JANUARY 2024

I think that we can all agree that 2023 wasn’t the best of years for the Island let alone the rest of the world, with the economy, weather and world relations combining to create the perfect storm on our senses and back pockets.

With the New Year now upon us, this doesn’t mean that everything is going to be rosy, although there are glimmers of hope in respect of the UK economy that should impact on Jersey as the year progresses.

I will leave others to comment on our ageing population, the dearth of staff in the hospitality and retail sector, the major problems suffered by developers in obtaining planning consent in a timely fashion and the profligate waste of taxpayers’ money on the new hospital site, but will instead focus on the local housing market.

DIP IN THE HOUSING MARKET

According to mortgage providers, this is the worst dip that has ever been seen in the local market - a view that most estate agents will no doubt confirm, and one only has to look at the few mortgage related transactions going through Court on a Friday afternoon to realise that we have a problem.

The reason is simple, although the solution is a challenge.

HOUSE PRICES

Post Covid, the housing market in Jersey became overheated as mortgage providers competed with each other to offer generous income multiples on mortgages which were being charged at interest rates below 2%. The supply of sale property diminished and therefore prices rose, making Jersey the most expensive place in the British Isles – way more expensive even than London.

COMBATTING INFLATION

In the meantime, the UK inflation rate started to rise, and the Bank of England had to intervene to prevent a financial crisis with long term damage to the economy. The target inflation rate, set by the Bank is 2% and this figure had moved to 11.1% by October 2022.

In March 2020, following twelve years of low interest, Base Rate had fallen to 0.1%, from a previous high of 5.75% in July 2007, and this was then increased by fourteen increments to reach its current high of 5.25%, from where it is predicted to remain for some time.

The impact of these increases has been to significantly cut inflation to 3.9% in just fourteen months, and many market commentators are now asking why Base Rate has not been reduced now that the job has been done.

THE UK ECONOMY

The strength of the UK economy will ultimately impact on where interest rates go next. The UK economy grew marginally in the first half of 2023 and then didn’t grow any further. The accepted definition of recession is when the economy shrinks in two successive quarters, so whilst that is not the case at the moment, the economy is teetering on the edge of one.

Weak economic growth reduces the chance of another rate rise whilst strong growth makes another rate rise more certain in order to avoid the economy overheating.

MODEST REDUCTIONS IN RATES POSSIBLE

Based on these facts, the good news is that the market is currently pricing in a reduction in Base Rate to 4.8% by July 2024 (down from its current level of 5.25%) By the end of 2025 it will have fallen to 3.6%, before slowly falling to 3.2% in five years’ time. It must be emphasised that these are projections only although they could result in slightly lower mortgage rates becoming available in January and February.

THE COST OF BORROWING

As Base Rate has increased, so has the cost of borrowing with indicative mortgage rates in Jersey at the beginning of the year being in the range of 5.39% for a 60% Loan to Value 5-year fixed rate up to 5.95% for a 60% LTV Tracker rate. For a 90% mortgage, these rates increase to 6.39% for both the fixed and the tracker.

HIGHER INTEREST RATES OFFSHORE

What confuses many local borrowers is that UK interest rates advertised by the main mortgage providers on TV and the national press are significantly lower than are available from their Jersey counterparts and this is due to a totally different pricing structure which has to be applied to all lending in the Crown Dependencies.

As mortgage rates have risen, so have the underwriting rules applied to affordability tests by all lenders and this is the main cause of the problem in the local housing market, where the high-income multiples that were previously available have been removed due to the perceived risk that borrowers will not be able to afford any further increases in Base Rate. This is a sensible attitude to adopt as mortgage providers have no wish to become landlords in the event of a repossession.

The unfortunate by product of this revised lending criteria is that most potential house buyers are unable to achieve the level of borrowing that they need to purchase at the unrealistically high prices that are still being asked by vendors.

LOCAL HOUSE PRICES MUST FALL

Lending criteria is not going to improve in the foreseeable future, so the only way forward is for the local market to show significant reductions in asking prices on most of the property that is currently for sale.

Various house price indices in the UK are recording small reductions in purchase prices and the Jersey market should not be mislead by these figures as the situation offshore is totally different due to the much higher value of property.

In Jersey we have the Statistics department that does an excellent job in providing reports on all aspects of island life to include the House Price Index which is produced quarterly in arrears. Due to the analysis of available data this index does not currently reflect the true picture as information on asking and sale prices is not recorded. We are told that action is being taken by the department in an effort to give a better idea of the situation and it is hoped that the publication of this information will go some way towards helping the market to gain momentum again.

BEST RATES FOR JANUARY

These are the most competitive interest rates that are currently available, and show a modest reduction from December 2023.

Bank of England Base Rate 5.25%:

2-year Tracker rate 60% LTV 6.04% (January 2023 4.44%)

2-year Fixed rate 60% LTV 5.79% (January 2023 5.79%)

2-year Fixed rate 90% LTV 6.04% (January 2023 5.49%)

5-year Fixed rate 60% LTV 5.39% (January 2023 5.29%)

5-year Fixed rate 90% LTV 5.81% (January 2023 5.49%)