News and views of property in English Riviera
This blog follows the buy-to-let market in Torbay. You’ll find tips, guidance, and analysis that relates specifically to Torbay and you’ll also find properties from all the estate agents in the town on here that may make decent investments. I operate Ridgewater Residential Lettings in Torbay and if you’re thinking of buying a property to let in Torbay, I’m happy to offer a second opinion.
I recently read a report by the Yorkshire Building Society that 54% of the country has seen wages (salaries) rise faster than property prices in the last 10 years. The report said that in the Midlands and North, salaries had outperformed property prices since 2007, whilst in other parts of the UK, especially in the South, the opposite has happened and property prices have outperformed salaries quite noticeably.
As regular readers of my blog know, I always like to find out what has actually happened locally in Torquay. To talk of North and South is not specific enough for me. Therefore, to start, I looked at what has happened to salaries locally since 2007. Looking at the Office of National Statistics (ONS) data for Torbay Council, some interesting figures came out…
Salaries in Torbay have risen by 20.27% since 2007 (although it’s been a bit of a rollercoaster ride to get there!) – interesting when you compare that with what has happened to salaries regionally (an increase of 18.63%) and nationally, an increase of 17.61%.
Next, I needed to find what had happened to property prices locally over the same time frame of 2007 and today. Net property values in Torbay are 4.08% higher than they were in late 2007 (not forgetting they did dip in 2008 and 2009). Therefore…
Salaries in Torbay have risen by 20.27% since 2007 (although it’s been a bit of a rollercoaster ride to get there!) – interesting when you compare that with what has happened to salaries regionally (an increase of 18.63%) and nationally, an increase of 17.61%.
Next, I needed to find what had happened to property prices locally over the same time frame of 2007 and today. Net property values in Torbay are 4.08% higher than they were in late 2007 (not forgetting they did dip in 2008 and 2009). Therefore…
All this is important, as the relationship between salaries and property values is the basis on how affordable property is to first (and second, third etc.) time buyers. It is also vitally relevant for Torquay landlords as they need to be aware of this when making their buy-to-let plans for the future. If more Torquay people are buying, then demand for Torquay rental properties will drop (and vice versa).
As I have discussed in a few articles in my blog recently, this issue of ‘property-affordability’ is a great bellwether to the future direction of the Torquay property market. Now of course, it isn’t as simple as comparing salaries and property prices, as that measurement disregards issues such as low mortgage rates and the diminishing proportion of disposable income that is spent on mortgage repayments.
On the face of it, the change between 2007 and 2017 in terms of the ‘property-affordability’ hasn’t been that great. However, look back another 10 years to 1997, and that tells a completely different story. Nationally, the affordability of property more than halved between 1997 and today. In 1997, house prices were on average 3.5 times workers’ annual wages, whereas in 2016 workers could typically expect to spend around 7.7 times annual wages on purchasing a home.
The issue of a lack of homeownership has its roots in the 1980’s and 1990’s. It’s quite hard as a tenant to pay your rent and save money for a deposit simultaneously, meaning for many Torquay people, home ownership isn’t a realistic goal. Earlier in the year, the Tories released proposals to combat the country’s ‘broken’ housing market, setting out plans to make renting more affordable, while increasing the security of rental deals and threatening to bring tougher legal action to cases involving bad landlords.
This is all great news for Torquay tenants and decent law-abiding Torquay landlords (and indirectly owner occupier homeowners). Whatever has happened to salaries or property prices in Torquay in the last 10 (or 20) years … the demand for decent high-quality rental property keeps growing.
Moving to a bigger home is something Torquay people with growing young families aspire to. Many people in two bedroom homes move to a three-bedroom home and some even make the jump to a four-bed home. Bigger homes, especially three-bed Torquay homes are much in demand and it can be a costly move.
If you live in Torquay in a two-bedroom property and wish to move to a four-bedroom house in Torquay, you would need to spend an additional £233,193 (or £921.11 pm in mortgage payments (based on the UK Bank average standard variable rate)). However, going straight to a four bed from a two-bed home is quite rare as most people jump from a two to three-bedroom home, then later in life, from a three to four-bedroom home.
So, after being asked my thoughts on moving home in Torquay by a friend recently, please find my analysis of the local property market and then some thoughts. To start with, let us see what the average property price is for a Torquay property by the number of bedrooms it has.
