Are we on the verge of an affordability crisis?

[Mark Rocks]

The majority of the country has seen house price growth outstrip wages, in what is being deemed by some to be a sign of an affordability crisis. 

According to the Office for National Statistics, 91% of England and Wales saw their house prices increase at a far faster pace than their earnings last year. 

Naturally this is a cause for concern for first time buyers. But it’s also yet another sign that the fears of the house market crashing and burning due to the pandemic were unfounded. 

If anything, the market has SOARED to levels very few people would have predicted. 

Back to the statistics, and a surprising aspect is that affordability actually improved in London! Well, we say surprising... if you followed Rob & Rob’s overview of London house prices decreasing last year, then that affordability increase wouldn’t be much of a shock. 

Still, all the signs are pointing to a market that’s continuing to heat up (if only we had a penny for every time we’ve said that) 

https://www.theguardian.com/money/2022/mar/23/house-price-growth-outstrips-wages-england-wales

[CH_]

Worrying times as an investor, on the one hand I'm confident our portfolio has shot up in value and I could probably put rents up, on the other hand valuing properties is tricky given that the market seems to be so fluid.I'm also struggling with valuations, had a couple recently down val and one that is asking lots of questions, seems to happen when the market is on the move.

Whilst its not negative that prices are rising how are people going to cope with increased property costs at a time when everything else is going through the roof? Then we have massive inflation which we all know will result in more rate rises. Our mortgages have probably all stress tested at 4/5% but at those rates profits evaporate... much higher and we would perhaps start losing money. Where does it all end? Do rents go up to cover it or will thousands of landlords end up subsidising mortgage payments, selling up or having property re-possessed?! Will prices crash due to affordability?

Im not having any sleepless nights at all (yet!) but can anyone out there provide re-assurance?! Are interest rates higher than 5% a possibility and if so how would it impact the PRS?

More strange times...right after a global pandemic too!

[Dino V]

5 hours ago, CH_ said:

Are interest rates higher than 5% a possibility and if so how would it impact the PRS?

 

Our first mortgage in 1996 was fixed at about 6%, as I couldn't have afforded to pay much more and that was as low as rates had been for several years. People have forgotten what interest rates 'usually' are. The years since 2008 have been an anomaly, hence why affordability just based on average prices and average salaries is a bit meaningless unless you're buying cash.

House prices may slow down a bit, due to lack of cash in people's pockets, but we're going to see wage inflation due to general inflation and rents will rise in line with wages. That would make mortgages more attractive to first time buyers, but will also improve yields, pushing house price back up again and the dance restarts. Will host prices crash at some point? Absolutely, but no one knows when, from what level or to what level. I'm not flipping houses, so I'm not worried about short term movements, up or down.

Property with a reasonable level of leverage (<75%) should be ok and can make up a good part of a diversified investment portfolio.