One big talking point of the property seminar I held at the start of this month was the affordability of property.
Whilst property values in the UK have only increased 1.3% in the last year, in the past decade prices are up by over a fifth!
At the same time interest rates have plummeted, so whilst renting used to be on a par in terms of cost compared to owning your own home, now it has become incredibly cheap to finance a property purchase.
Most recently a very pleasant two-bedroom house in Chichester was for sale at £243,000; a perfect first-time buyer starter home.
If we assume it sold for £240,000, our first-time buyer would require a £12,000 deposit, £2,300 stamp duty plus money for the legal fees. Their £228,000 95% mortgage with a five year fixed rate of 2.69% would cost £511 per month (which includes paying down the debt).
That same house was in fact sold to a buy-to-let investor and is now up for rent…..at £895pcm!
So, if it’s so much cheaper to buy why doesn’t everyone do so?
Well there’s certainly some who choose to rent rather than buy for social and job mobility reasons. Some don’t want to be tied down to a particular property or area and in today’s more nimble economy this can be a sensible practice for many.
But affordability issues remain a major factor; with difficulties in raising the deposit as well as getting the banks to lend enough money in the first place.
A couple with a joint income of £50,000 are likely to be able to borrow around £200,000 from a bank……not enough to buy the two bedroom house I mentioned earlier without having an extra £40,000 to spare.
Consider that same couple earning £50,000 could theoretically RENT a property up to £1,650 per month (based on affordability criteria set by referencing agents) and you can see why some are choosing to rent a nicer property than they could ‘afford’ to buy (they could afford to buy it, they’re just not given the chance to).
This, for me, is the major issue facing our property market – banks’ unwillingness to lend at what are seen today as abnormal interest rates. Whilst for the next five years it is evident that buying the same property is far cheaper than renting, banks still assume interest rates will be at a more ‘normal’ level after this period and thus loading up on debt now would be unsustainable in the long run.
Taking a step back, I feel this is the number one factor in terms of future house prices. If today’s low interest rates become ‘normal’ then property prices will surely surge as lending becomes more available. If, on the other hand, interest rates revert to pre credit crunch levels then prices are likely to flat line….and if we see interest rates of 15% like we did on Black Wednesday in 1992 then all bets are off!
Article Courtesy of: Clive Janes, CRJ Lettings