Rising inflation and the local property market.

How will rising inflation affect the Maghull property market in 2022?

The UK is currently experiencing its highest inflation rate since the early 1990s.

The very real increase in prices on everything from groceries to fuel has mainly been caused by the combination of an increase in demand for goods and services from consumers following lockdowns, together with global supply chain disruptions.

Most economists weren't too concerned about this increase in the inflation rate as the very same thing happened in the early 1990s following the Credit Crunch with a similar rise in demand and supply chain issues. Thankfully, back in the early 1990s, inflation returned to lower levels quite quickly, but the situation in Eastern Europe now could change things.

A combination of factors, and what they mean for the property market.

The crisis in Eastern Europe has sparked even further rises in crude oil, gas and grain prices as pressure on supply chains around the world increases, all of which had already had some heavy price hikes.

At North Wall, we thought that the UK inflation rate could possibly rise to around 7% in the spring and drop back to 5% in the autumn and as we entered 2023, be approximately 3% to 4%. But with everything factored in, we could see inflation rise to 8% to 9% by late spring and still be around 6% to 7% in autumn, well above the Bank of England's target of 2%.

How does this affect you?

Wages are rising at only 3% to 4%. If inflation does hit 7%+ then household incomes will fall in very real terms.

This is because ‘real’ UK household incomes characteristically have been the most consistent lead indicator of growth (or a drop) in house prices. Growing inflation erodes the value of money you earn, reducing buying power. When the cash in your pocket has a lower spending power, people tend to spend less when they buy or rent a home (and vice versa).

Next month, Income Tax thresholds will be frozen, and National Insurance contributions are increasing. Collectively, all these issues will create a drop of around 2% to 2.5% in the real disposable income of Britain's households in 2022

Is it time to tighten the belt?

With less money in our pockets, most of us are less inclined to spend on treats or luxuries.

But statistically, most people’s savings are at an all-time high – perhaps due to changed lifestyle habits after two years in and out of lockdown - but still many will decide to sit on the cash instead of spending it – consumer confidence in this unstable market is low.

All the indicators are there for the bubble to burst and unsustainable house price growth to come tumbling down.

It’s all doom and gloom! … or is it?

This blog is about the local property market in and around Maghull & Lydiate, and though obviously my heart goes out to people caught up in the awful humanitarian crisis in Eastern Europe, respectfully, let’s put that to one side for just a moment for the purpose of this article.

We’ve discussed the impending fall in real disposable incomes of 2% to 2.5% in 2022. I appreciate it's going to be tough for many families in Maghull. Yet, it is always important to consider what has happened in previous market dips.

• 1982 – a drop of 2.3% in real disposable income
• 1992 – a drop of 3.7% in real disposable income
• 2008 – a drop of 5.8% in real disposable income

Yes, it's going to be tough, yet we got through 1982, 1992 and 2008 – and so we shall in 2022/23.

What about fuel prices?

The price of petrol and diesel is very high compared to a year ago, I’m sure most of us are feeling that.

At the time of writing, the average price of unleaded petrol is £1.51/litre today, quite a jump from the £1.21/litre a year ago. But here is an interesting fact, petrol was a lot more expensive (in real terms) in 2011 than today.

In TODAY's money, a litre of unleaded petrol in 2011 would be the equivalent of £1.79/litre. We have some way to go before we get to those levels – and again, the economy (and property market) kicked on quite nicely after 2011.

The market is a cycle.

What about mortgage & home energy costs?

Owner-occupiers were spending on average 17.3% of their household income on mortgages in 2015, by 2021 this had risen to 17.7% - an increase, but not a huge one.

Social housing tenants have seen a drop in their rent outgoings from 29.2% in 2015 to 26.7% in 2021, whilst private tenants from 36.4% in 2015 to 31.2% in 2021 – these are currently on the rise, but arguably private tenants were proportionally 14.29% better off in 2021 than in 2015.

The average UK home spent 4.2% of their household income on energy in 2021, and that is due to rise to 6.3% after April (and probably 7% in October). Yet, as a country, we spend 9% of our income on restaurants and hotels and 8% on recreation and culture. As with all aspects of life, it will mean choices, and maybe we will have to sacrifice some of the things we enjoy.

