The price crunch

FACTS speak for themselves but rarely tell the whole story and statistics are even more obtuse. Nonetheless, the average price for a local market house now stands at £598,963, according to gov.gg. This relates to the April-May-June quarter and recent findings by an independent property market analyst show the average price for the month of July stood above £730,000.

I’ve written before about the risk of placing too much emphasis on these snapshots of our relatively small property market that indicate market hotspots rather than the ‘average price’ of the common perception of an ‘average house’. Admittedly some pretty average properties are being drawn into the vortex and setting this market trend are conflicting extremes of availability; the lack of available housing and the glut of available credit. House prices are rocketing because buyers are offered increasing levels of borrowing to outbid each other in these challenging market conditions.

The States’ response to the perceived housing shortage is to rezone land and purchase additional sites for residential development, the two most recent acquisitions having been available more cheaply as distressed sales within the last three years yet were either overlooked or not considered necessary.

In any event, few of the planned new houses and apartments are likely to be available to the wider public. Housing key workers we’re told is paramount and for the remainder I suspect the consistent vesting of these sites in the Guernsey Housing Association is part of the States’ plan to offload social housing entirely onto the GHA, releasing in turn some of its dated and dilapidated social housing developments onto the market for the private sector to renovate or detonate.

Not that private sector development is able to ease today’s challenging conditions quickly enough, having been stymied for six years by the flawed Island Development Plan.

The Development & Planning Authority says multiple permissions have been granted to provide all types of housing during that time and that it’s not the fault of the authority if developers don’t build them. But neither is it the fault of developers who without need nor obligation shy away from providing affordable and entry-level housing when their business is driven by more profitable market forces. The fault clearly lies with the IDP if developers and not the DPA dictate what gets built where and when.

New developments aside, what is truly causing today’s market conditions is a lack of properties replacing those already sold. Not necessarily new housing but the expected year-on-year house moves within the island, which are beginning to show a drop in numbers. Homebuyer affordability will be increasingly affected by rising mortgage interest rates and Guernsey’s rate of inflation, which at the end of last year stood at a 10-year high of 3.3% with predictions of reaching 5% later this year. At the end of June, inflation had already reached 7%.

At the beginning of August, the Bank of England increased its base rate by 0.5 percentage points to 1.75%, the highest interest rate hike in 27 years. The base rate and other policies are set to meet a 2% inflation target that would sustain growth and employment. In general terms, when interest rates are low the economy grows and inflation increases. Conversely, when interest rates are high the economy slows and inflation decreases.

Neither inflation nor interest rates will deter some resolute house hunters, it may even accelerate their efforts, but for most it will cause them to lessen their expectations or step back from the market altogether. Or so you would think.

Under the pretext of providing a helping hand, mortgage providers have extended facilities for some buyers up to 5.5 times their salaries. Young professionals with careers in accountancy, medicine or law are even able to get a mortgage linked to six times their salary.

I have stated before and again take issue with this for two reasons.

Firstly, considerably more cash available in the market increases demand, fuelling rapid increases in house prices. Secondly, the prospect of further interest rate increases places additional pressure on an individual or couple in the event of unemployment or should they wish to have children.

Mortgage providers counter the risk of unemployment by offering mortgage repayment protection insurance, at an additional cost, and parents can return to work following maternity or paternity leave with the help of childcare, again at a cost. Increasing levels of borrowing might bring house prices within the reach of more buyers, but will it keep house prices within their means?

As I’ve said previously, the level of house sales and price increases during the past two years are concerning as much as they are unsustainable. Back in December the Nationwide Building Society’s chief economist, Robert Gardner, said Britain’s annual house price growth, much like our own, is now tracking the level that preceded the global financial crash between 2007 and 2009, which followed rising energy prices on global markets such as we now experiencing.

The looming recession the Bank of England warned against earlier this month will not be as severe but it will come at a cost.

Guernsey’s local rental market is under similar pressure as a consequence of soaring house prices, with average rents now at 55% of median earnings. This prompted a claim last week from within the lettings and management industry that it’s ‘morally wrong for investors to own multiple family homes’.

At the end of last week Deputy Gavin St Pier made an early audition for the role of Sheriff of Nottingham in this year’s panto by suggesting debate on a ‘tax on second homes’ to ease the pressure on the rental market. I fail to see how this would help tenants here and now and could actually further deplete rental availability.

Most regrettable and harmful in our present rental market is a profound lack of awareness among most tenants and even some landlords. Next week I’ll explain how by accident or design it’s not only rogue landlords who benefit.