🏡What On Earth Is Going On With Real Estate Right Now & The Clues It’s Giving Us About Where The Market Is Headed Next!

Ever since the UK gov introduced the stamp duty tax holiday in 2020 to protect our real estate market from covid, I’ve had my eyes fixed on this space. I was eager to see how things would unravel and when they started to get a little-more-than-frothy, I became a whole lot more curious. I can’t help myself! Over these past two years I’ve noticed some weird and wonderful things going on. The wonderful being that your property has most likely risen in value. By an usually-nice chunk. Hurrah! The weird: we’ll get to that later!

Now, our real estate market has a lot of things to say for itself. The things that are (and aren’t) going on right now are very telling of the times we live in, and the times we may very well be entering. The flurry of home-buying is most definitely slowing down and rate rises cast a gloomy shadow on homebuyers, homeowners and the entire real estate market quite frankly.

A few months back, all a home buyer needed to do was arrange a property viewing for one day and sell it come the day end. Oh, and a viewing wasn’t always a guarantee! I’ve heard stories of countless people who weren’t able to even view the property because a super punchy and well-over-the-odds offer had already been placed (and accepted) which brings me onto my next point: the offer wars.

We saw desperate home buyers wanting to lock in their dream home (and finally step onto that property ladder) that they had no choice but to seriously up the ante or risk starting the entire process all over again. Only for prices to rise yet further! It was a sellers’ market for a while there. Time for that to reverse! (Read here what you can do to prepare for buying your very first property).

Make no mistake, a slowing economy affects us all!

An economy with persistently high levels of inflation and higher levels of interest rates, not to mention a lot of doom and gloom sloshing around, oh, and a recession to the add to the mix, it’s bound to affect one of the largest asset classes out there: good old bricks ‘n mortar. After looking at the CPI report yesterday, there’s no cause for cheering. The CPI figure dropped from 8.7% (very high) to 8.5% (only slightly less-high) which means we ain’t outa the woods just yet. Read here if this is the calm before the storm.

If we don’t think the economy’s doing too well or that conditions will deteriorate, it’s very normal for real estate to take a hit. After all, recessions mean layoffs and fewer can afford to buy homes plus high rates lower affordability. These factors act as a drag on property prices. And if you think that this stuff (aka recessions) only affects the non-rich, you’re totally mistaken! The rich can be just as cash strapped as the rest of us. Except their cash is strapped in assets. Not in thin air. And they often take on leverage (debt) to boost their returns.

Their incomes, just like the rest of us, come under pressure during downturns. And when stock markets take a tumble like they’ve recently done (and stunningly rebounded!), it can have a negative wealth effect: you feel poorer when your assets go down and you’re less likely to spend. Also, economic uncertainty spreads like wildfire and ignites the fear. Are you worried about a recession? Read here 3 ways in which you can recession-proof your portfolio. And if you’re really curious, read here 4 ways to recession-proof yourself!

Countryside cooling down?

A friend of mine lives in the countryside with her hubby. They were fortunate enough to be able to buy a flat of their own right before lockdown. They were one of the first to move in and slowly but surely, the flats started to sell. She told me how one of the buyers was a C-Suite banker who had bought a flat to escape the city life to enjoy a quiet lockdown!

Well guess what, just one year later, said banker is now listing this property for 7% below what he paid for it. Looks like someone’s in a hurry and they know something we don’t! Selling at the peak of any market is near to impossible but selling before things go down even further is, in many cases, a little easier. It looks like this banker looked to cut his losses now rather than cling to a property whose value could tumble in the coming months.

No longer a seller’s market?

This got me thinking. If a well-off guy like him has to sell, or at least feels like he needs to, how many more of them are out there? Loads more is my guess! And it’s not just rich fellas, it’s everyone. 

The real estate market is cooling off and properties aren’t selling as quickly as they were during the covid rush where people wanted to bag a property without having to pay the stamp duty tax plus get the chance to lock in super-low rates. The kind we might not be seeing for a loooong time. 

Take my friend who’s been trying to sell his property as an example! 7 months and 3 offers later (this included a deposit for one offer since the client didn’t complete and the best part was he didn’t need to pay capital gains on it) his property does not want to seem to budge! On average, it takes between 4-6 months to sell a home so 7 months isn’t unusual but my friend is getting a little agitated.

A recession is looming, and a pretty harsh one is set to hit us here in the UK, not to mention the fact that rates are rising which means he’ll have to pay a higher rate on his BTL mortgage when he has to renew. Turn the clock back 7 months ago and real estate was booming. House prices kept on going up and up and deals were moving quicker than me running to get that last slice of pizza. Back then, properties had one single viewing and it was sold at the end of the day. Now, with our lovely 20-20 vision, calling the property market top looks kinda simple! 

The thing that matters most to this market are interest rates. Warning: an oversimplification is coming your way but I’m all for simplicity so I’m gonna hit you with it! High rates = lower prices, low rates = higher prices. When interest rates are high, prices for homes start to fall since fewer can afford a home since servicing a mortgage will cost a whole lot more. But when interest rates go down, it becomes cheaper do so, so we’re able to actually buy homes and prices for them rise as demand climbs. 

Rates narrate the story 

For the past who-knows-how-long, interest rates have been stuck to the ground like gum. This meant that it was relatively cheap to service a mortgage. Last year, you could’ve secured a sub-1.5% rate on your 10yr mortgage. Those cheap mortgage rates have vanished. Now, you’re having to pay double what you would’ve done last year. And they reckon it can go a lot higher. Inflation here in the UK is forecast to hit 13% come year-end! Interest rates aren’t stopping here. 

Though plenty will tell you how they remember double-digit interest rates but my gen, and millennials, will not recall a time at all like that. And even the gen above (gen X) had single-digit rates, nothing close to what their parents’ gen. So you can see how the direction of rates has been in a downward spiral. 

But this is reversing. While I don’t reckon rates will ever hit double-digits due to the ballooning debt countries now have as a result of expanding balance sheets during covid, moderately higher rates are something we should start getting used to.

A reset is healthy. House prices rising by 20% in one single year as they did this past year is pricing us future home-buyers outa the market. Millennials are moving back in with their folks in record numbers. Housing’s just become too expensive. Once this recession is over, housing affordability will be better. But the short-term pain will no doubt be uncomfortable.

Hopefully us young lot will be able to afford a property of our own and not have to wait years and years to do so, while we watch our incomes fill the coffers of our landlords!

In the meantime, plan for the worst but hope for the best. No one knows what’s lying in store for us. Think ahead to stay ahead.

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.