The past couple of months has been a turbulent time, to state the obvious. With inflation, cost of living, mortgage costs, and energy prices all increasing exponentially, what is going to happen to the housing market? Well, here are my thoughts and commentary on where I feel we are heading as we are likely to hit a recession.

Commercial & Retail property

This is almost certainly going to take the biggest hit. Speaking to small independent traders yesterday, they all share the same concern, the cost of energy within their business. This group has averaged £8000 per annum over the past few years, when they come off their existing tariff, their costs will jump to around £22,000, with government intervention. In 2023, when government help ends, this will likely be £42,000. This is not sustainable for any of these retailers!

The result will be business closures. This will increase unemployment and decrease the value of commercial property. Without further government assistance, this will have an adverse effect on the high streets of the UK as we will see empty shops. I predict we can see values reduce by circa 30% in this area. Local Solicitors in Greenwich, Grant Saw, have lots of information when it comes to Commercial Property legal work; you can find them here Grant Saw Services for Business

A further area of concern in the world of commercial property is the new EPC requirements, under the proposed legislation, landlords will need to ensure their properties carry an EPC minimum value of ‘C’ for all new tenancies by 2027 and a ‘B’ by 2030 which will be highly challenging as many of our commercial stock are older properties.

Residential property

Again, there are many challenges here. With mortgage rates taking a hit, consumers are having a shock when their present fixed rate expires. Pre-2022 we have enjoyed rates of 1% to 2%, generally. As people come off their fixed rate, they are finding fixed rates of around 5% to 6% (depending upon their circumstances). SWAPS rates are high, mainly thanks to the “truss effect”, the confidence in UK markets is low which has increased the costs of fixed-rate borrowing. Some positive news is that we have recently seen reductions in the cost of fixed-rate mortgages, suggesting there is a degree of stabilisation in the UK market following the replacement of Truss by Sunak.

We are finding that some borrowers are looking at interest-only solutions, but this is only recommended in the short term as it will mean the capital of a mortgage is not being repaid and the “can is being kicked down the road”.  We would always recommend a repayment mortgage or, worst case, a part repayment.

Many borrowers are reverting to tracker rates, they are about 2% cheaper than fixed-rate mortgages. Is it likely that rates will increase by a further 2% after last week’s 0.75% increase to 3%? My guess is that it is unlikely, which supports this move towards the tracker rate. At the time of writing my commentary, we have a lender who has a market-leading tracker rate without a tie-in; this means that if the cost of fixed rates come down then you can move across without penalty – subject to the individual circumstances of the borrower, of course.

The alternative to home ownership is renting. However, rents have increased exponentially, and I feel it makes sense, assuming it is affordable, to own your own home; after all, aren’t you better off paying your mortgage than someone else’s?

Ultimately, I feel the price of residential property is protected compared to non-domestic but there is likely to be a small contraction of values. I predict between 5% and 10% locally. Please remember that over the past two years prices have increased by circa 20% so, unless you have recently purchased your home, then your property is likely to be worth more than the price you paid for it! I am seeing that some savvy estate agents are starting to list properties taking this into account and realism is the best course of action in these times.

Buy-to-Let property

This is a tricky one. Generally, many landlords bought property to increase their income. Since 2009 bank saving rates have been below 1% so cash was re-directed into property where you could benefit from a 4%+ return. There seems to be a public perception that landlords are wealthy individuals, but experience tells me this is not necessarily the case. Most landlords own one or two properties. The majority have also taken mortgages.

Again, landlords are getting a shock as their existing fixed rates expire and their lovely 2% rate becomes 6% thus taking a large chunk of their profit away. One sizeable challenge for landlords is those who have larger loan-to-value (LTV). Despite lenders offering 75% LTV mortgages, the lender’s stress test will mean a far higher assessment of rental income required to borrow at this level which makes it near impossible to borrow at this level presently. This affects landlords looking to switch lenders after coming off their existing fixed rate and new loans. Realistically, a 50% deposit/equity is required. Existing landlords may be forced to stay with their existing lender even if their rates are higher!

I predict that many landlords will look to sell whilst the market is still ok. Even if a 5% hit is taken on the sale price, the property has increased in value meaning that there is good profit. Please be aware that there is a CGT liability, but you will get the normal exception (for each owner at £12,300 for the 2022/2023 tax year). The tax rate is currently 18% or 28% for higher-rate taxpayers.

I hope this helps. The key thing is to ensure you take the best advice whether it be from a local property expert (the locally trusted estate agent), independent mortgage experts (such as us – I would say that!!), and your accountants.

Regards

Simon