According to the Financial Times, the UK banks withdrew a record number of 935 mortgage products following the jump in the gilt rates after the UK chancellor’s announcement of tax cuts and unfunded government spending increases. The ones returning to the market have higher interest rates.
The thirty-year gilt yields reached 5% on the 27th of September, with some relief following the Bank of England announcement that it is starting to buy gilts to prevent a further crash.
Still, the UK yield curve is up by almost 1% as of the time of the writing, with an almost flat yield curve of above 4.3% for the pricing intervals of 2 years to 30 years.
What does this mean for Jersey house prices?
With the gross rental yields generally not exceeding 4-4.5%, it is becoming less and less sensible for investors to buy Jersey property. Deducting the tax rate of 20% and service and maintenance charges, the net yield of Jersey property lands at about 3.5%.
This comparison does not support the current valuations of Jersey properties. For them to become investments with acceptable again, the yield would need to be higher, which, considering the rental affordability can reasonably be achieved through the price correction.
Add to this the price rally of the last 2 years and hence little expectations of further growth, the likelihood of noticeable decline – the Jersey property market is unlikely to be overcrowded by investors at this point.
Things do not look optimistic in the first-time buyer segment as well. Out of 1665 properties sold in Jersey in 2021, about 600 were on a mortgage of above 70% LTV, almost equally split between 70-80%, 80-90% and 90%+ ranges. Given the high leverage of these transactions and substantial borrowing, the housing market becomes increasingly unaffordable. It will be probably fair to say, that in 2022 and 2023 about 300-400 of these buyers will stay out of the market with the rest of the highly leveraged borrowers working on very tight budgets.
The economic woes, the crisis mood and high turbulence in the financial market will also potentially affect Jersey’s economy through the potential decline in the fund activities over the mid to long term and hence lower need to recruit and fewer promotions over the coming periods. The disposable incomes of first-time buyers will be significantly constrained.
Although our conversations with the agents show general price pessimism about the prices, some of the agents do recognize that the correction is long overdue and fair. Despite apparent unfair pricing practices of some of their peers, the agents we have talked to expressed regret for the pressure on buyers taking place during the last 18 months.
As to the buyers, including the first-time buyers, being armed with the market information and outlook will be helpful. It would be wise to recognize that the market environment has changed, and so should change the pricing and bidding approaches. Significant discount requests to the asking price are expected to become more and more acceptable.Jersey house