I then decided to calculate what it would cost to make the jump upmarket from one bedroom to two bedrooms, two to three bedrooms etc, etc, both in actual money and in mortgage payments (using the current standard variable rate of UK Banks of 4.74% – so the mortgage cost could be higher or lower depending on the mortgage taken).
There are some interesting jumps in costs when moving upmarket as a Torquay buyer. The cost of moving from one to two beds, and two to three beds is relatively reasonable, whilst the jump from three to four beds in Torquay is quite high and therefore financially prohibitive for most families. This helps provide a partial explanation as to why some four-bed properties are currently taking slightly longer to sell.
As an aside, there is a lesson here for all my blog readers. You can quite clearly see why the larger 4 and 5-bed properties don’t offer the best returns for buy to let. Simply put the monthly finance costs and rents achieved don’t match up so well (i.e. a mortgage for a 4 bed home in Torquay would cost you 43.96% compared to a 3 bed mortgage, but the jump in rent would be a lot less than that). I don’t wish to be dismissive about the solidity of investing in larger properties because it does depend on your circumstances. Four bedroom properties sometimes offer other advantages. Pick up the phone if you want to know what they are in more detail.
A further look at the stock of properties in Torquay is revealing.
The most active purchasers are 20 and 30 something home-owning parents with growing families. Many look to more modern developments for the perfect balance of access to decent primary schools, commutability and lifestyle. For landlords looking to buy within Torquay, they face stiff competition from these 20/30 something families, making the three bedroom Torquay home massively in demand, often attracting spirited offers and selling within weeks of listing. This mix of homebuyers and landlords is a pressure point in the Torquay property market. Again, if you are a landlord, call me and I will show you areas with decent returns where you aren’t in so much competition with young Torquay family homebuyers.
Yet, the cost of an additional bedroom can be too much for some Torquay buyers. It is quite challenging moving home the first time, but to then find you are priced out on the next move up the ladder can be quite disconcerting, with families often having to move to a different part of town to get the bigger home they need.
Nevertheless, that’s the position many homeowners find themselves in with the cost of the additional bedroom being too much to bear. To those buying their home for the first time, all I suggest is they not only consider the mortgage payments and other costs of their first home, but also do their homework into their next rung up the Torquay property ladder. Thinking about it now will keep you ahead of the game in the future; as your number of bedrooms, family property needs and lifestyle wants change.
..and Torquay landlords – well these changes in the way people live also mean there are opportunities to be had in the Torquay rental market. Many Torquay landlords are starting to pick my brain on this, so if you don’t want to miss out – drop me a line.
The mind-set and tactics you employ to buy your first Torbay buy to let property needs to be different to the tactics and methodology of buying a home for yourself to live in. The main difference is when purchasing your own property, you may well pay a little more to get the home you (and your family) want, and are less likely to compromise. When buying for your own use, it is only human nature you will want the best, so that quite often it is at the top end of your budget (because as my parents always used to tell me – you get what you pay for in this world!).
Yet with a buy to let property, if your goal is a higher rental return – a higher price doesn’t always equate to higher monthly returns – in fact quite the opposite. Inexpensive Torbay properties can bring in bigger monthly returns. Most landlords use the phrase ‘yield’ instead of monthly return. To calculate the yield on a buy to let property one basically takes the monthly rent, multiplies it by 12 to get the annual rent and then divides it by the value of the property.
This means, if one increases the value of the property using this calculation, the subsequent yield drops. Or to put it another way, if a Torbay buy to let landlord has the decision of two properties that create the same amount of monthly rent, the landlord can increase their rental yield by selecting the lower priced property.
To give you an idea of the sort of returns in Torbay…
Now of course these are averages and there will always be properties outside the lower and upper ranges in yields: they are a fair representation of the gross yields you can expect in the Torbay area.
As we move forward, with the total amount of buy to let mortgages amounting to £199,310,614,000 in the country, landlords need to be aware of the investment performance of their property, especially in the era of tax increases and tax relief reductions. Landlords are looking to maximise their yield – and are doing so by buying cheaper properties.
