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Are you worried about Inflation? Serious question.
I’m keen to know because, if I understand this correctly, the Bank of England (BoE) is no longer concerned.
So, I guess we should stop worrying huh?
If a central bank believes everything’s fine, well, who am I to argue.
Good news then if you find yourself one of thousands of prospective UK mortgage applicants right now.
Seems the BoE has your back.
In their ‘wisdom’ they have decided to do away with that nasty little affordability tests that banks make you go through.
No longer needed you see.
Or, if you will, an ‘unnecessary regulation.’
So, should UK mortgage applicants rejoice as the dream of home ownership has just moved a lot closer?
I will say this, you’re timing here is critical.
As you’ll see, the premises being touted by the BoE are both entirely predictable and flawed.
Your ability to hold onto your new home depend upon understanding this difference.
So read on.
The formula to higher land prices.
I get the impression that most of what passed former Prime Minister Boris Johnson mouth will quickly fade from memory.
Though one of the last things he said may indeed linger a while.
Source: Financial Times
You may think that since he’s resigned from office this really is yesterday’s news. I’d say it’s wise to watch.
I have seen this many times in the past. Governments all around the world will release news like this to chosen news media, and then watch.
If the reaction is deemed positive, then it’s possible it may become official policy. Boris Johnson simply being out of office doesn’t mean this idea, like Johnson political career, is also dead.
Nonetheless, it’s clear that to those in power in the UK, property prices are front and centre of the agenda again.
Frankly, it’s as how the Property Sharemarket Economics (PSE) team have forecasted for years now.
The credit growth we are about to witness will be beyond anything that’s come before.
And it’s precisely this dynamic that’s behind the BoE decision to remove its own affordability test which has required borrowers get tested for their resilience to a 3-percentage point rise in interest rates.
The reasons for this are revealing.
We all know what’s happening around the world in terms of conflict, rising energy prices and interest rates.
All feeding into above average inflation.
And for the UK there are issues surrounding rising unemployment, expected to peak near 11% at the end of the year.
But fear not! The BoE welcomes inflation with open arms. Well, home price inflation to be specific.
Because there’s so many levers your government ‘could’ pull to help alleviate cost of living pressures. But nothing may get in the way of the property market.
In an ironic twist, the BoE leveraged its ‘own’ research to decide that about 6 per cent of borrowers, or about 30,000 people a year, took out smaller mortgages than they could have if the affordability test had not existed.
Those 30,000 may now be able to borrow more.
And therefore, the affordability test is now superfluous. Besides, the BoE and its twin regulator, the Financial Conduct Authority, say the system should be fine, even through the tough years ahead.
Banks have bigger capital cushions now, and they rely less on volatile wholesale funding markets to finance lending.
Told you it was ironic.
One of the defining trends of the last real estate cycle was the government led mandate for banks and lending institutions to lend more, driven in part by governments themselves unwinding regulation supposed to protect banks and customers from themselves plus ignoring clear breaches of those few laws that remained.
And here we are. Again.
This is the tried and tested formula for higher land prices. And it will work.
Right up to the point when it no longer does.
Will you be the one who’s forced to carry the can your government just kicked down the road?
Now you may believe this is the part of the blog where I step onto my soap box and yell to kingdom come about how the BoE are going to ruin people’s lives etc.
Nope. I think this is good for new UK based mortgage applicants.
And it will continue to be good news for borrowers for the next few years.
Until, one day, it isn’t.
So why do I think it’s good?
Let’s look facts in the face here. The average aspiring homeowner needs a lot of help right now to buy even a modest abode.
Take UK house prices relative to wages. The £280,000 average house price for England and Wales (compared with £175,000 just before the 2008 crisis) is nearly nine times average earnings (against decades of three- to five-times multiples up to the early 2000s), according to the Office for National Statistics.
London’s £515,000 price tag is 13 times average earnings.
This fact alone has seen the tenure for new mortgages now extended from an average length of 24 years to 28 years.
This is to assist in bringing down the monthly cost associated with servicing the mortgage.
What the UK government is trying to do is force open a window of opportunity for new buyers to get in. They are 100% behind this, regardless of conflict, inflation, and rising living costs.
All that matters to a sitting government is that you feel ‘wealthy,’ nothing speaks better to their electorate than their government making home ownership easier.
That’s why this is good.
Though there’s a catch. Oh, you don’t want to hear about that, do you?
It’s just the small matter that this will work so long as land prices continue to rise.
But keep that to yourself for now. I’m sure the BoE have your back in that unlikely event.
Or maybe not?
Maybe, instead of searching online and opening that Google spreadsheet to write down your finance history to qualify, some due diligence may be in order?
Perhaps, it would be beneficial to know what your finances look like if land prices don’t just fall, but catastrophically drop, and when such an event is most likely to happen?
Would a 28-year long mortgage secure that dream home, or lock you into 28 years of debt repayment and abject misery?
Don’t be alarmed. Be prepared. This is a genuine window for first time UK homebuyers right now.
So, start your due diligence here; with a membership to the Boom Bust Bulletin (BBB).
It will teach you the history of the 18.6-year Real Estate Cycle, why it continues to repeat to this day and guide you to the opportunities the cycle presents as it continues to turn.
Think about how you could structure your loan if you knew ahead of time when the UK land market is likely to peak?
This would allow you to better insulate your dream home from the worst of a falling land price.
A welcomed opportunity to join the homeowner ranks with the knowledge of over 200 years of real estate cycle history to get your timing spot on.
A powerful combination. The BBB can guide you to make it a reality.
All for less than USD $4 a month, that’s a takeaway coffee a day!
What a bargain!
Sign up now.
Best wishes,
Darren J Wilson
and your Property Sharemarket Economics Team
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This content is not personal or general advice. If you are in doubt as to how to apply or even should be applying the content in this document to your own personal situation, we recommend you seek professional financial advice. Feel free to forward this email to any other person whom you think should read it.