I wrote my thoughts in an article in October 2016 after interest rates were slashed to 0.25%. You can read the full article by clicking here. Then in December 2017 I wrote a further article when it was announced interest rates would be increased to 0.50%. The full article can be found by clicking here. Existing clients and Blog reading friends alike have been asking me for my thoughts on the recently announced increase…the current average value of a property in Walsall currently stands at £181,994 so what will the recent increase in the base rates to 0.75% from 0.50% do to the local property market?
In many of my articles, I talk about what is happening to property values over the short term (i.e. the last 12 months or the last 5 years), but to answer this question we need to go back over 40 years, to 1975.
The average value of a Walsall property in 1975 was £8,285
However, since 1975, we have experienced in the UK, inflation of 807.5%.
Back in 1975, the average salary was £2,291 and average car was £1,840. A loaf of bread was 16p, milk was 28p a pint and a 2lb bag of sugar was 30p. Inflation has increased prices, so comparing like for like, we need to change these prices into today’s money. In real spending power terms, an average value of a Walsall house in 1975, expressed in terms of today’s prices is £75,186.
That means in real terms, property costs a lot more today, than in the mid 1970’s, but has it always been that way? Looking at the important dates of the UK property market, you can see from this table, the last two property boom years of 1989 and 2007, show that there was a significant uplift in the cost/value of property (when calculated in today’s prices).
Before we move on, hold onto the thought that you can quite clearly see from the table, in real terms, properties are cheaper today in Walsall than they were in 2007!
So, it made me wonder if there was a link between house prices, inflation and other external economic factors, such as interest rates? Interest rates have a strong influence on inflation and property values, principally because changes in the interest rate affect the cost of mortgage payments for homeowners and they affect the flow of foreign currency in (or out) of an economy, thus changing the exchange rate and prices we can sell our goods and services abroad and prices we pay on imports.
Interestingly though, values in 2008/2009 – was not due to interest rates, but due to the credit crunch and global recession.
So, what will happen now that interest rates have risen?
It is vital to remember that interest rates are not the only factor affecting Walsall property values.
It is also possible that when interest rates increase, property values can also continue to rise (it happened throughout the mid to late 1980’s and again between the boom years of 2002 and 2007). When confidence in the economy is good, and we as a Country experience a period of rising real incomes (i.e. after inflation), then the British in the past have continued to buy bricks and mortar, notwithstanding the rise in interest rates.
Another important factor on property values is the supply of housing. A big reason in the current level of Walsall house prices is due to the shortage of supply, which has kept property values higher than I would have expected.
Fixed Rate mortgages
An additional factor is whether Walsall homeowners have a variable or fixed rate mortgage. 90.6% of new mortgages taken out in the last Quarter were at a fixed rate, and 66.2% of all mortgaged homeowners are on fixed-rate mortgages, therefore, they will not notice the effects of higher interest rate payments until they re-mortgage in a few year’s time, meaning there is frequently a time-lag between higher interest rates and the effect on property values.
Another factor on mortgages is the ability to get one in the first place. Back in 2014, mortgage providers were told to be stricter on their lending criteria when arranging mortgages following the footloose days of 125% loan to value mortgages with the likes of lenders such as Northern Rock. These new rules are a lot more rigorous on borrowers’ ability to repay the payments (although it makes me laugh, when with starter homes it nearer is always cheaper to buy then rent!).
I think the final point is this… affordability is the key. Look at the graph and you will see in REAL HOUSE PRICE terms – it’s cheaper to buy a Walsall home today than it was in 2007, yet why aren’t we seeing people buying property at the levels we were seeing in the 2000’s before the credit crunch?
In conclusion, interest rates are important – but nowhere near as important on the Walsall property market than they were 15 or 20 years ago.
A final, final thought before I go…how do we measure the success of the Walsall property market?
Well I believe one measure that is a good barometer is the number of property transactions, as that could show a more truthful picture of the health of the property market than property values.
Maybe I should talk about that in an up and coming article?
If you are thinking of getting into the property rental market and don’t know where to start, speak to me for impartial advice and guidance to get the best return on your investment. For more information about other potential investment properties that I could introduce you to, or to ask about my thoughts on your own investment choices, feel free to call me on 01922 311016, you can always email me on email@example.com.
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