However, before everyone in Torbay starts selling their upmarket properties and buying cheap ones, yield isn’t the only factor when deciding on what Torbay buy to let property to buy. Void periods (i.e. the time when there isn’t a tenant in the property between tenancies) are an important factor and those properties at the cheaper end of the rental spectrum can suffer higher void periods too. Apartments can also have service charges and ground rents that aren’t accounted for in these gross yields. Landlords can also make money if the value of the property goes up and for those Torbay landlords who are looking for capital growth, an altered investment strategy may be required.
In Torbay, for example, over the last 20 years, this is how the average price paid for the four different types of Torbay property have changed…
It is very much a balancing act of yield, capital growth and void periods when buying in Torbay. Every landlord’s investment strategy is unique to them. If you would like a fresh pair of eyes to look at your portfolio, be you a private landlord that doesn’t use a letting agent or a landlord that uses one of my competitors – then feel free to drop in and let’s have a chat. What have you got to lose? 30 minutes and my tea making skills are legendary!
I was having a lazy Saturday morning, reading through the newspapers at my favourite coffee shop in Torquay. I find the most interesting bits are their commentaries on the British Housing Market. Some talk about property prices, whilst others discuss the younger generation grappling to get a foot-hold on the property ladder with difficulties of saving up for the deposit and other articles about the severe lack of new homes being built (which is especially true in Torquay!). However, a group of people that don’t often get any column inches are those existing homeowners who can’t move
Back in the early
To answer that, we have to go back 40/50 years. Inflation was high in the late 1960’s, 70’s and early 80’s. To combat that, the Government set interest rates high to try to lower inflation. Higher interest rates meant the householders monthly mortgage payments were higher, meaning mortgages took a large proportion of the homeowner’s household budget. However, that wasn’t all bad news as the high inflation eroded the mortgage debt in ‘real spending power terms’. Consequently, as wages grew (to keep up with inflation), this allowed them to get an even higher mortgage (whilst their mortgage debt was decreasing) and therefore to move up the property ladder quicker.
Roll the clock on to the late 1990’s and the early Noughties, and things had changed. UK interest rates tumbled as UK inflation dropped. Lower interest rates and low inflation, especially in the five years 2000 to 2005, meant we saw double digit growth in the value of UK property. This inevitably meant all the home owner’s equity grew exponentially, meaning people could continue to move up the property ladder (even without the effects of inflation).
This snowball effect (of everyone moving house) continued into the mid noughties (2004 to 2007), as Banks and Building Society’s slackened their lending criteria (who can remember the 125% loan to value Northern Rock Mortgages that could be obtained with just a note from your Mum!! ) meaning home movers could borrow even more to move up the property ladder.
So, now it’s 2017 and things have changed
You would think that with ultra-low interest rates at 0.25% (a 320+ year all time low), the the number of people moving would be booming – wouldn’t you ? However, with (1) low wage growth of 1.1% per annum, (2) the tougher mortgage rules since 2014 (3) sporadic property price growth in the last few years( and (4) high property values comparative to salaries (I talked about this a couple of months ago), all these four points have come together to mean less people are moving … but by how many?
Therefore, we have just over 900 less households moving in the Torquay and surrounding Council area each year. Now of that number, it is recognised throughout the property industry around fourth fifths of them are homeowners with a mortgage. That means there are around 737 mortgaged households a year (fourth fifths of the figure of 900) in the Torquay and surrounding council area that would have moved 10 years ago, but wont this year.
The reason they can’t/won’t move can be split down into different categories, based on a recent report by the Council of Mortgage Lenders (CML). So, of those estimated 737 annual Torquay (and surrounding area) non-movers, based on that CML report –
Undoubtedly, whilst the first three points (demographics, lifestyle and high price growth) is something beyond Government or Bank of England control , it is the fourth point where something could be done, as it is the people and households in that final 4th point (the non-movers because of financing the new mortgage and keeping within the new rules of mortgage affordability) that if Torquay property values were lower, this would decrease the size of each step up the property ladder. This would mean the opportunity cost of increasing their mortgage would reduce (i.e. opportunity cost = the step up in their mortgage payments between their existing and future new mortgage) and they would be able to move to more upmarket properties.
And then there is the mortgage rules, but before we all start demanding a relaxation in lending criteria for the banks, do we want to return to free and easy mortgages 125% Northern Rock footloose and fancy-free mortgage lending that seemed to be available in the mid 2000’s … available at a drop of hat and three tokens from a cereal packet?
