Some believe that inflation and the cost of living crisis could lead to property values falling by 10% to 20% over the next 12-18 months.
It is clear that the Croydon real estate market is extremely interesting right now.
Croydon currently has 2294 properties available for sale (the 15-year-long average is between 2300-2600), which means that house prices have risen significantly.
According to the Land Registry
Croydon property prices increased 6.1% in the past 12 months (or PS23.300)
Robert Kiyosaki said that looking back at the past is the best way to predict the future. It is important to compare today’s situation with 2008’s last property crash.
1. Inflation Rates Increase
The possible cause of the crash can be attributed to the Bank of England’s rise in interest rates. This affects homeowners’ mortgages.
Higher mortgage rates will mean homeowners will pay more for their mortgage payments. This leaves less money for household necessities. Many Croydon residents put their homes up for sale in 2007 to reduce their mortgage payments.
However, newspapers do not mention that 79% British homeowners with mortgages have them at a fixed rate (at 2.03% on average).
A mere 19% of the 20 UK house purchase in 2021 (or 93.2%) had their mortgage rates fixed.
In the short- to medium-term (two to five year), most homeowners won’t see an increase in their mortgage payments for many years. 27.8% of UK house sales were made with cash, meaning that there was no mortgage.
Of the 932 577 UK house purchases made since February 2021, 259 205 were done without a mortgage.
Some people believe this will cause problems when all homeowners are lowered from their fixed rates. In 2014, the mortgage lending rules were changed. Every applicant for a mortgage would have been evaluated at the time of application to determine if they can afford to make their mortgage payments at mortgage rates ranging from 5% to 66%, not the 2% or 3% they might be currently paying.
No pundit predicts that the Bank of England will raise interest rates to above 2%, with a worst-case scenario of as low as 3%. If the Bank of England raised interest rates to 3.3% homeowners would pay 4.5% to 5.5% for their mortgages, which is well within the stress range at the time they applied for their mortgage.
The probability of Croydon property sales or Croydon repossessions is lower because of rising interest rates (both of which cause house prices to fall).
2. House Price / Salary Ratio
A second reason for another crash in house prices is the ratio between average house prices and average wages.
The lower the ratio, the more expensive property it is. The ratio of the average UK house price to the average UK salary was 5.30 in 2000 (i.e. The average UK house cost 5.3 times the average UK salary. The ratio was 8.64 at its highest point just before 2008’s property crash.
This ratio is now 8.85. Some commentators believe we are headed for another housing price crash. They are wrong, however, because today’s mortgage rates are lower than they were in 2007. Take, for example:
In 2007, the average 5-year fixed rate mortgage was 6.19%, just before the property crash. Today it is only 1.79%
The house price/salary ratio remains the same as 2008’s property crash, but mortgages are today 71.1% less expensive.
3. Banks are reckless in lending
Unscrupulous lending practices during the lead-up to the crash were another reason for 2008’s property crash.
Self-certified mortgages were the first instance of reckless lending. Self-certified mortgages are those where the lender does not require income proof.
Self-certified mortgages accounted for 24.6% in 2007
When the economy became a bit sticky in 2008, people who didn’t have enough income (since they were self-certified), quickly put their properties up for sale.
The second aspect of reckless lending by banks was the amount they loaned buyers to purchase their homes. Banks require first-time buyers to deposit at least 10%, and perhaps more. Although 95% mortgages are now available (meaning that first-time buyers only need a 5% deposit), they can be quite difficult to get.
In 2005/6/7 Northern Rock allowed first-time home buyers to borrow 125% off the property’s value. First-time buyers were eligible for 25% cashback on their mortgages!
In 2017, 9.5% of all mortgages were 95% and 6.1% were 100% to 125%.
This means that almost one in six mortgages (or 15.6%) had a 95%-125% mortgage in 2007.
Negative equity is when the property’s value falls below the amount owed on the mortgage. Many Croydon homeowners who had negative equity or were close to it in 2008 panicked about the Credit Crunch. They put their houses on the market.
For a better understanding of the situation regarding mortgage lending in 2021, 2.4% of mortgages were 95% and 0.2% were 100%. The reason is that the mortgage lending rules have been tightened since 2014.
Hence, why did Croydon’s house prices plummet in 2008?
In a nutshell, 2018 saw a flood of Croydon properties come on the market, flooding the Croydon real estate market with properties to buy.
Mortgages were becoming more difficult to get (because of the Credit Crunch), which led to a decrease in demand for Croydon properties.
When there is an excess supply and a lower demand for something, the price will fall. Croydon property prices declined by 16% to 19% depending on which property type, between January 2008 – May 2008.
What was the number of properties available for sale in Croydon during the last housing market crash?
In Croydon, there were 3565 properties on the market for sale in Summer 2007 (just prior to the crash), while a year later, the Credit Crunch brought that number up to 5200.
Croydon house prices fell in 2018 due to the huge increase in supply and decrease in demand.
Today, Croydon has 2294 properties available for sale, whereas the average 15-year-old Croydon property sale is between 2300-2600 properties.
What will happen to Croydon’s property market?
Croydon’s house prices have risen since Lockdown 1 was lifted. This is due to a shortage in Croydon homes available for sale (as noted above) and an increased demand from buyers (the reverse of 2008.
There are signs that the disparity between supply and demand for Croydon property is beginning to improve. However, it will take some time before this has any impact on the Croydon real estate market.
As a result, buyer demand will decrease while the supply of properties for sale (i.e. supply) increases. This will gradually bring Croydon’s property market back to long-term levels and not the housing crash.
I advise you to keep an eye on how many properties are being sold in Croydon at any given time. Only worry if it exceeds the long-term average.
Before I leave, let’s talk about inflation and how it will affect the Croydon real estate market.
What will inflation and cost of living affect Croydon’s property market?
It is clear that rising costs of living will affect buyer demand. People with less income won’t have the money to pay for such expensive mortgages. This will reduce Croydon’s house price growth, particularly for first-time buyers.
However, the decrease in first-time buyers has been offset by an increase of buy-to-let landlords purchasing, particularly at the lower end.
This will help stabilize the Croydon middle-to-upper property market. This will mean that Croydon’s owner-occupiers, mainly Croydon homeowners, will enjoy greater stability in their Croydon homes and find a buyer if they decide to move up the property ladder.
Hence, Croydon landlords are looking to expand their buy-to-let portfolios despite these economic conditions.
I’m seeing new and established buy-to-let Croydon landlords return to the market to add rental properties. Because there isn’t as much competition for first-time buyers, they aren’t being outbid as often.
But, even more important, residential property can be a good hedge against inflation.
First, inflation tends to slow down property values in the medium-term.
Inflation also benefits existing homeowners and landlords, as well as the impact it has on mortgage debt. Croydon house prices rising over time will reduce the loan-to-value percentage of your mortgage debt, and increase your equity. A lower interest rate will be offered to the homeowner/landlord if they decide to remortgage the property in the future.
Third, your fixed rate mortgage payments will remain the same regardless of how much equity you have in your Croydon home.
Croydon landlords who own buy-to-let properties also benefit from inflation. Because rents increase with inflation, this is why it is important to remember. Rents rise, but your fixed-rate buy to let mortgage payments remain the same. This creates the possibility of a greater return on your buy-to -let investment.
