Why did landlords start taking their properties off the market?
Normally, when monetary policy rates go up, that is bad for property prices. But then I am sure you assumed there would be a ‘but’ coming very soon as otherwise I wouldn’t have mentioned it. We are not living under a normal economic environment, so why should standard rules of economics apply to the housing market?
Policy rates everywhere in the world have moved rapidly up (5.25% in the US, 4% in Europe, 5.25% in the UK and likewise globally). It’s natural to assume mortgages (like any other loans) will get pricier and they indeed did. Mortgage rates in the US are now more than 7.4% (for a 30-year mortgage).
But house prices, after falling ca 5% last year, are on their way up again. It’s immensely counter-intuitive. Why did house prices fall first and why are they going up now? The reason they fell was because as mortgage rates were going up, demand fell. No curveballs there.
But why are they rising again when mortgage rates are still high? The demand is probably subdued even now but what happened is supply fell even more than demand. This fall in supply overcompensated for fall in demand. I want to talk more about this fall in supply.
Why did landlords start taking their properties off the market?
Typically, one would assume that if someone sells one’s house, one would be looking to buy another place to live. Imagine a house owner having bought a property five years ago for €1 million. Let’s assume she bought it with a down payment of 20% (€200k) and mortgage rate of 3%. I won’t do the exact math but let’s assume she has paid back 20% of the principle (€160k) implying she has €640k worth of mortgage left to be paid (remember, at 3% for say another 25 years).
Let’s assume she can sell it for €1.3 million (a 30% appreciation). She has a nice positive equity of €300k and is sitting on a nice pot of cash of €660k that can be used to pay out a deposit of, say, 44% on a €1.5 million dream house she likes and looking to move into.
She should do it, right? Not so fast. It’s where the mortgage rate comes into play. She would have to take a mortgage of €840k at a rate of, say, 6% on her dream house.
Suddenly, it’s a deal-breaker, despite the nice positive equity that can be realised and the chance of an upgrade.
A 3% interest only mortgage on remaining €640k mortgage would mean interest of €1,600 per month, which simply shoots up to €4,200 per month with a 6% interest rate on €840k mortgage.
Why did landlords start taking their properties off the market?- Somnath Banerjee
The keen eyed might have noticed that I am not even talking about amortisation of the principle here (that would make it even costlier).
You can see why supply is falling apart. She, along with other landlords, would not look to move while mortgage rates are so high. Supply went down faster than demand. Conundrum solved.
Now I come to assumable mortgages. A mortgage is considered ‘assumable’ if the loan agreement allows the original borrower to transfer their loan to someone else. In this case, the buyer of the home would simply take over the seller’s existing loan, and the current rate, terms and balance would stay the same.
Imagine the same landlord whom we discussed above finds that the dream house she wants to buy is on an assumable mortgage of 3% or thereabouts. Problem solved. She can upgrade to her new house and keep her monthly instalments in line with what she was paying before (not exactly as the mortgage value has gone up from €640k to €840k but you get the idea).
I am to believe assumable mortgages are more prevalent in the US than Europe, but one thing is for sure, no bank will tell you if you have an assumable mortgage. Read the fine print. If required call your bank and check.
Sure, they would stall you and give you a hard time to the extent that you may feel like giving up, but don’t. Pursue. Banks have to honour that agreement (if it’s there) with a minimal fee and, of course, credit checks etc. on the new owner.
Somnath Banerjee is head of investment management at Curmi and Partners Ltd.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.