We all know what happened with Northern Rock …. Your thoughts would be welcome on this topic.
Jonathan Holmes, 34-year-old father of two from Torquay, was out house hunting. It was a pleasant August Saturday afternoon, and our man cycles along on his bike. He cycles up a street of suburban semis, where he spots a few retired mature neighbours, chatting to each other over the garden fence. He leans his bicycle against a lamppost and launches softly into his property search.
“Anyone on the road contemplating moving?” Jonathan asks, “I am not a landlord or developer, I’m just a Torquay bloke trying to get out of renting, buy a house, do it up and live in it with my wife and two children”
“The only way I will leave here is in a box”, answers an 80-something lady, wearing her fading Paisley patterned housecoat from the 1970’s.
“I‘ve lived here since before you were born, its lovely up here .. we aren’t moving, are we Doris?” (as her neighbour sagely shook his head at his wife).
Jonathan, like many Torquay people born in the late 1970’s to the early 1990’s, is keen to get a slice of prime Torquay real estate. Yet people like Jonathan in Generation Y (or the Millennials as some people call them i.e. born between 1977 and 1994 and needing family housing now) are discovering, as each year passes by, they are becoming more neglected and ignored when it comes to moving up the property ladder.
Looking at the graph for the UK as whole …
Over 75 percent of Brits aged 65 and above (the baby boomers) are owner-occupiers, the biggest share since records began and a proportional rise of over 48.3% since the early 1980’s. Looking at those Baby Boomers (the current 65+year olds) .. and roll the clock back 36 years (to when they were in their 30’s and 40’s and two thirds (65.6%) of them owned their own home.
Whilst today, just under a half of 25 to 49 year olds (47.3%) own their own home.
However, the biggest drop has been in the 18 to 24-year old’s, where homeownership has dropped from a third (32%) in the 1980’s to less than one in ten (8.9%) today. Looking at the Torquay statistics, the numbers make even more interesting reading.
Government policy contributes to the generational stalemate. Stamp Duty rules prevent older Brits from moving as the price of land and planning rules make it harder to build affordable bungalows that are attractive to members of the older generation who want to move.
The average value of an acre of prime building land in the UK is between £750,000 and £800,000 per acre. Bungalows are the favoured option for the older generation, but the problem is bungalows take up too much land to make them profitable for new homes builders. The housing market is gridlocked with youngsters wanting to get on (then move up) the property ladder whilst the older generation, who want to move from their larger houses to smaller, more modern bungalows, can’t. The problem is – there simply aren’t enough bungalows being built and the high price of land, means they are prohibitive to build.
So, what is my point? Well, all I would say to the homeowners of Torquay is that one solution could be to start to talk to your local councillors, so they can mould the planners’ thoughts and the local authority thinking in setting land aside for bungalows instead of two up two down starter homes? That would free the impasse at the top of the property ladder (i.e. mature people living in big houses but unable to move anywhere), releasing the middle aged gridlocked people in the ladder to move up, thus releasing more existing starter homes for the younger generation.
… and to you Jonathan … the wandering new home searcher – if things are going to change, it will be years before they do .. so keep going out and spreading the word of your search for a new home for your family.
“What’s happening to the Torbay Property Market” is a question I am asked repeatedly. Well, would it be a surprise to hear that my own research suggests that there isn’t just one big Brixham property market – but many small micro-property markets?
According to recent data released by the Office of National Statistics (ONS), I have discovered that at least three of these micro-property markets have emerged over the last 20+ years in the town.
For ease, I have named them the …
The ‘lower’ and ‘lower to middle’ sectors of the Torbay property market have been fuelled over the last few years by two sets of buyers. The first set, making up the clear majority of those buyers, are cash rich landlord investors who are throwing themselves into the Torbay property market to take advantage of alluringly low prices and even lower interest rates. The other set of buyers in the ‘lower’ and ‘lower to middle’ Torbay property market are the first-time buyers (FTB), although the FTB market is in a state of unparalleled deadlock as it’s been trampled into near-immobility and incapacity by the new 2014 stricter mortgage affordability regulations and also fewer mortgages with low deposits.
Some of you may be interested to know how I have classified the three sectors ..
