To buy, or not to buy? That is the question

Whether it’s sky-rocketing mortgage rates or house price crashes, the media has offered nothing short of doom and gloom when it comes to the current state of the housing market.

It’s made finding a balanced view of what’s going on almost impossible, and especially difficult for house hunters to decide whether buying a house now is the right thing to do. However, if you or someone you know needs to buy a new home, it’s important to remember that while these attention-grabbing headlines drive TikTok views, they don’t tell the whole story.

Recently we spoke to Oliver Peace, Managing Director of James Leighton Financial Services and non-advising Firm Principal. He shared his fears for many prospective house buyers, who may feel they’re stuck between a rock and a hard place, trapped in painful limbo by indecision. Together we discussed the big questions around this topic and found that many of the things buyers are worrying about aren’t as bad as people think.

So, to help you see things from a wider perspective and make informed decisions about your future, we’ve shared the key discussion points below…

What will happen with interest rates – are you best to wait for them to come down or just bite the bullet?

“Well, unless you have a crystal ball, it’s a wild guess”, explains Oliver. “However, most commentators expect the Bank of England Base rate to go up to around 5.50% to 6.00% by the end of this year and that they will fall slowly and steadily to around 4.50% to 5.00% by the end of 2025. The so called “SONIA Swap rates”, [1]AKA “The Money Markets”, that determine mortgage product rates seem to indicate that the Bank of England Base Rate will not drop below 4.00% for at least 7 years.”

The figures suggest that waiting for interest rates to drop is therefore not advised. In the short term, buyers should try and secure the best product they can now and if, in the unlikely event that rates did fall between now and completion, the majority of lenders will allow you to switch to a new product without charge. If you do possess a crystal ball and you’re sure that rates will come down, then there are plenty of attractive tracker products available.

It’s also worth bearing in mind that if rates do come down, demand for houses will increase, driving house prices higher. By waiting for rate drops, any savings made are likely to be outweighed by the extra amount you would need to borrow to buy the same house.

What will happen with house prices – should you wait for them to drop or just bite the bullet?

“We have a serious housing crisis in this country”, explains Oliver. “Due to an aging population and extremely high immigration levels, the number of new households could be growing by 250,000[2] a year, and only 1% of the nation’s housing stock remains empty. The number of new build properties being built is also falling short of the government’s original 300,000 target, which has now been made non-mandatory. The House Builder’s Federation has warned that net housing supply could drop from 233,000 to 111,000[3] in the coming years because of overly restrictive planning regimes.

“The recent mortgage market turmoil has panicked developers into mothballing vast numbers of new developments. It means the supply of new build property is decreasing, while the demand for those properties will increase enormously. The rental market is also undersupplied with more and more landlords selling up.

“House prices have come down from the peak in September 2022 by around 4.25%. According to The Telegraph[4], Oxford Economics have forecast the eventual drop from the peak to be around 11% by second half of 2025. This means a potential further reduction of 6.75% over the next 2 years before rising again. This is not a massive drop, and in practice, most developers are offering huge cash incentives, often around 5% of the purchase price to compensate. Taking that into account, we could be looking at a net marginal reduction of only 1.75% over 2 years.”

Despite the numbers, there’s no guarantee that prices will come down. Modern new builds, with their significantly lower running costs, are in much greater demand. And it may be that much of the forecasted reduction in valuations is limited to the older resale market.

It means unless you’re a property investor, plan on stepping off the housing ladder entirely, or are re-mortgaging to a different lender within the next 5 years, there’s little to worry about. And always remember this: if you do sell for whatever reason, you’ll be selling and buying in the same market. So if your selling price has reduced, so will the one you’re buying.

Consider your alternatives with care

Of course, the decision on whether to buy now or wait depends on your personal circumstances and motivation to move. However, it’s very easy to forget that almost everything has become more expensive, including your existing accommodation. So it’s important to be realistic about the cost of the alternatives. Below we explore some the main scenarios you might be facing:

Renting

Almost all landlords have mortgages too and, in fact, Buy to Let mortgages have been most affected by the rise in rates. This means that rents are skyrocketing and with a 6- or 12-month rental agreement, it won’t be long before your rent increases, if it hasn’t already.

