The sell side is hoping for a reduction in mortgage rates. The rates will decline from the peaks of above 6%, but they are unlikely to get below 5% in the foreseeable future, considering the need for more tightening.
5% or even 4.5% is still a high interest rate, considering the level of debt the buyers are expected to undertake and the significant decline in real incomes. 5% is also noticeably higher than the pre-covid rates.
But the absolute level of the rates is not the only factor. The rate expectations are fundamental. The crazy property frenzy that intensified in May and was mistakenly referred to by some agents as “the market is expanding” was not a market expansion. It was a behavioural phenomenon of “locking in low rates” as the banks started raising them.
The market, driven by the fear of missing out, continued until August, started cooling in September and then broke its neck in October.
Since October, the rates are already sufficiently high to prevent rent-to-buy arbitrage with significant headroom. There is little point in buying and paying more interest than rent in the market, which is expected to decline unless the property is really unique, well-priced and fits one’s long-term needs.
The expectations have reversed: the fear of missing out on a mortgage deal and a property deal have largely been replaced with a legitimate expectation of price and interest rate decline. This causes people to wait instead of acting.
The third factor working against the sales side is the gradual reduction of the information asymmetry and impairment of, in many cases, dishonest marketing methods.
The buyers are enjoying a breathing space, evaluating the market environment, and clearly seeing that property prices can decline and that real estate is an illiquid asset class. The buyers are getting more and more educated, and the narrative of the sellers and their agents is no more dominant.
This, if it continues, is a significant behavioural change in the market and will result in tougher negotiation behaviour and immunity against the manipulative and psychologically damaging marketing practices of the agent.
Lastly, the GoJ seems to be moving towards policies limiting the price growth in the property market. One such initiative is the potential introduction of a tax of up to 50% on the sale of property owned by non-residents, which is expected to incentivize them to exit the Jersey real estate market. We cannot comment on the potential effectiveness of the policy, but the direction of the travel is positive.
We must be clear. We are not against the market principles and understand that the builders build for profit. We, however, also know that the current and pre-covid level of property prices was of significant headroom over the construction costs. Any further decline must be accommodated in the land prices.
We are not against market principles, but the asymmetry of information, the ability of the sellers/agents to run an entire industry to dictate narrative at the high level or to depress and manipulate people at the personal interaction or advertising level, is far from the market economy.
The current level of pricing reflects the balance of a highly sophisticated agency network on the supply side and unsophisticated and uninformed individuals competing with each other, financed with cheap debt on the demand side.
This is changing.
