I think the housing market will crash
With house prices hitting record highs over the past year, and no sign of this slowing down anytime soon, it made me begin to wonder if this is sustainable.
The stamp duty holiday offered by the Government during the Covid-19 pandemic certainly helped boost the demand for houses as many saved £1,000s on purchasing their dream homes.
However, is this the only reason that property prices are booming?
I live in the South West of the UK, and houses down here are being sold at a rapid pace as people who previously worked in large cities realise they can now work remotely. Naturally, the choice is to live in a beautiful place where the cost of living is significantly lower.
The more people that want to move house, the higher the demand rises. Higher demand causes house prices to rise as there is more competition on who wants to buy a house.
But I’m not saying the housing market is a bubble. Obviously it is, but I am focusing on the new house market. Let me explain.
The UK Government currently offers a scheme called the Help To Buy Equity Scheme. This offers first-time buyers in England to borrow between 5% and 20% of a house’s full purchase price (40% in London)
Okay - that sounds great, why is this a problem?
Well, this is effectively a loan from the Government which is interest-free for the first 5 years.
But what happens once you get to Year 6, I hear you ask…
This is where it gets nasty.
From Year 6, you can begin repaying the loan, but only in increments of 10%. So, unless you managed to save another 5-20% of your property’s value in 5 years you probably need to understand the interest you are going to be paying.
This is what you pay from Year 6 onwards:
£1 monthly management fee
1.75% interest monthly
Okay, so that doesn’t seem too bad right? Except the interest rates increase by the CPI (Inflation rate) + 2% per year.
I think the best way to visualise this is to look at figures.
Assume you purchase a £250,000 property and borrow the full 20% equity on the Government’s Help To Buy Scheme. Therefore, you are borrowing £50,000 from the Government.
Perhaps you may have saved £5,000 or £10,000 in 5 years but £50,000 in 5 years is steep. For this example, we will assume that you haven’t managed to save any money to pay off some of the equity.
So on top of your monthly mortgage payments, you will have to pay the following monthly payments
Year 6: £72.92
Year 7: £76.56
Year 8: £80.39
Year 9: £84.41
Year 10: £88.63
That doesn’t sound like much, but I can guarantee you that there are a lot of young couples and young families who will not be able to afford these additional monthly costs. Unfortunately, these will be the same people who haven’t saved any percentage of the equity to pay back.
As a result, they will have to sell their houses and repay the Government’s equity portion by way of 20% of the house’s sale price being given back to the Government.
And as we know, an increase in supply of houses will cause house prices of new builds to decrease.
More recently, banks have started declining 95% mortgages on new builds because they already believe that they are overvalued. Therefore, I am relatively certain that at some point in the next 10 years, new builds are going to plummet in value.