…. and if one looks at the figures for Torbay Council area you can see the three different sectors (lower, lower/middle and middle) have performed quite differently.
| Torbay Council Property Market – Sold Prices | Price Paid in 1995 | Price Paid in 2017 | Percentage Uplift 1995 – 2017 |
| Lower (Bottom 10%) | £29,000 | £107,000 | 268.97% |
| Lower to Middle (Lower Quartile) | £38,500 | £141,350 | 267.14% |
| Middle (The Median) | £57,671 | £206,649 | 258.32% |
You can quite clearly see that it is the ‘lower’ market that has performed the best.
You might ask, what do all these different figures mean to homeowners and landlords alike? Quite a lot – so let me explain. The worst performing sector (with the lowest Percentage uplift) was the ‘middle’ housing market. Therefore, interestingly, if we applied the best percentage uplift figure (i.e. from the ‘lower’ market percentage uplift), to the ‘middle’ 1995 housing market figure, the 2017 figure of £206,649, would have been £212,789 instead.
Now, I have specifically not mentioned the upper reaches of the Brixham housing market for several reasons. Firstly, the lower or middle market is where most of the buy to let investment landlords buy their property and where the majority of property transactions take place. Secondly, due to the unique and distinctive nature of Torbay’s up-market property scene (because every property is different and they don’t tend to sell as often as the lower to middle market), it is much more difficult to calculate what changes have occurred to property prices in that part of the Torbay property market – looking at the stats for the up-market Brixham property market from Land Registry, only 24 properties in Brixham (and a 5 mile radius around it) have sold for £2,000,000 or more since 1997.
So, what should every homeowner and buy to let landlord take from the information that there are many micro-property markets? Well, when you realise there isn’t just one Torbay Property Market, but many Torbay “micro-property markets”, you can spot trends and bag yourself some potential bargains. Even in this market, I have spotted a number of bargains over the last few months that I have shared in my Property Blog and to my landlord database, especially in the ‘lower’ and ‘lower/middle’ market. If you want to be kept informed of those buy to let bargains, have a look at my blog INSERT URL .. it’s free to do so and I’m sure you wouldn’t want to miss out – would you?
I would love to know if you have spotted any micro-property markets in Torbay.
As the dust starts to settle on the various unread General Election party manifestos, with their ‘bran-bucket’ made up numbers, life goes back to normal as political rhetoric on social media is replaced with pictures of cats and people’s lunch. Joking aside though, all the political parties promised so much on the housing front in their manifestos, should they be elected at the General Election. In hindsight, irrespective of which party, they seldom deliver on those promises.
Housing has always been the Cinderella issue at General Elections. Policing, NHS, Education, Tax and Pensions etc., are always headline grabbing stuff and always seem to go ‘the ball’. However, housing, which affects all our lives, always seems to get left behind and forgotten.
Nonetheless, the way the politicians act on housing can have a fundamental effect on the wellbeing of the UK plc and the nation as a whole.
One policy that comes to mind is Margaret Thatcher’s Council House sell off in the 1980’s, when around 1.4m council houses went from public ownership to private ownership. It was a great vote winner at the time (it helped her win three General Elections in a row) but it has meant the current generation of 20 somethings in Torbay (and elsewhere in the Country) don’t have that option of going into a council house. This has been a huge contributing factor in the rise of the private renting and buy to let in Torbay over the last 15 years.
Nevertheless, looking back to the start of the Millennium, Labour set the national target for new house building at 200,000 new homes a year (and at one point that increased to 240,000 under Gordon Brown for a couple of years). In terms of what was actually built, the figures did rise in the mid Noughties from 186,000 properties built in 2004 to an impressive 224,000 in 2007 (the highest since the early 1980’s) as the economy grew.
Then the Credit Crunch hit. It is interesting, that the 2010 Cameron/Clegg government did things a little differently. The fallout of the Credit Crunch meant a lot less homes were built, so instead of tackling that head on, the coalition side-stepped the target of the number of new homes to build and offered a £400m fund to help kick start the housing market (a figure that was a drop in the ocean when you consider an average UK property was worth around £230,000 in 2010). The number of new houses being completed dipped from 146,800 in 2011 to 135,500 the subsequent year.
So, one might ask exactly how many new homes do we need to build per year? It is commonly accepted that not enough new properties are being built to meet the rising need for homes to live in. A report by the Government in 2016, showed that on average 210,000 net additional households will be formed each year) up to 2039 (through increased birth rates, immigration, people living longer, lifestyle (i.e. divorce) and people living by themselves more than 30 years ago). In 2016, only 140,600 homes were built … simply not enough!
