30 years on The Rostrum – An Auctioneers View!
I started working at Barnard Marcus Auctions on 29th August 1989 so it’s now 30 years I’ve been on the rostrum. In that time I have had oversight of the auction sales of over 50,000 lots with sales running into the billions of pounds. A lot has changed in that time both in my industry, the property market generally and of course many other aspects that affect our daily life.
Costa Coffee was a business selling to the catering trade and by 1995, only had 41 stores across the UK. Technology that today affects every aspect of our personal lives was completely different:
Mobile phones, whilst introduced in the UK in 1985, were only for those with deep pockets at a cost of some £3,000 (or in today’s money, closer to £7,500), they didn’t really serve as a communication tool, more of a status symbol that nobody could miss given the size of the “brick”, which in itself, was insignificant compared to the call charge rates. In fact, in 1989 Motorolla introduced the non “brick “phone, the 9800X , the first of its kind “flip phone “ which in those days would have set you back £1,765 just for the handset !
In 1989, we had no internet in the UK. Dial-up internet (yes you remember the modem!) was first established in the UK in 1991 as the UK’s first commercial internet provider and was in fact launched in March 1992. Towards the end of 1993, Pipex provided internet services to 150 customer sites. Clearly sites such as Rightmove and Zoopla, part of the range of essential tools we now have in my industry were unthinkable at that time. In fact, it wasn’t until 2000 that Rightmove was launched, our company being one of the founder estate agency groups that launched this.
Of course along with this came an entire new way of communicating. Filing cabinets full of property details, phones on the desk and no way of communicating when out on the road all became challenges of the past. We could now instantly email and not wait for the post bag, let customers know about new properties the second they came to market and of course, with access to so much data, tracking house prices, market activity and providing comparable evidence when advising customers all changed. Today, at a click of a mouse we can be “in the street “with google maps and see property streets and locations before we even get in our cars.
Of course, in my 30 years of being an auctioneer one of the biggest changes we have seen is the demographic of buyers and sellers in our rooms and of course prices. There is so much discussion across all media sectors and indeed dinner tables, about how difficult it is for first time buyers and “getting on the property ladder “ but has this not always been the case? I don’t remember having an easy time saving for a deposit for my first flat and sacrifices had to be made. Of course, back then in 1989 we didn’t have some of the costs that so many consider “essential" today. I didn’t have to give up my Sky Subscription to save for a deposit because it didn’t exist. I didn’t spend the best part of £500 a year buying Costa coffee on my way to work because it didn’t exist and certainly, I had no mobile phone bill as I couldn’t afford to buy one in the first place!
So to put this into context, I’ve had a look at average house prices, earnings and interest rates to establish and compare the real cost of buying a property in 1989 to the cost in 2019. We have to remember that mortgage lending 30 years ago was based only on a multiple of salary and not affordability. The limitation back in 1989 was between 3 and 3.5 times your annual salary. Today, mortgage lending is based more upon circumstances and affordability. But, for the purposes of this exercise, I have made an assumption based upon lending criteria being accepted and looked more closely at the cost of purchasing over the term of a mortgage and, the percentage of earnings that paying that loan requires. Of course no one can be sure as to what the future may hold with interest rates and so, I have looked at Day 1 of purchase and, a buyer assuming no change to interest rates across the term.
My research today concludes that the best tracker mortgage available for a 95% loan to value / purchase price is at the rate of 2% above Bank of England base. Base rate today being 0.75%.
I’ve also averaged various indices to get to average House Price and Earnings for the years concerned.
So this is what the numbers look like today in 2019:
The Bank of England base rate is holding steady at 0.75%
The average house price in the UK currently stands at £230,000
The average salary in the UK currently stands at £28,677 per annum
Borrowing 95% loan to value would require a mortgage of £218,500 and applying an interest rate at 2% above Bank of England Base rate (currently 0.75%) would mean over a 25 year term, a capital and interest repayment mortgage would result in repayments of £1,008 per month. (This would be £892 per month if on the same basis the mortgage was taken over 30 years).
So, the total repayments of this mortgage over 25 years would be £302,400 i.e. the cost of borrowing over the 25 year term would be £83,900 (an average of just under £280 per month).
