The housing market has been going from strength to strength following the CV-19 financial stimuli of quantitative easing and the stamp duty holiday. The people were rushing to buy properties to benefit from the extremely low rates, but were they not overpaying?
No, the agents would say. Likely, as the data shows. The pricing sentiment in the UK has turned ugly in recent weeks.
Firstly, the rise in interest rates has significantly slowed the buying momentum. Secondly, it becomes more and more clear that the rise is part of an expected long cycle of quantitative tightening, the reversal of the quantitative easing (QE) policies following the 2008 financial crisis and the housing crash with ultralow interest rates.
Although the sellers in Jersey tend to claim that this market is relatively immune and the prices do not go down, the pricing index does not support the assertion. Specifically, the Q1 2009 value of the seasonality-adjusted house price index in Jersey of 156.2 was only exceeded in Q2 2017.
The signs of a slowdown are already undisguised. The stock of properties in Jersey has more than doubled from the averages we observed for early 2022 standing at more than 960 units available for sale from the mid-400s earlier in the year.
“Reduced price” / “Motivated vendor” has become one of the key tactics of the agents to generate sales, albeit, looking at the increasing stock of the available properties, not very successful. The agents we have spoken to recently reluctantly admit that the market reached its peak in the summer.
Price drops from July peaks in certain cases we have observed exceed neared or 10%, and 5-10% in many cases. However, this seems just the start.
One of the directors in the real estate agency business we spoke about recently also admitted that in essence, the pricing of the recent months was speculative with agents adding an opportunistic 10% on their “fundamental” valuations with the hope it will sell (and in many cases it did). This provides further colour to the significant level of mispricing in the current market and the necessary correction.
The demand decline can be estimated by looking at the Government statistics. According to the Jersey House Price index 2021 report, over 62% of property transactions involved a loan. The average LTV exceeded 72% for these transactions.
According to the report, the greatest numbers of properties transacted with a loan in Jersey during 2021 were in the 70%-79% loan to value bracket. However, both the 80%-89% and 90%-100% loan-to-value brackets saw a similar number of transactions. In total, this is just about 600 properties. Considering 1665 properties transacted in 2021 (source: gov.je), more than the third are significantly leveraged transactions and prone to interest rate movements.
Considering the tightening of the monetary policy (BoE rate is expected to exceed 6% in 2023 as compared to 0.1% at the beginning of 2022), the interest rate and deposit requirement increase in the banks, in the coming months, 2023 and possibly beyond, the housing market is likely to see significantly diminished demand due to the significantly reduced buying capacity of the typical buyer. (Jersey property)
On the other hand, the end of 2022 and 2023 are seeing a large number of properties in the market which we think will put noticeable further pressure on the prices.
As such, we think:
– There are significant downward pressures on the prices and the buyers should be aware
– It is sensible to negotiate noticeable discounts if buying now given the deteriorating housing market worldwide, in the UK and we think, in Jersey
– For off-plan sales for the buildings with 2023 completion dates, it is risky to place significant non-refundable deposits considering the mortgage rates when the transaction closes are expected to be significantly higher and potentially unaffordable.
– For the sellers and the agents it could be more sensible to recognize the changed and changing market conditions in their pricing sooner, rather than later to ensure a smooth flow of sales and no “loss-loss” situations. (Jersey property)
Disclaimer: The note above is not financial advice and readers should perform their own analysis when making financial decisions. Money.je is a start-up financial blog created out of the necessity to comment on all things financial in Jersey.