Looking at the numbers locally in Torbay and the surrounding area, it is obvious to me, that we as an area, are not pulling our weight either when it comes to building new homes. In the 12 months up to the end of Q1 2017, only 270 properties were built in the Torbay Borough Council area. Go back to 2007, that figure was 330, 10 years before that in 1997, 240 new homes and further back to 1988, 280 new homes were built.
Who knows if Teresa May’s Government will last the five years? She will think she has bigger fish to fry with Brexit to get bogged down with housing issues. But let me leave you with one final thought.
The conceivable rewards in providing a place to live for the public on a massive house building programme can be enormous, as previous Tory PM’s have found out. Winston Churchill in 1951, asked his Minister for Housing (Harold Macmillan) if he could guarantee the construction of 300,000 new properties a year, he was notoriously told: “It is a gamble—it will make or mar your political career, but every humble home will bless your name if you succeed.”
Isn’t it interesting, that the Tories remained in power until 1964! Mrs May will have to work out if she wants to be the heiress to Harold Macmillan or David Cameron?
Over the last 12 months, the UK has decided to leave the EU, have a General Election with a result that didn’t go to plan for Mrs May and to add insult to injury, our American cousins elected Donald Trump as the 45th President of the United States. It could be said this should have caused some unnecessary unpredictability into the UK property market. The reality is that the housing and mortgage market (for the time being) has shown a noteworthy resilience. Indeed on the back of the Monetary Policy pursued by the Bank of England there has been a notable improvement of macro-economic conditions! In July for example it was announced that we are witness to the lowest levels of unemployment for nearly 50 years. Furthermore, despite the UK construction industry building 21% more properties than same time the previous year, there has still been a disproportionate increase in demand for housing, particularly in the most thriving areas of the Country. Repossessions too are also at an all-time low at 3,985 for the last Quarter (Q1 2017) from a high of 29,145 in Q1 2009. All these things have resulted in…
Property values in Torquay according to the
Land Registry are 2.36% higher than a year ago
So, what does all this mean for the homeowners and landlords of Torquay, especially in relation to property prices moving forward?
One vital bellwether of the property market (and property values) is the mortgage market. The UK mortgage market is worth £961,653,701,493 (that’s £961bn) and it representative of 13,314,512 mortgages (interestingly, the UK’s mortgage market is the largest in Europe in terms of amount lent per year and the total value of outstanding loans). Uncertainty causes banks to top lending – look what happened in the credit crunch and that seriously affects property prices.
Roll the clock back to 2007, and nobody had heard of the term ‘credit crunch’, but now the expression has entered our everyday language. It took a few months throughout the autumn of
2007, before the crunch started to hit the Torquay property market, but in late 2007, and for the following year and half, Torquay property values dropped each month like the notorious heavy lead balloon, meaning …
The credit crunch caused Torquay property values to drop by 18.4%
Under the sustained pressure of the Credit Crunch, the Bank of England realised that the UK economy was stalling in the early autumn of 2008. Loan book lending (sub-prime phenomenon) in
the US and across the world was the trigger for this pressure. In a bid to stimulate the British economy there were six successive interest rates drops between October 2008 and March 2009; this
resulted in interest rates falling from 5% to 0.5%!
Thankfully, after a period of stagnation, the Torquay property market started to recover slowly in 2011 as certainty returned to the economy as a whole and Torquay property values really took off in 2013 as the economy sped upwards. Thankfully, the ‘fire’ was taken out of the property market in Spring 2015 (otherwise we could have had another boom and bust scenario like we had in the 1960’s, 70’s and 80’s), with new mortgage lending rules. Throughout 2016, we saw a return to more realistic and stable medium term property price growth. Interestingly, property prices recovered in Torquay from the post Credit Crunch 2009 dip and are now 22.7% higher than they were in 2009.
Now, as we enter the summer of 2017, with the Conservatives having been re-elected on their slender majority, the Torquay property market has recouped its composure and in fact, there has
been some aggressive competition among mortgage lenders, which has driven mortgage rates down to record lows. This is good news for Torquay homeowners and landlords, over the last few months a mortgage price war has broken out between lenders, with many slashing the rates on their deals to the lowest they have ever offered. For example, last month, HSBC launched a 1.69% five-year fixed mortgage!