If we equate this to average salary, the deposit required for this purchase is £11,500 i.e. 40% of annual gross salary, or, if a borrower saved 10% of their earnings each year for the deposit, it would take 4 years to save this deposit. But, once the mortgage is up and running, the mortgage payments would equate to 42% of their gross salary.
Now go back 30 years to when I started working at Barnard Marcus Auctions and what did things look like in 1989:
The Bank of England Base Rate was rising and averaged 14% and peaked at 15 %( Black Wednesday wasn’t until September 1992).
In 1989 the average house price in the UK was £61,500
In 1989 the average salary in the UK was £16,000
Borrowing 95% loan to value would require a mortgage of £58,500 and applying an interest rate at 2% above Bank of England Base rate (14% at that time) would mean over a 25 year term, a capital and interest repayment mortgage would result in repayments of £795 per month. A 30 year term was not available in the mortgage market at that time and of course, we were all told to buy endowment products and similar – we know the results of that advice!
So, the total repayments of this mortgage over 25 years would be £238,500 i.e. the cost of borrowing over the 25 year term would be £180,000 (an average £600 per month).
If we equate this to average salary, the deposit required for this purchase is £3,000 i.e. 19 % of annual gross salary, or, if a borrower saved 10% of their earnings each year for the deposit, it would take 2 years to save this deposit. But, once the mortgage is up and running, the mortgage payments would equate to 59% of their gross salary.
In fact, because of lending criteria then linked directly to a multiple of earnings this loan would have been just above the 3.5 times annual salary maximum criteria and almost certainly, would have required a mortgage guarantee premium to be added to the debt.
I appreciate this is a simplistic approach on the face of it but it does show I direct comparable of costs and debt cost at the outset of the loan taken in 1989 compared to today.
The figures give interesting reading, whilst the average salary has increased by some 78%, the average property price over this 30 year term has increased by some 274%. The cost of a property is directly linked to the cost of borrowing so, if we took the same circumstances today of average house price but, applied the prevailing interest rate in 1989, a house purchase of £230,000 utilising a 95% loan to value mortgage over 25 years would cost £2,969 per month. The total repayments over the 25 year term would be £890,752, the cost of borrowing over this period being £672,252. i.e the interest costs alone on such a mortgage would be £2,240 per month. Now that is an increase in the cost of borrowing i.e the interest paid over the lifetime of the mortgage, of over 700%!
So yes, the average house price growth over 30 years compounded at 274% far outstrips earnings growth at 78%, but, comparing the cost of borrowing over the same period, that has fallen whereby today, it is some 8 times cheaper to borrow money than it was 30 years ago.
Whilst there are always short term gains for those taking a speculative view with property, for the majority, we view this a first and foremost “Our Home”. It is a long term investment and should always be viewed as such but, in the knowledge almost every term in history shows that growth in property values will always show an upward curve. Most importantly, when we commit to purchase we have to do so based upon circumstances and interest rates available at that time and assume there will be no dramatic change during the term of our borrowing.
In 1989 the average property bought with a 25 year mortgage at the rates available then over the period would cost a total of £241,500 including the 5% deposit. Today, 30 years later with average property prices etc being where they are, the total cost is £313,900 an increase of just under 30% or to put it another way, 1% per annum.
So given these factors, if average salaries have increased by 78% but the cost of buying a property over the term of purchase has only gone up in real terms by 30%, what is the issue?
I know that some will try and pull apart this as a simplistic approach, many other factors should be considered and have not been but, the numbers do speak for themselves. What is abundantly clear to me is this, in recent months if not over the last two years we have experienced a slowdown in the market and it is undoubtedly less heated. We are at a point in a generation (and possibly more) in which we have the lowest interest rates available to property buyers. So, whilst I accept deposits are hard to save and require sacrifice, look at what we faced 30 years ago, it wasn’t easy to buy our homes and reality, it never has been but today, a set of circumstances exist that make purchasing property over the period of a mortgage cheaper than it’s ever been before.
This is my personal view and not expressed or implied to be expressed on behalf of, or by the company I have had the delight of working for over the last 30 years and hopefully many more to come.