Wednesday, 11 October 2017

Grantham Homeowners and their £891.4 million Debt

Over the last 12 months, the UK has decided to leave the EU, have a General Election with a result that didn’t go to plan for Mrs May and to add insult to injury, our American cousins elected Donald Trump as the 45th President of the United States. It could be said this should have caused some unnecessary unpredictability into the UK property market.

Nevertheless, the housing and mortgage market in the (for the time being) shows a noteworthy resilience, nurtured by the ongoing extensive monetary policy by the Bank of England, all combined with a macro-economic improvement and a general extensive enhancement of the economic conditions. Furthermore, despite the UK construction industry improving its year on year figures and growth rates (building 21% more properties than same time the year before), there has been a disproportionate increase in demand for housing, especially in the most thriving areas of the Country. Repossessions are also at an all-time low at 3,985 for the last Quarter (Q1 2017) from a high of 29,145 in Q1 2009. All these things combined mean ..

Property values in Grantham according to
the Land Registry are 6.84% higher than a year ago

So, what does all this mean for the homeowners and landlords of Grantham, especially in relation to property prices moving forward?

One vital bellwether of the property market (and property values) is the mortgage market. The UK mortgage market is worth £961,653,701,493 (that’s £961bn) and it representative of 13,314,512 mortgages (interestingly, the UK’s mortgage market is the largest in Europe in terms of amount lent per year and the total value of outstanding loans). Uncertainty causes banks to stop lending – look what happened in the credit crunch and that seriously affects property prices.

Roll the clock back to 2007, and nobody had heard of the term ‘credit crunch’, but now the expression has entered our everyday language.  It took a few months throughout the autumn of 2007, before the crunch started to hit the Grantham property market, but in late 2007, and for the following year and half, Grantham property values dropped each month like the notorious heavy lead balloon, meaning …

The Credit Crunch caused Grantham Property Values to drop by 20.1%

The Bank of England grasped in the early Autumn of 2008 that the UK economy was starting to stall under the sustained pressure of the Credit Crunch due to uncertainty of certain loan books (sub-prime lending) in the US and across the world. Therefore, between October 2008 and March 2009, interest rates dropped six times in six months from 5% to 0.5% to try and stimulate the British economy. 

Thankfully, after a period of stagnation, the Grantham property market started to recover slowly in 2011 as certainty returned to the economy as a whole and Grantham property values really took off in 2013 as the economy sped upwards. Thankfully, the fire was taken out of the property market in Spring of 2015 (otherwise we could have had another boom and bust scenario like we had in the 1960’s, 70’s and 80’s), with new mortgage lending rules and throughout 2016, we saw a return to more realistic and stable medium term property price growth. Interestingly, property prices recovered in Grantham from the post Credit Crunch 2009 dip and are now 36.1% higher than they were in 2009.

Now, as we enter the Summer of 2017, with the Conservatives having been re-elected on their slender majority, the Grantham property market has recouped its composure and in fact, there has been some aggressive competition among mortgage lenders, which has driven mortgage rates down to record lows. This is good news for Grantham homeowners and landlords, over the last few months a mortgage price war has broken out between lenders, with many slashing the rates on their deals to the lowest they have ever offered.  For example, last month, HSBC launched a 1.69% five-year fix mortgage!

Interestingly, according to the Council of Mortgage Lenders, the level of mortgage lending had soared to an all-time high in the UK. 

In the Grantham postcodes of (NG31, NG32 and NG33), if you added up everyone’s mortgage, it would total £891,440,711!

Since 1977, the average Bank of England interest rate has been 6.65%, making the current 323 year all time low rate of 0.25% very low indeed. Thankfully, the proportion of
borrowers fixing their mortgage rate has gone from 31.52% in the Autumn of 2012 to the current 59.3%. If you haven’t fixed – maybe you should follow the majority?

In my modest opinion, especially if things do get a little rocky and uncertainty seeps back in the coming years (and nobody knows what will happen on that front), one thing I know is for certain, interest rates can only go one way from their 300 year ultra 0.25% low level. ….and that is why I consider it important to highlight this to all the homeowners and landlords of Grantham. Maybe, just maybe, you might want to consider taking some advice from a qualified mortgage person? There are plenty of them in Grantham

Wednesday, 4 October 2017

Grantham’s 1,585 Mortgage Time-Bombs?

