the way up. The average quoted rate for a new two-year fixed mortgage with a 75 per cent loan to value ratio jumped to 2.12 per cent in March, says analyst Pantheon Macroeconomics. That’s the highest since late 2014 and up from 1.76 per cent in February.
It is also forecast to hit 2.7 per cent by the end of the year — at the same time as real household disposable incomes are set to fall by 2.5 per cent this year.
At the same time, says Hargreaves Lansdown, lenders are “increasing the assumed [household] costs in their affordability calculations”. That’s going to make it harder to get mortgages.
Are there signs that demand is not as hot as it was? Google Trends data offers a clue: search data for the big property websites is only 5 per cent above 2017-19 averages, having been 15 per cent higher in the pandemic months. There are also, say Pantheon, “tentative signs” of a rise in supply. The average agent has 38 homes on their books (against a long-term average of 55) but the latest Royal Institution of Chartered Surveyors’ survey data suggests a sharp rise in new instructions. Overall it seems obvious that this house price boom must end — and soon.
Or not. Interest rates are still almost ridiculously low by historical standards. The last time inflation was this high, the base rate was 10 per cent. Today, if you have a deposit of 40 per cent or more you can get a 10-year fixed-rate from Halifax at 2.48 per cent. Have 25 per cent and the rate goes to 2.58 per cent.
Long-term borrowing at 5.5 percentage points below the rate of inflation? That is as close to free money as you are going to see this year. At these levels the cost of servicing a mortgage is more manageable than it has been in most other periods. In the northern regions of the UK, notes Capital Economics, a consultancy, the cost of servicing an 80 per cent mortgage on the average house remains below its long-term average and even in London (where house prices are about 50 per cent overvalued in house price-to-earnings terms compared to the long-term average. Prices only look about 7 per cent too high if you consider them in terms of monthly payment affordability alone, again relative to the long-term average.
The Bank of England’s bank rate would, says Capital, have to hit 3 per cent for affordability to deteriorate to the same levels in London and the south-east as before the 2008 financial crisis and, even at 3 per cent, the rate would still be very negative in real terms.
It is also worth remembering that most mortgages (just over 80 per cent) are on fixed rates and those remortgaging this year will be doing so with lower loan-to-value ratios — due to rising house prices — and so may well see their rates rise very little, if at all.
Even if they do, any rise could be offset via the very tight jobs market — and rising wages. Note that average pay growth in the private sector was 6.2 per cent between December 2021 and February 2022 — and that overall growth in total pay kept pace with inflation.
Workers are more aware of inflation now than they were even a few months ago — and prepared to ask for pay rises to match it: it is not a given that real earnings will fall. The upshot? Even if buyer numbers fall off, there will not be the sudden rush to sell you might expect if rate rises were to push mortgage holders over the financial edge
Finally, it is worth casting your mind back to the early 1970s. Much was different then — mortgage lending was just opening up to dual income for example and house prices did not start the decade expensive. But nonetheless, prices went bananas. Land Registry data tells us they more than doubled from the start of the decade to the end of 1975 (from £3,950 to £10,000) and doubled again by 1980 (£19,273).
Over a horribly volatile decade, money invested in property just about held its value — while that invested in the stock market did not. Those nervous of losing their cash to inflation may well have noted this: there is a record £1.9tn on deposit in the UK at a time in which deposit rates are at a record low. Keep your money in cash and with UK CPI at 7 per cent you are guaranteed to see the purchasing power of that cash fall by over 6 per cent every year.
Put it into property and you might think you won’t. None of this suggests the boom can keep going indefinitely. It can’t. At some point reality will catch up with prices. But it does suggest that there might be a year or two left in it. This won’t make the value of Sunak’s houses less irritating for voters. However, there could be a positive in it for Boris Johnson: he appears to have a cottage in Oxfordshire and a flat in Camberwell. But no mansions.
Merryn Somerset Webb is editor-in-chief of MoneyWeek. The views expressed are personal; merryn@ft.com; Twitter: @MerrynSW
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