Interestingly, according to the Council of Mortgage Lenders, the level of mortgage lending had soared to an all-time high in the UK.
In the Torquay postcodes of TQ1 & TQ2, if you added up everyone’s mortgage, it would total £848,682,811!
Since 1977, the average Bank of England interest rate has been 6.65%, making the current 323 year all time low rate of 0.25% very low indeed. Thankfully, the proportion of borrowers fixing their
mortgage rate has gone from 31.52% in the autumn of 2012 to the current 59.3%. If you haven’t fixed – maybe you should follow the majority? In my modest opinion, especially if things do get a little rocky and uncertainty seeps back in the coming years (and nobody knows what will happen on that front), one thing I know is for certain, interest rates can only go one way from their 300 year ultra 0.25% low level … and that is why I consider it important to highlight this to all the homeowners and landlords of Torquay. Maybe, just maybe, you might want to consider taking some advice from a qualified mortgage adviser? There are plenty of them in Torquay.
According to my research, of the 22,711 properties in Torquay, 8,755 of those properties have mortgages on them. 74.2% of those mortgaged properties are made up of owner-occupiers and the rest are buy to let landlords (with a mortgage).
… but this is the concerning part .. 1,891 of those Torquay mortgages are interest only. My research also shows that, each year between 2017 and 2022, 23 of those households with interest only mortgages will mature, and of those, 6 households a year will either have a shortfall or no way of paying the mortgage off. Now that might not sound a lot – but it is still someone’s home that is potentially at risk.
Theoretically this is an enormous problem for anyone in this situation as their home is at risk of repossession if they don’t have some means to repay these mortgages at the end of the term (the typical term being 25 to 35 years). Banks and Building Societies are under no obligation to lengthen the term of the mortgage and, when deciding whether they are prepared to do so or not, will look at it in the same way as someone coming to them for a new mortgage.
Back in the 1970’s and 1980’s, when endowment mortgages were all the rage, having an endowment meant you were taking out an interest only mortgage and then paying into an endowment policy which would pay the mortgage off (plus hopefully leave some profit) at the end of the 25/35-year term. There were advantages to that type of mortgage as the monthly repayments were lower than with a traditional capital repayment and interest mortgage. Only the interest, rather than any capital, is paid to the mortgage company – but the full debt must be cleared at the end of the 25/35-year term.
Historically plenty of Torquay homeowners bought an endowment policy to run alongside their interest only mortgage. However, because the endowment policy was a stock market linked investment plan and the stock market poorly performed between 1999 and 2003 (when the FTSE dropped 49.72%), the endowments of many of these homeowners didn’t cover the shortfall. Indeed, it left them significantly in debt!
Nonetheless, in the mid 2000’s, when the word endowment had become a dirty word, the banks still sold ‘interest only’ mortgages, but this time with no savings plan, endowment or investment product to pay the mortgage off at the end of the term. It was a case of ‘we’ll sort that nearer the time’ as property prices were on the rampage in an upwards direction!
Thankfully, the proportion of interest only mortgages sold started to decline after the Credit Crunch, as you can see looking at the graph below, from a peak of 43.81% of all mortgages to the current 8.71%.
Increasing the length of the mortgage to obtain more time to raise the money has gradually become more difficult since the introduction of stricter lending criteria in 2014, with many mature borrowers considered too old for a mortgage extension.
Torquay people who took out interest only mortgages years ago and don’t have a strategy to pay back the mortgage face a ticking time bomb. It would either be a choice of hastily scraping the money together to pay off their mortgage, selling their property or the possibility of repossession (which to be frank is a disturbing prospect).
I want to stress to all existing and future homeowners who use mortgages to go in to them with your eyes open. You must understand, whilst the banks and building societies could do more to help, you too have personal responsibility in understanding what you are signing yourself up to. It’s not just the monthly repayments, but the whole picture in the short and long term. Many of you reading my blog ask why I say these things. I want to share my thoughts and opinions on the real issues affecting the Torquay property market, warts and all. If you want fluffy clouds and rose tinted glasses articles – then my articles are not for you. However, if you want someone to tell you the real story about the Torquay property market, be it good, bad or indifferent, then maybe you should start reading my blog regularly.
