When we bought our first home my dad, not one to mince (or even use) words, said not to ever worry about the price. A home was always worth another home. Once you were in, all that mattered was whether you could keep up repayments.
It’s therefore with morbid curiosity that I’m watching the news articles roll around about people not being able to afford their homes. Emma from Norfolk is having to sell and move into shared ownership as her two year fix is up, and she has to pay an extra £200/month (1). There’s been a flurry of questions like below on Reddit from people trying to work out what is the cheapest option for them, or how to afford a new mortgage (2). Chloe from London can’t afford her east end flat with the higher bills, although that might have something to do with changing from a city job to teaching (3). It comes on the back of research from Citizen’s Advice who suggest that 1/4 couldn’t afford an extra £100/month on their mortgage, and half can’t afford £250/month (4). The estate agent says “buy the biggest house you can afford, it can only go up”, and the populace jump how high.
I continue to sound like Cassandra (Burry), but this has been coming down the tracks for yonks. Years. It’s an interest rate reversion to mean people. 0.5% as a base rate is bonkers. 4-6% is a long term average, depending on whether you talk median or mean and time periods. Everyone’s so sodding focused on the next 24 hours, the next week, the next month, they’re not looking further out. How many of these lot do you think stress tested their mortgage to greater than long-term averages? Monevator talked about it twice in the summer (5, 6). I did it last year when we remortgaged. It’s just prudent personal finance. Now they’re all getting their towels wet as the tide comes in. Poor planning means…
Scan the horizon
How bad is this going to get? The BoE reckons two years of recession and unemployment doubling (7). It’s turning off the easy money tap (8). I’m not sure what to think, but am wary of this being a warning shot to prepare people, as has happened with interest rates. They started going up, and then accelerated rapidly. A warning to prepare people for recession might soften the blow of 3-4 years of shit, when you don’t want to tell them straight up. Mixing metaphors, the frogs in the pot and the heat is being turned up. Interest rates, energy bills, higher materials and wage costs are all going to pinch employers (9). Those just-about-managing businesses and the zombie companies supported by cheap loans, they’re all going to go. The recession is going to build lean businesses. I was planning a stag do for next year and noticed a load of local hostelries are shut over the winter, citing energy costs, with vague plans to re-open in the spring for the summer trade.
Back on property, there’s a balance at play between bank mortgage books, house prices, and mortgages as proportion of ownership (in my head a bit like stock float). The BoE is going to tighten stress tests on banks, because they know there will be more repossessions and bank failures if they don’t (10):
So the banks are going to want safer lending and aren’t going to be giving out easy money. Higher interest rates, and tightened lending on stretched LTVs. Higher mortgage rates have a lovely negative feedback loop on the wider economy (11), as the you lose the discretionary £100 in your pocket for spending every month to the bank to cover your new mortgage. Higher mortgage rates also discourage people from buying (12). If you can’t afford to move to a bigger home you stay put – sort of the position we’re in now. Early indicators suggest a reasonable fall in new mortgage approvals – 10% (12). It’s one of the few relatively contemporaneous measures, as most house price indicators are backward looking. Data on average mortgage % agreements are about six months behind current, as they’re fixed in advance, and house prices are similarly slow as they rely on data from completion on the land registry, not current marketing conditions.
Mortgage rates can only go so high. It’s a market. People can’t/ won’t pay silly prices. There are signs rates may be stabilising, at least in the interim. There’s been a dip of some fractions of percent in recent weeks (13, 14). A combo of the BoE base rate rise and having apparently sober politicians in charge. However the cheapest rates are still from small providers, and at low LTVs, showing that risk aversion is still there in banks balance sheets (15).
That’s well founded. This month has seen house prices fall, following on from a fall into October (16, 17). Only a little bit, but it’s a sign the heat is coming off the market. My perpetual Rightmove search is now full of reduced properties, whereas last year is was all Sold Subject To Completion. Lloyd’s caused headlines by speculating on an 8% fall in prices over the next year (18). There’s other figures between 6-15% (19). That’s still above pre-pandemic levels.
I was really worried about a bigger fall, but I’ve updated based on a different consideration. It’s not Fred Harrison’s 18 year property cycle prediction of rises until 2026 (20). It’s about that float/ percentage mortgaged. Mortgage affordability may have reached 9x average wages, house prices may have dipped, new build sales may be falling, but this all only matters if you’re moving and have a mortgage (21). Only 28% of properties are owned with a mortgage (22). 36% are owned outright. For Margot and Jerry, who own their home and have no plans to move, the market matters not. There’s a kicker about people using second properties owned outright as rental income for a pension, but the corresponding rise in rental prices seen over the last couple of years is still a market. If people can’t afford to pay they’ll have to do something else, and the market has to cool. They’ll just have to accept a lower (pension) income from the poor bugger renting from them.
So I don’t think it’s going to be catastrophic. A fall yes. Outliers who overstretched themselves in negative equity, like 2008. A loss in net worth (on paper) for most. A real terms loss of income (BTL) for some, and potentially a further old-age pensions/ income sting. But the market will re-balance. House repossessions are starting to climb, but they’re still at low levels (23, 24). 10% off the top isn’t awful for most who are at better than 75% LTV, and the market might actually be sensible again. Shit houses might not sell for silly money. Look at me being all not-Cassandra-ey.
Why do I even care when I’m sat in an alright house with a 4 years left of a fix at 1.65%? Well our house is just alright, and we want to go bigger to get more space for tat and potential sprogs. We’ll probably move next summer, when things have stabilized a bit and we’re in a better position to sell. The BBC’s calculator reckons if we just re-mortgaged we would be paying £350 extra a month. Doubling our mortgage, and extending the term out to compensate, would add £900/month on. Oof. Luckily we can port, but I better get cracking on promotions to meet the lifestyle bloat.
That’s how this FIRE thing works right?
P.S. Vaguely interesting other stuff
Guardian opinion piece on the impact of cost of childcare on the economy (25). As someone living this I feel the pain.
The Republicans likely did worse in the midterms because more of their voter base died of COVID (26). Anti-vax politicians; play stupid games, win (lose) stupid prizes.
October 2022 Finances
Here’s what my finances done done:
These are taken, as always, from my Beast Budget spreadsheet. I saved 10% of my income in October. Pretty poor that. I’m still fronting up for a load of work expenses, so hopefully that should offset from the figure later in the year. My net worth did sod all, up 0.6%, as I toe the line of £100k net worth. Once again all saving was just into rebuilding my existing emergency funds, though I did look at a Barclay’s 5% Blue Rewards account.
As compared to my four year back-calculated mean monthly spend:
- Groceries: September £234, October £330, budget £220 – Booo
- Eating out & Takeaway: Sept £93, Oct £105, budget £50
- Transport: Sept £220, Oct £280, budget £330
- Holiday: Sept £330, Oct £10, budget £40
- Personal: Sept £32, Oct £465, budget £120 – This was buying a couple of large special gifts for close family
- Health: Sept £52, Oct £52, budget £150
- Misc: Sept £515, Oct £699, budget £215 – Nursery
- Work fees: Sept £130, Oct £394, budget £265
In the garden:
Just tidying up now with everything put to bed for winter.