Of the 17,944 properties in Grantham, 7,338 of those properties have mortgages on them according to my research. 84.4% of those mortgaged properties are made up of owner occupiers and the rest, buy to let landlords (with a mortgage).

… but this is the concerning part .. 1,585 of those Grantham mortgages are interest only. Also, my research shows that 19 of those households with interest only mortgages in Grantham will mature each year between 2017 and 2022, and of those, 5 households a year will either have a shortfall or no way of paying the mortgage off. Now that might not sound a lot – but it is still someone’s home that is potentially at risk.

This is theoretically an enormous problem for anyone in this situation as their home is at risk of repossession if they don’t have some means to repay these mortgages at the end of the term (the typical term being 25 to 35 years). Banks and Building Societies are under no obligation to lengthen the term of the mortgage and when bearing in mind whether they are prepared to do so, will look at it in the same way as someone coming to them for a new mortgage.

Back in the 1970’s and 1980’s, when endowment mortgages were all the rage, having an endowment meant you were taking out an interest only mortgage and then paying into an endowment which would pay the mortgage off (plus hopefully some profit) at the end of the 25/35 year term. There were advantages to that type of mortgage as the monthly repayments were lower than with a traditional capital repayment and interest mortgage, because only the interest, rather than any capital, is paid to the mortgage company, but the full debt must be cleared at the end of 25/35 year term.

Plenty of Grantham people bought an endowment policy to run alongside their interest only mortgage in the 80’s and 90’s. However, whilst the endowment policy was a stock market linked investment plan designed to pay off the mortgage in full at the end of the term, because of the poor performance of the stock market between 1999 and 2003 (when the FTSE dropped 49.72%), many homeowners realised, the endowment did not grow enough to cover the mortgage debt at the end of the term (although many have been compensated since).

Nonetheless, in the mid 2000’s, when the word endowment had become a dirty word, the banks still sold ‘interest only’ mortgages, but this time with no savings plan, endowment or investment product to pay the mortgage off at the end of the term. It was a case of ‘we’ll sort that nearer the time’ as property prices were on the rampage in an upwards direction!

Thankfully, the proportion of interest only mortgages sold started to decline after the Credit Crunch, as you can see looking at the graph below, from a peak of 43.81% of all mortgages to the current 8.71%.

Increasing the length of the mortgage to obtain more time to raise the money has gradually become more difficult since the introduction of stricter lending criteria in 2014, with many mature borrowers considered too old for a mortgage extension.

Grantham people who took out interest only mortgages years ago and don’t have a strategy to pay back the mortgage face a ticking time bomb. It would either be a choice of between hastily scraping the money together to pay off their mortgage, selling their property, or the possibility of repossession (which to be frank is a disturbing prospect).

I want to stress to all the existing and future people, who use mortgages, to go into to them with your eyes open. You must understand, whilst the banks and building societies could do more to help, you too have personal responsibility in understanding what you are signing yourself up to. It’s not just the monthly repayments, but the whole picture in the short and long term. Many of you reading my blog ask why I do say these things. I want to share my thoughts and opinions on the real issues affecting the Grantham property market, warts and all. If you want fluffy clouds and rose tinted glasses articles – then my articles are not for you. However, if you want someone to tell you the real story – a story you need to hear, both good, bad or indifferent about the Grantham property market – then maybe you should start reading my blog regularly.

Thursday, 17 August 2017

The Unfairness of the Grantham Baby Boomer’s £1,157,000,000 windfall? (Part 2)

Grantham Baby Boomers vs Grantham Millennials

Well last week’s article “The Unfairness of the Grantham Baby Boomer’s £1,157,000,000 windfall?”caused a stir. In it we looked at a young family member of mine who was arguing the case that Millennials (those born after 1985) were suffering on the back of the older generation in Grantham. They claimed the older generation had seen the benefit of the cumulative value of Grantham properties significantly increasing over the last 25/30 years (which I calculated at  £1.15bn since 1990). In addition many of the older generation (the baby boomers) had fantastic pensions, which meant the younger generation were priced out of the Grantham housing market with very little in the public pot to sustain their futures!

