House prices are set to crash following two consecutive months of price falls. The forecast for the UK housing market is that prices will trend down for a number of years, following a huge crash in sales volume. In fact, sales are at their lowest point since Covid-19 lockdowns and falling at their fastest pace since 2008.
The problem is that most of the mainstream estimates are probably incorrect or at the best case 5-6 months behind. The way the media reports on this is similar to the 2008 house price crash in terms of this lag. This means that most people won’t know about the house prices recession, until it’s too late.
The crucial question for people looking to buy a house, is are the UK house prices going to crash? Then if house prices are going to fall, by how much? The becomes difficult to answer when we are not given accurate information ahead of time. This article will change all of that.
UK House Prices Sold Data Lag Behind Reality
In January 2007, the Independent was still asking if house prices would rise another 10% or if there would be a house price crash. Similarly, the Guardian reported that house prices were back on the rise after three months of falls at 2007 ended. They also reported that “Halifax said the mixed pattern of rises and falls of the past few months was consistent with a subdued market and predicted that prices would remain flat in 2008.”
In retrospect, we now know that data from Land Registry data, house prices fell by 16% over the course of 2008. Here’s a headline from November 2008 ‘Britain’s Worst Price Falls‘. As you can see, even right up until house prices started to tumble, Banks and media outlets were only just questioning if they would crash. