Inflation is rising. What will happen to the Swansea Property market?
Read the full blog article Here
The UK is currently experiencing its highest inflation rate since the early 1990s.
What will this mean to the Swansea property market, people
wanting to move home and Swansea house prices?
How Will Rising Inflation Affect the Swansea Property Market in 2022?
The UK is currently experiencing its highest inflation rate since the early 1990s. This increase in prices has primarily come about by the combination of an increase in demand for goods and services from consumers following lockdown last year, together with global supply chain disruptions.
Most economists weren't too concerned about this increase in the inflation rate as the very same thing happened in the early 1990s following the Credit Crunch with a similar rise in demand and supply chain issues. Thankfully, back in the early 1990s, inflation returned to lower levels quite quickly. However, the devastating situation in Eastern Europe now could change matters.
So, let's look at all the factors and what it means for
the Swansea property market.
The crisis in Eastern Europe has sparked even further rises in crude oil, (which diesel and petrol are made from) gas and grain prices as pressure on supply chains around the world increases.
Yet, with these issues, inflation could rise between 8% to 9% by late spring and still be around 6% to 7% in autumn, well above the Bank of England's target of 2%.
With Swansea wages rising at only 3% to 4% and inflation at 7%+,
Swansea household incomes, in real terms, will fall.
This is because ‘real’ UK household incomes characteristically have been the most consistent lead indicator of growth (or a drop) in house prices. This is because growing inflation erodes the value of money you earn, which reduces its buying power. When the cash in your pocket has a lower spending power, people tend to spend less when they buy (and rent) a home (and vice versa).
Next month, Income Tax thresholds will be frozen, and National Insurance contributions are increasing. Collectively, all these issues will create a drop of around 2% to 2.5% in the real disposable incomes of Britain's households in 2022 (real disposable income - somebody's take-home wages after tax and then the effects of inflation are considered).
Will Swansea people be more anxious to spend their money?
With less money in people's pockets, people's inclination to spend the money they do have could also be curtailed. People's savings are at an all-time high, yet many will decide to sit on the cash, instead of spending it, especially as consumer confidence has dropped.
Does this mean there is going to be a house price crash?
It’s all doom and gloom! … Or is it?
In the first half of the article, we looked at the impending fall in real disposable incomes of 2% to 2.5% in 2022. Yet, it is always important to consider what has happened in previous times.
1982 – a drop of 2.3% in real disposable income
1992 – a drop of 3.7% in real disposable income
2008 – a drop of 5.8% in real disposable income
Yes, it's going to be tough, yet we got through 1982, 1992 and 2008 – and so we shall in 2022/23.
What are Swansea people spending on their rent and mortgages?
Housing costs - owner occupiers were spending on average 17.3% of their household income on mortgages in 2015, yet in 2021 this had risen, albeit to 17.7% .
Council house (social) tenants have seen a drop in their rent from 29.2% of their income in 2015 to 26.7% in 2021, whilst private tenants from 36.4% in 2015 to 31.2% in 2021.
Interesting that private tenants are proportionally 14.29%
better off in 2021 than in 2015.
How we spend our money - the average UK home spent 4.2% of their household income on energy in 2021, and that is due to rise to 6.3% after April (and probably 7% in October). Yet, as a country, we spend 9% of our income on restaurants and hotels and 8% on recreation and culture. As with all aspects of life, it will mean choices, and maybe we will have to forego some luxuries?
Interest rates - higher inflation is generally brought under control using higher interest rates, meaning mortgage payments will be higher.
Firstly, 79% of homeowners with a mortgage are on a fixed rate, so any rise won't be instantaneous. Yet, the situation in Eastern Europe may affect the UK inflation, possibly deferring the Bank of England raising interest rates. This means mortgage rates won't increase as much, as the bank won't want to exacerbate any pressures to the UK economy in 2023/24 caused by the conflict.
The stock market had priced an interest rate rise to 2% by the end of 2022. Possibly this will now be no more than 1% to 1.25% by Christmas, slowly going up in quarters of one per cent every few months.
Next, looking at Consumer Confidence Indexes and the Organisation for Economic Co-operation and Development Consumer Confidence Index the data from the mid 1970s, the drop in consumer confidence is big, yet nothing like the drops seen in the Oil Crisis of the mid 1970s, Recession of the early 1980s, ERM crisis of 1992 and the Global Financial Crisis of 2008/09. Also, when compared to the other main economies of the world (G7), the UK has always bounced back much more quickly from recessions when it comes to consumer confidence.
What about house prices in Swansea in 2022/23?
Increasing energy prices, rising inflation, an increase of sanctions, and a probable drop in consumer confidence and spending in the aftermath of the conflict will knock the post-pandemic recovery globally, which could lead to a recession around the world, including the UK.
A recession is when a country’s GDP drops in two consecutive quarters. For the last 300 years, there has been a direct link between British house prices and GDP – (i.e. when GDP drops, UK house prices fall). Yet in 2020, the British GDP dropped by nearly 12%, yet house prices went the other way.
But, let’s look at what would happen if Swansea house prices did drop by the same extent they did in the Global Financial Crisis of 2008/09.
House prices in Swansea dropped by 16.3% in the Global Financial Crisis, the biggest drop in house prices over 16 months ever recorded in the UK.
The average value of a property in Swansea today is £188,632.
On the face of it, not good – until you realise that it would only take us back to Swansea house prices being achieved in October 2020 – and nobody was complaining about those.
And all this assumes there will be a crash, and we are not suggesting that for one minute!!
The simple fact is, the circumstances of 2009 that caused the property crash are entirely different to 2022 (no lending by the banks, higher interest rates and increasing unemployment compared to today’s increased lending, ultra-low interest rates and low unemployment environment).
The expected fall in household spending could be counterbalanced by UK businesses’ plans to invest more in their businesses (with last year’s tax breaks on investing), which will create even more jobs.
Who knows what the future holds? These are just opinions – what are yours?