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?
In 2007, 3,780 properties sold in the Torbay Council area and last year, in 2016 only 2,881 properties sold – a drop of 23.78%.
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 –
- There are around 265 households a year that aren’t moving due to a fall in the number of mortgaged owner occupiers (i.e. demographics).
- I then estimate another 103 households a year are of the older generation mortgaged owner occupiers. As they are increasingly getting older, older people don’t tend to move, regardless of what is happening to the property market (i.e. lifestyle).
- Then, I estimate 44 households of our Torquay (and surrounding area) annual non-movers will mirror the rising number of high equity owner occupiers, who previously would have moved with a mortgage but now move as cash buyers (i.e. high house price growth).
- Finally, and the majority of people that would have moved (but can’t). I believe there are 324 Torquay (and surrounding area) mortgaged homeowners that are unable to move because of the financing of the new mortgage or keeping within the new rules of mortgage affordability that came into play in 2014 (i.e. mortgage).
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.