It’s also worth checking whether the property you’re renting is A, B or C energy rated. If not, it’s going to be costly to heat compared to a new build property. You could be talking £2,000 saving a year by buying new build.

Worryingly, the rental market has recently been described as ‘like the Wild West’ and finding a suitable rental property in acceptable condition is a challenge in itself. The list of hoops that need to be jumped through is also long and includes security deposits, credit checks, income checks, affordability checks, personal and rental history references. And even if you do manage to pass these tests, it’s common to find yourself on a list with 20 other tenants. Sadly to be the chosen one, many are having to offer 3-6 month’s rent upfront.

Stay in your existing mortgaged home

The chances are, if you’re reading this blog, and you own your current residential property, you’ll be one of the 1.5 million households whose fixed rate is coming to an end within the next 2 years. This means you’re probably coming off a mortgage rate of sub 2% and going on to one between 4.5% and 6%. Therefore, the cost of your current home is going to get significantly more expensive. You’re well advised to calculate what your existing mortgage cost will go up to and compare that to the cost of the new build property when making your decisions.

And don’t forget to account for the utility bill savings on a new build property, if your existing property does not have an A, B or C EPC rating.

Living rent and/or board free? No mortgage?

If you’re lucky enough to be one of these people then, of course, buying a new home with a mortgage is going to cost you more money. So the questions to ask are: ‘What is my motivation to move?’, ‘If I have to move, what are my options?’, and ‘What will they cost?’.

The answer to these questions will inevitably be: Rent, buy a resale or a new build home. All of which will cost more. So are you prepared to pay more to satisfy your need to move? Only you can answer this question. But make sure you’re carefully comparing the costs of all the different options, including the option of doing nothing.

The time is now to save on your new home

These are the financial benefits of buying a new build property…

• A, B and C EPC ratings mean much lower energy bills. You can find out more in this “Watt a Save” report published by the HBF.
• Energy efficient properties are likely to be worth more than less efficient homes in the future.
• Green Mortgages, offered by lenders to buyers of A, B and some C EPC rated properties, can mean a discount on a rate, better cash backs, and in some cases, more generous lending.
• 10-year guarantees (like NHBC & Premier) – this means repair and maintenance costs should not be an issue.
• Cash incentives – at William Davis Homes we have a full suite of options to help you move including our Monthly Mortgage Subsidy, which can save you up to £750 a month on your mortgage.

While it’s true that the economy is in a bad way right now and inevitably this is affecting the mortgage and housing market, it doesn’t mean you should put your dream to buy a new home on hold. Looking carefully at the costs of all the options available to you and weighing up those costs with what is motivating you to move home, will help you make better decisions about your future.

References:

https://www.chathamfinancial.com/technology/european-market-rates “SONIA Swaps”

https://publications.parliament.uk/pa/ld5802/ldselect/ldbuiltenv/132/13206.htm & https://www.telegraph.co.uk/business/2023/05/28/record-immigration-drives-rents-britain/

https://www.hbf.co.uk/news/government-planning-reforms-could-see-housing-supply-fall-record-low-and-cost-400000-jobs/#:~:text=A%20new%20report%2C%20’Planning%20for,level%20since%20World%20War%20Two.

https://www.telegraph.co.uk/property/house-prices/britain-house-price-crash-will-worst-in-world/

https://www.itv.com/news/2023-03-07/people-being-held-to-ransom-desperate-tenants-forced-into-cash-bid-wars & https://www.telegraph.co.uk/property/uk/how-rise-work-home-created-wild-west-rental-market/

https://www.hbf.co.uk/documents/12053/Watt_a_Save_Report_Feb_2023_-_Final_nW9oUaX.pdf