Mark Carney, the governor of the Bank of England, addressed the cabinet during a recent Brexit briefing. One statement was highly reported. House prices could fall by over 30% in the event of a no-deal Brexit.
This is close to the scenario laid out in the Bank’s stress tests from March 2018, which looked at how the country’s lenders would be able to cope if UK house prices fell by 33%.
This blog looks at a few practical steps that will help you consider the effects of house prices falling. But firstly, I’m going to use Christmas snowfall as a metaphor.
Will it snow on Christmas Day 2018? Every year, bets are placed on the outcome. Right now, nobody knows. The outcome is outside your control.
Even if it does snow somewhere in the UK on December 25th, it doesn’t mean that it will snow where you live. The snow has to land on the tarmac of a major airport near a big city. This makes the odds for snow in Glasgow much lower than the odds at Heathrow.
The same as guessing if there will be a hard Brexit, a people’s vote, or a chequer’s Brexit. What Mark Carney said was not a prediction. Nobody can predict with accuracy. We are living in uncertain times.
The global investment markets don’t like uncertainty. The same goes for housing. If there is uncertainty, markets wobble.
Some of the key property-related concerns are:
- What if the Chinese and Russians put their UK property up for sale at the same time?
- Is my job safe after Brexit?
- Will the largest local employers relocate to Europe in 2019?
- Can I afford my mortgage if interest rates go up?
- Should I start to offload my buy-to-let holdings before it’s too late?
- If my house value falls, I may not be able to downsize and retire.
- Is it best to defer buying or selling a property, and wait and see post-Brexit?
Understand what you can control
Let’s face it, you can’t control interest rates. You can’t dictate what foreign property owners will decide to do (they may buy more property if values fall). Whether a major business decides to relocate is out of your power. Worrying will do your health and wellbeing no good at all.
Ask yourself whether you own a home, or an investment. If it is your home and you plan to live in it for years or decades, sit tight.
The larger threat of a fall in house prices
What is the larger threat to you – a fall in the paper value of your home? Or a significant rise in the mortgage interest rate? The ‘fall’ in value may cause emotional angst and could leave you feeling poorer. A steep rise in mortgage interest could cause real financial harm.
The media and influential business leaders are telling us to prepare for a storm ahead. A good financial planner may suggest that you prepare yourself but perhaps don’t take drastic measures. Noah built his ark before it started to rain.
Whatever happens to property values and Brexit in 2019, there will always be pros and cons. The same with winter snowfall. To some people, snowfall is great. Schools closed, sledging in the park, or great skiing in the Cairngorms. To others it means blocked roads, the fear of falling, and cancelled operations. Perspective and circumstance are everything.
The same with property values. The buy-to-let landlord can pick up cheaper properties but keep the rents stable, so increasing the annual return. For those trying to get on the first rung of the property market, a fall in values may just get them there. In other circumstances, some homeowners may face extreme financial hardship.
Budgeting and planning for a fall in house prices
Run your finger through your family budget. If you have a mortgage, loan or credit cards, calculate the effect on your expenditure if rates doubled for five years. What could you cut from your annual budget? Gym membership, a holiday, the daily latte, magazine subscriptions? Build yourself a buffer when you can think straight and have time to prepare.
If you plan to downsize and pass money to your children, if all property values fall in unison, the smaller home will reduce in price. Proportion matters though.
Consider this example:
Chris and Kate live in a £1m property with no mortgage. The plan is to downsize in two years and pass money to their two children, so they can get on the housing ladder.
Kate has seen a nice cottage for £600,000, which will generate £400,000 to pass on. If there is a 30% fall across the board before they downsize, the numbers change. Their own home falls to £700,000 and the cottage falls to £420,000. There is now only £280,000 to pass on.
The percentages are the same (a 30% fall on £400,000 leaves £280,000) but everyone will ‘feel’ poorer.
If you or other family members have borrowed to buy a property, you may suffer a period of negative equity (the mortgage is higher than the sale value of the property). It’s a case of sitting tight and waiting it out.
It makes sense to speak to your financial planner, mortgage broker or lender and discuss your options. Getting a new, longer fixed-rate, or the option to extend your loan from 25 to 30 years. In the case of the ‘bank of mum and dad’ find out what the scope is if things go wrong.
The following chart from The Guardian illustrates the geographical effect of house price declines.
Like the earlier reference to Christmas snowfall, any Brexit property issues may come down to where you live. And it is probably too late to change that before March 2019. For some people in the UK, negative equity is a real and present danger. Some house prices haven’t recovered since 2009. The Guardian graphic below highlights this.
Predictions and guesswork
Few people predicted the outcome of the UK referendum. Or the latest presidential election in the USA. The ‘experts’ at the time predicted mayhem.
Since then, unemployment rates have fallen, and the global economy and stock markets have produced positive returns.
According to the ONS (Office for National Statistics) since 1980 UK house prices have risen by an average of 6.9% a year. The Nationwide house prices study reveals some interesting data. In Q3 2007 house price averages ‘peaked’ at £184,131. By Q1 2009 they had fallen to £149,709, minus 19%.
It took 7 years until Q2 2014 for average house prices to pass the 2007 peak. For those readers with longer memories, the last peak/drop period ran from Q3 1989 until Q2 1998, a 9-year period. The problem is, nobody lives in the ‘average’ house in the average region of the UK. Homeowners are affected differently. Just like winter snowfall.
The Brexit property effect may all come down to the law of unintended consequences.
There are three potential outcomes from unintended consequences:
- Unexpected benefit: A positive unexpected benefit (referred to as luck, kismet and “it’s a miracle!”)
- Unexpected drawback: An unexpected detriment occurring in addition to the desired effect of the policy.
- Perverse result: A perverse effect contrary to what was originally intended (when an intended solution backfires).
Whatever your personal circumstances, expect more market wobbles and uncertainty during the next few months. There is time to plan before 29th March 2019, so talk to your financial planner about a family check-up.
At Capital, we believe that worrying is like sitting in a rocking chair. It gives you something to do but it doesn’t get you anywhere.