I replied there should be no surprise though that the older members of our society hold considerably more of our Country’s wealth than the younger generation. This is wealth which  has accrued across someone’s life, and reaches it’s peak usually at the point of retirement. If we are to comprehend differing wealth levels between generations we need to compare ‘apples with apples’. It is much more relevant to track the wealth held by different generations at the same age, ie what was ‘real’ wealth of the 30 something couple in the 1960’s compared to a 30 something couple say in the 1980’s or 2010’s.
Looking back over the last 120 years from various economic studies, the growth in wealth from one generation to the next one only occurred during a 30 year period of between 1960 and late 1980’s. Since the 1990’s, wealth has not improved across the generations, in the same age range.

Significantly in the last 10 years, UK households have saved on average 7.5% to 8% of the household income into savings accounts, compared to an average of 6% to 7% in the late 1960’s and 1970’s. The baby boomers haven’t been actively squirrelling away their cash for the last 30 or 40 years in savings accounts to accumulate their wealth. Most of their gains have been passive, i.e.  lucky bonuses gained on the back of massive property value rises or through their generation naturally living longer thus making final salary pensions more valuable!

..and herein lies the issue … it is assumed that these Millennials aren’t buying property in the same numbers like the older generation did in the past (because most of their wealth has come from house price inflation). The Millennials have often been described as ‘Generation Rent’, because they rent as opposed to buy property – because we are told they cant buy.

However, when Grantham mortgage payments are measured against monthly income, home ownership is affordable by historic standards because mortgage rates are currently so low. As you can see, the ratio of average house price to average earnings in Grantham hasn’t vastly changed over the last decade …

  • ·      2008 average house price to average earnings of a single person in Grantham  7.24 to 1 

  • ·      2017 average house price to average earnings of a single person in Grantham  8.38 to 1

(ie in 2008, the average house price in Grantham was 7.24 times more than the average person’s salary in Grantham and this has only risen to 8.38 in 2017 – and all this off the property boom of the early 2010’s)

95% first time buyer mortgages were reintroduced in 2010. The average interest rate charged for those 95% FTB mortgages has slowly dropped from around 5.5% in 2009 to the current 4% rate. However back in the 1980’s/ 1990’s mortgage interest rates were between 8% and 10%, and one time in the early 1990’s, reached 15%! The main difference between the two periods was the absolute borrowing relative to income is greater now than in the 1980’s. They call this the ‘mortgage to joint household income ratio’. In the 1980’s the mortgage was between 1.8x to 2x joint income; today it is an eye watering 3.4x to 3.6x salary.

The simple fact remains for the majority of first time buyers, it is still cheaper for them to buy a property with a 95% mortgage, than to rent it. The barrier for these Millennials is not servicing the monthly mortgage payments but finding the minimum  5% mortgage deposit in the first place.

Millennials make up 7,824 households in the South Kesteven District Council area (or 13.6% of all households in the area).  However, behind the doom and gloom, surprisingly, 40.2% did save up the 5% deposit and do in fact own their own home (that surprised you didn’t it!)

Nonetheless, the majority of Millennials in the area still do rent from a landlord (3,272 Millennial households to be exact). Yet, they have a choice. Buckle down and do what their parents did and go without the nice things in life for a couple of years (ie the holidays, out on the town two times a week, the annual upgraded mobile phones, the £100 a month Satellite packages) and save for a 5% mortgage deposit .. or live in a lovely rented house or apartment (because they are nowadays), without any maintenance bills and live a life with no intention of buying (because renting doesn’t have a stigma anymore like it did in the 1960’s/70’s. (secretly hoping their parents don’t spend all their inheritance so they can buy a property later in life – like they do in central Europe)

Neither decision is right or wrong – although it is still a choice. Until Millennials decide to change their choices – that is the reason why the Country’s private rental sector will continue to grow for the next 30 years – meaning happy tenants and happy landlords.