Gravesend Property Market
• According to some newspapers and pundits, the property market boom could soon be over with the increasing interest rates and inflation.
• In this article, I share the 3 fundamental economic reasons why things are different to the last property market crash.
• The insider’s way to find out if there will be a property crash.
• ...and 4 reasons why buy-to-let landlords are coming back into the Gravesend rental market to protect their wealth and hedge against inflation.
With inflation and the cost-of-living crisis, some say this could cause property values to drop, by between 10% and 20% in the next 12 to 18 months.
There can be no doubt that the current Gravesend property market is very interesting.
At the time of writing, there are only 222 properties for sale in Gravesend (the long-term 15-year average is between 570 and 600), meaning house prices have gone up considerably.
According to the Land Registry…
Gravesend property prices have increased by 14.2%
So, as Robert Kiyosaki says, ‘the best way to predict the future is to look to the past’. I need to look at what caused the last property crash in 2008 and how that compares to today.
1. Increase in Interest Rates
One reason mentioned as a possible cause of a crash is the rise in the Bank of England interest rates affecting homeowners' mortgages.
Higher mortgage rates mean homeowners will have to pay a lot more on their mortgage payments, leaving less for other household essentials. In 2007 (and the 1989 property crash), many Gravesend people put their houses up for sale to downsize to try and reduce their mortgage payments.
Yet the newspapers fail to mention that 79% of British people with a mortgage have it on a fixed interest rate
Also, just under 19 out of 20 (93.2%) of all UK house purchases in 2021 fixed their mortgage rate.
So, in the short to medium-term (two to five years), most homeowners won't see a rise in mortgage payments for many years. Also, 27.8% of all UK house purchases were 100% cash (i.e. no mortgage).
Of the 932,577 house purchases registered since February 2021 in the UK, 259,205 were bought without a mortgage.
Yet some people say this will be a problem when all these homeowners come off their fixed rate. The mortgage lending rules changed in 2014, and every person taking out a mortgage would have been assessed at application as to whether they could afford their mortgage payments at mortgage rates of 5% to 6% rates, not the 2% to 3% they may well be paying now.
No pundit says the Bank of England interest rates will go above 2% with a worst-case scenario of 3%. If the Bank of England did raise interest rates to 3%, homeowners would only be paying 4.5% to 5.5% on their mortgages and thus well within the stress test range made at the time of their mortgage application.
This means the probability of a mass sell-off of Gravesend properties or Gravesend repossessions because of interest rate rises (both of which cause house prices to drop) is much lower.
2. House Price / Salary Ratio
Another reason being bandied about by some people for another house price crash is the ratio of average house prices compared to average wages.
The higher the ratio, the less affordable property is. In 2000, the UK average house price to average salary ratio was 5.30 (i.e. the average UK house was 5.3 times more than the average UK salary). At its peak just before the last property crash in 2008, the ratio reached 8.64.
The ratio now is 8.85, so some commentators are beginning to think we’re in line for another house price crash. However, I must disagree with them because mortgage rates are much lower today than in 2007.
The average 5-year fixed-rate mortgage in 2007 was 6.19% (just before the property crash), yet today it’s only 1.79%.
So, whilst the house price/salary ratio is the same as the last property crash in 2008, mortgages today are proportionally 71.1% cheaper.
3. Banks Reckless Lending
Another reason for a property crash in 2008 was the reckless lending practices in the run-up to that crash.
The first example of reckless lending was self-certified mortgages. A self-certified mortgage is when the lender doesn’t require proof of income.
In 2007, 24.6% of new mortgages were self-certified mortgages.
So, when the economy got a little sticky in 2008, the people that didn’t have the income they said they had to pay for their mortgages (because they were self-certified) promptly put their properties on the market.
The banks' second aspect of reckless lending was how much they lent buyers to buy their homes. Today, banks want first-time buyers to have at least a 10% deposit and ideally more. There are 95% mortgages available now (meaning the first-time buyer only requires a 5% deposit), yet they are pretty challenging to obtain.
Back in 2005/6/7, Northern Rock was allowing first-time buyers to borrow 125% of the value of their home. Yes, first-time buyers got 25% cashback on their mortgage!
In 2007, 9.5% of all mortgages were 95%, and 6.1% of mortgages were 100% to 125%.
Meaning that nearly 1 in 6 mortgages (15.6%) taken out in 2007 had a 95% to 125% mortgage.
When the value of a property goes below what is owed on the mortgage, this is called negative equity. A lot of Gravesend homeowners with negative equity (or who were getting close to negative equity) in 2008 panicked because of the Credit Crunch and put their houses up for sale.
To give you an idea of what happened last year (2021) regarding mortgage lending, only 2.4% of mortgages were 95%, and 0.2% of mortgages were 100%. This is because the mortgage lending rules were tightened in 2014.
So why did Gravesend house prices drop in 2008?
Well, in a nutshell, a lot more Gravesend properties came onto the market at the same time in 2008, flooding the Gravesend property market with properties to sell.
Meanwhile, mortgages became a lot harder to obtain (because it was the Credit Crunch), so we had reduced demand for Gravesend property.
Prices will drop when we have an oversupply and reduced demand for something. Gravesend property prices fell by between 16% and 19% (depending on the property type) between January 2008 and May 2008.
So, what were the numbers of properties for sale in Gravesend during the last housing market crash?
There were 674 properties for sale on the market in Gravesend in the summer of 2007 (just before the crash), whilst a year later, when the Credit Crunch hit, that had jumped to 1,342.
This vast jump in supply and the reduction in demand caused Gravesend house prices to drop in 2008.
Compared with today, there are only 222 properties for sale in Gravesend, whilst the long term 15-year average is between 570 and 600 properties for sale.
So, what is going to happen to the Gravesend property market?
The Gravesend house price explosion since we came out of Lockdown 1 has been caused by a shortage of Gravesend homes for sale (as mentioned above) and increased demand from buyers (the opposite of 2008).
However, there are early signs the discrepancy of supply and demand for Gravesend properties is starting to ease, yet this takes a while before it has any effect on the property market, so it will be some time before it takes effect.
There is no doubt that cost-of-living increases will have a dampening effect on buyer demand. If people have less money, they won’t be able to afford such high mortgages. This will slow Gravesend house price growth, especially with Gravesend first-time buyers.
So why are more Gravesend landlords looking to extend their buy-to-let portfolios, even in these economic circumstances?
I see new and existing buy-to-let Gravesend landlords come back into the market to add rental properties to their portfolios. As the competition with first-time buyers is not so great, they’re not being outbid as much.
Yet, more importantly, residential property is a good hedge against inflation.
Firstly, in the medium term, property values tend to keep up with inflation.
Secondly, inflation benefits both landlords and existing homeowners, with the effect of inflation on mortgage debt. As Gravesend house prices rise over time, it reduces the loan to value percentage of your mortgage debt and increases your equity.
When the landlord/homeowner comes to re-mortgage in the future, they will receive a lower interest rate.
Thirdly, as the equity in your Gravesend property increases, your fixed-rate mortgage payments stay the same.
Finally, inflation also helps Gravesend buy-to-let landlords. This is because rents tend to increase with inflation. So as rents go up, your fixed-rate buy-to-let mortgage payments stay the same, creating the prospect of more significant profit from your buy-to-let investment.