It’s a turbulent time in the mortgage market, with lenders pulling a small number of products, some lenders are adding to their products and underpinning it all we have rates rising. How long will the rise continue? Will this pull back in rates be temporary or sustained? Or will this just be a brief pull back before we continue higher?
Our first tip is to mitigate your risk. If you are in the quandary between fixing at a 35% higher value to your previous rate or rolling onto a variable rate then ask yourself this – can you afford the 35% extra? If yes then that’s a good position to be in. If no, should you sell? You could roll onto a variable and hope them to come down. If they don’t and continue to go up, can you sustain payments above 6%?
The early 1990s saw rates as high as 16% and in those days there were no fixed rate products, people had to put on their big boy pants and make ends meet. Today, there is evidence, given the M2 money supply, that with more money in the market it is effectively more diluted and rates may struggle to sustain above 6%. Another piece of evidence that adds to this argument is that lenders need to lend. They don’t want cash on their books they need to get it out of the door. Will we see lenders chasing investors during 2023 to take products?
Sustainably and economically, it will be difficult for rates to sustain above 6% but it’s not to say they will. The question for everyone is whether rates will short term spike (a la bitcoin “blow off top”) or will we see a gradual grind up and a long term sustained higher rates, a bit like we are seeing with the DXY and the move of liquidity globally to dollars.
In property circles you hear two sayings – “cash is king” and “cash is trash”. This just goes to show how polarising and opinionated property investing is. What’s right for you is not necessarily right for your neighbour. As we have moved through 2022 we have seen a consistent grind up in the migration to the dollar. So it’s not just about cash it’s about which cash. The dollar has won the hearts of 2022 but we may have reached it’s peak, and in which case the hordes of cash that investors are sat on will flood into assets. Which assets? Take your pick! We’ve seen a depreciation of all assets this year – gold, silver, crypto, stocks and even GBP. But is the tide about to turn?
Inflationary Bear Market is technically what we are in. In other words, we have high inflation in things such as food and fuel, but asset prices are dropping. Double whammy. Ouch. The last time we have seen this was in 1973 and it lasted 3 years. Are we on the cusp of a really tough economic market for the next 2 years?
Property is a lagging indicator which means that we see all other assets drop first and property is the last to make its move down. We’ve seen weakness in the Chinese property market for issues of their own making. Are we about to see similar 1-2% monthly drops in house prices in the UK? This is likely after the growth we have had since covid, but do not forget how short our housing stock is in the UK. There is an underlying demand for accommodation. In the last month we have seen land deals and house building stop. Great news for the existing stock if you ask us.
So, cue HMOs. The demand this month for HMO rooms has been highest it’s ever been. People are seeking cost effective alternatives to other forms of accommodation, ie renting a 3 bed house and having to heat the whole thing when you only really use two rooms at a time! Article 4 has taken hold in almost all major cities now in the UK. The premium HMO areas are stitched up, for those that got in already congratulations. Manchester was a leading Article 4 area and it had a massive impact on the capital appreciation of their HMOs (albeit the local economy may also have been another huge factor).
Utility bills on HMOs are going to go up which means rents for HMOs are almost certain to go up. With demand at all time highs for HMOs that’s another indicator that show rents will go up too. This could and should be good for HMO valuations, certainly those valued on commercial valuations and not bricks and mortar.
But nothing is a given, stay focused on your objectives and ultimately “MITIGATE YOUR RISK”.