Obviously, these statistics are generalised – many of us rarely spend on hotels and restaurants, and the impact of rising energy costs will hit some households much harder than others in real terms.

The point of the generalisation is not to pretend that some won’t suffer more than others, but to reflect the market as a whole and to demonstrate that when things have been hard in the past, the economy has recovered – and will do again.

Inflation is generally brought under control through higher interest rates - meaning mortgage payments will go up.

First off, it’s not necessarily time to panic - 79% of homeowners with a mortgage are on a fixed rate, so any rise won't be instantaneous.

But, there will be a bizarre side effect from the issues in Eastern Europe. Though the current situation in Eastern Europe, by its very nature, will bring greater UK inflation, it will also probably defer the Bank of England raising interest rates.

This means mortgage rates won't increase too heavily as the bank won't want to exacerbate any pressures on the UK economy in 2023/24 caused by the conflict.

The stock market had priced an interest rate rise to 2% by the end of 2022. I suspect this will now be no more than 1% to 1.25% by Christmas, slowly going up in quarters of one per cent every few months. The crisis in Eastern Europe might even come to be seen as a defence for higher inflation throughout 2022, all meaning everyone's mortgage could end up costing less, which could continue to prop up property prices.

Next, looking at Consumer Confidence Indexes - these indexes are fickle things. I prefer to look at the Organisation for Economic Co-operation and Development Consumer Confidence Index as it has a larger sample range and a longer time frame to compare against. Looking at the data from the mid 1970s, the drop in consumer confidence is big, yet nothing like the drops seen in the Oil Crisis of the mid 1970s, Recession of the early 1980s, ERM crisis of 1992 and the Global Financial Crisis of 2008/09. Also, when compared to the other main economies of the world (G7), the UK has always bounced back much more quickly from recessions when it comes to consumer confidence.

What about house prices in Maghull in 2022-23?

Increasing energy prices, rising inflation, an increase of sanctions, and a probable drop in consumer confidence and spending in the aftermath of the conflict will knock the post-pandemic recovery globally, which will lead to a recession around the world, including the UK.

A recession is when a country’s GDP drops in two consecutive quarters. For the last 300 years, there has been a direct link between British house prices and GDP - (i.e. when GDP drops, UK house prices fall).

But.

In 2020, the British GDP dropped by nearly 12%, and house prices went the other way…

What would happen if house prices in Maghull did drop by the same extent they did in the Global Financial Crisis of 2008/09

House prices in Maghull dropped by 17.6% in the Global Financial Crisis, the biggest drop in house prices over 16 months ever recorded in the UK.

Today, the average value of a property in Sefton is £197,303. So, if Maghull's house prices dropped by the same percentage in the next 16 months, an average home locally would only be worth £162,577.

On the face of it, not good - until you realise that it would only take us back to Maghull house prices being achieved in May 2020 - and nobody was complaining about those. We have seen phenomenal growth since Spring 2020, and the rebalancing of that would be nowhere near as catastrophic as the events of the last crash.

Yes, that will mean if they do drop in price, the 5.3% of Maghull homeowners who have moved home since May 2020 would lose out if they sold after that price crash. But how many people move home after only being in their home for a few years? Not many!

The simple fact is that 94.7% of Maghull homeowners will be better off when they move if house prices crash.

And all this assumes there will be a crash.

The circumstances of 2009 that caused the property crash are entirely different to 2022 (no lending by the banks, higher interest rates and increasing unemployment compared to today’s increased lending, ultra-low interest rates and low unemployment environment).

I do believe with all that's happening in the world we might see a rebalancing of the property market later in 2022 or in 2023, and we could see the odd month with some negative growth in house prices, but it will be nothing like 2009.

The expected fall in household spending could be counterbalanced by UK businesses’ plans to invest more in their businesses (with last year’s tax breaks on investing), which will create even more jobs.

Who knows what the future holds? These are just my opinions - what are yours?