Well last week’s article “The Unfairness of the Torquay Baby Boomer’s £2,270,920,000 windfall?” caused a stir. In it we looked at a young family member of mine who was arguing the case that Millennials (those born after 1985) were suffering on the back of the older generation in Torquay. They claimed the older generation had seen the benefit of the cumulative value of Torquay properties significantly increasing over the last 25/30 years (which I calculated at £2.27bn since 1990). In addition many of the older generation (the baby boomers) had fantastic pensions, which meant the younger generation were priced out of the Torquay housing market.
I replied there should be no surprise though that the older members of our society hold considerably more of our country’s wealth than the younger generation. This wealth is accrued and saved across someone’s life, and reaches it’s peak about the time of retirement. If we are to comprehend differing wealth levels between generations we need to compare ‘apples with apples’. It is much more important to track the wealth held by different generations at the same age, i.e. what was ‘real’ wealth of the 30-something couple in the 1960’s compared to a 30-something couple say in the 1980’s or 2010’s?
Looking back over the last 120 years at various economic studies, this growth in wealth from one generation to the next (at the age range), only happened over a 30 year period of between 1960 and late 1980’s. Since the 1990’s, wealth has not improved across the generations, in the same age range.
So could it be all about these people saving? The fact is, in the last 10 years, UK households have saved on average 7.5% to 8% of the household income into savings accounts, compared to an average of 6% to 7% in the late 1960’s and 1970’s. The baby boomers haven’t been actively squirreling away their cash for the last 30 or 40 years in savings accounts to accumulate their wealth. Most of their gains have been passive, lucky bonuses gained on the back of things out of their control (unanticipated and massive property value rises or people living longer making final salary pensions more valuable) – it’s not their fault!
…and herein lies the issue … it is assumed that these Millennials aren’t buying property in the same numbers like the older generation did in the past (because most of their wealth has come from house price inflation). The Millennials have often been described as ‘Generation Rent’, because they rent as opposed to buying property – because we are told they cant buy.
However, when Torquay mortgage payments are measured against monthly income, home ownership is affordable by historic standards because mortgage rates are currently so low. As you can see, the ratio of average house price to average earnings in Torquay hasn’t vastly changed over the last decade …
(i.e. in 2008, the average house price in Torquay was 8.93 times more than the average person’s salary in Torquay and this has dropped to 8.14 in 2017 – and all this off the property boom of the early 2010’s)
95% first-time buyer mortgages were reintroduced in 2010. The average interest rate charged for those 95% FTB mortgages has slowly dropped from around 5.5% in 2009 to the current 4% rate. Back in the 1980’s/1990’s mortgage interest rates were between 8% and 10%, and one time in the early 1990’s, reached 15%! The main difference between the two periods was the absolute borrowing relative to income is greater now than in the 1980’s. They call this the ‘mortgage to joint household income ratio’. In the 1980’s the mortgage was between 1.8x to 2x joint income; today it is 3.4x to 3.6x salary.
The simple fact is, in the majority of cases, it is still cheaper for a first-time buyer to buy a property with a 95% mortgage, than it is rent it. The barrier for these Millennials, has to be finding the 5% mortgage deposit – instead of being able to afford monthly mortgage outgoings at the current 95% mortgage rates?
Millennials make up 7,700 households in the Torbay Council area (or 13.04% of all households in the area). However, behind the doom and gloom, surprisingly, 30.9% did save up the 5% deposit and do in fact own their own home (that surprised you didn’t it!)
Nonetheless, the majority of Millennials in the area still do rent from a landlord (4,600 Millennial households to be exact). Yet, they have a choice. Buckle down and do what their parents did and go without the nice things in life for a couple of years (i.e. the holidays, out on the town two times a week, the annual upgraded mobile phones, the £100 a month Satellite packages) and save for a 5% mortgage deposit … or live in a lovely rented house or apartment (because they are nowadays), without any maintenance bills and live a life with no intention of buying (because renting doesn’t have a stigma anymore like it did in the 1960’s/70’s (secretly hoping their parents don’t spend all their inheritance so they can buy a property later in life – like they do in central Europe).
Neither decision is right or wrong – although it is still a choice. Until Millennials decide to change their choices – that is the reason why the country’s private rental sector will continue to grow for the next 30 years – meaning happy tenants and happy landlords.
