There is a theoretical answer to ‘where is the housing market going?’, just as there is with the stock market, or any market for that matter. Understanding that, and the key drivers, will help you navigate emotional decisions around any purchase or sale.
So, what are the key drivers of the housing market?
Liquidity with banks and their willingness to lend and at what levels, is one of the greatest drivers. If the loan to value offer is decreased from a 100 per cent loan, to, say 90 per cent, this clearly leads to a reduction of the market. At an average house price of around £283,000, one requires a £28,300 deposit on top of the stamp duty and solicitor legal fees. Like much of what I will mention, it will increase or decrease demand. So, the greater bank liquidity and their willingness to lend, the greater the market.
Similarly, and still on liquidity, the rate at which lenders will lend drives affordability. The higher the rate, less people meet affordability tests and lower demand further. In fact, those who want to borrow are told they must borrow less to be accepted. Interest rates are falling and have been for a while.
Government policy has an influence on affordability. A reduction in stamp duty cuts out a barrier to entry. Think of how people talk about affordability in the modern world. The capital value cost isn’t the issue – it’s the monthly affordability. And so having to come up with a further £2,800 approximately on the average house price can mount up.
Housing market
There are plenty of other key factors which can affect the housing market such as the state of the economy, government building policy, rising, or falling incomes, job security leading to paralysis of mind, and overseas demand due to a low sterling.
Much of this economic analysis is not at the forefront of decisions, given that it is not really the skillset of the average buyer. The greatest driver in my 35 years of all ups and downs is…’sentiment’, which of course drives all the aforementioned supply and demand issues.
Look to the headlines for sentiment. Take the last headline point of foreign investors above. “The number of foreign buyers has tripled since 2010″. The reality is they are just one per cent of the market.
Headlines, even at the FT (and of course driven by the Bank of England’s (BOE) communications to slow things down), have been interesting.
In October/November buyers would have been panicking with “UK house prices fall for sixth consecutive month”; “UK house prices drop 13.4 per cent from peak”; “UK house prices suffer first annual fall since 2012″; “fall for sixth consecutive month”. I could go on for a very long time. This is just one quality paper. Within a week they flipped to “rise unexpectedly on scarcity of supply”; “mortgage approvals beat forecasts to hit three-month high”; “prices beat forecasts to rise again”; “extend recovery for second month”.
The fact is, I can book money today for six months from now at a rate 0.25 per cent less than today’s base rate. That’s the forward price. Rates are still falling. It is only when those headlines come from the BoE (they aren’t ready for that yet as the economy is still stronger than they would like) that the press headlines reflect the new reality, and those ‘waiting to see’ will have missed the ‘bottom’.
Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
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