Jersey’s housing market is slowly becoming a monument to greed.
It’s not moving. The buyers simply cannot afford to pay high interest at the historically high price. And to be honest, neither they are willing to. Considering, that the monetary policy tightening is here to stay, the prices need to go down.
House price maths has changed
Assume a mortgage amount of £400,000. Take a mortgage calculator. At the interest rate of 2% and 20 years of tenure, the monthly mortgage payment was just above £2,000 (£2,023 to be precise). Of that, £1,356 is the principal repayment and about £660 (for the first year) – is the interest payment. The total interest repayment for the 20 years – £85,648.
What do we have for an interest rate of 6%? Monthly payment – £2,865, principal for the first month – £865, interest – £2,000, total interest – £287,000. Overpayment in interest only exceeds £200,000.
We summarize the comparison in the table below.
Prices going down, but not there yet
The agents are trying to pretend nothing has happened. At the same time, they are quietly reducing the prices. The collection of the snips below is from the website – onthemarket.com filtered for Jersey properties.
Next time the estate agents repeat the mantra of “Jersey house prices never go down” just show them this picture.
But is this enough? We do not think so and to prove that we just calculated the equivalent property price to result in the same monthly mortgage repayment amount.
We take a mortgage of 85% LTV (15% deposit and 85% mortgage) for our calculation. We take two hypothetical flats priced at £350k and £450k – the “typical” price of one-bed and two-bed flats if you ask the agents. We then calculate what would be the monthly mortgage repayment for these flats for 20-year lending at 2%, 5% and 6%. Finally, we calculate the price of the property required, to result in the same 2% mortgage monthly payment for the mortgages of 5% and 6%.
In this way, assuming the market prices for such flats were fair earlier in the year when the mortgage rates were lower, we derive the value of the “fair” prices when the mortgage rates are higher. Below are the results.
The analysis shows, that to result in an identical monthly repayment amount on the mortgage, the flats must be priced at about 23% and 29% lower for the mortgages of 5% and 6% respectively.
We understand, that the interest rate is not the only factor in property prices, but it is a significant factor and is correlated with wider economic conditions, such as the potential of earnings growth of the population, the consumer and market confidence, etc. Owing to the interplay of other factors, the property prices will adjust to a different level, than in our analysis, however, we believe, that there is still significant room for adjustment. And on the example of specific properties, we have observed double-digit adjustments (a property initially listed at £485k agreed to a tentative offer of £420k (-14%) post interest rate hikes, however, the buyer is now looking at a lower price)
Based on this analysis, we conclude, that there is still significant room for property price reduction in Jersey.
Monument to greed and fear
The housing market has come to a halt. The transactional activity report for Q3 is not out yet, however, we expect a significant decline in the volumes. Being a lagging indicator and considering it will include the July and August data, we do not expect a material decline in the Q3 house prices report when it’s published in November, but we do expect significant pricing declines for the Q4 report, which will have somewhat priced in the market movements in rates.
If the Q3 report comes out as we expect, the property sales industry will start hailing the market as “resilient”. Some will try to keep the prices for another month. But that will be another act of greed.
The market has to balance and the balance in the housing market is in the price decline. Opposition to it will only stall the market further until the sellers run out of interest. And then, the sellers are likely to capitulate, making the market of greed a monument to fear.
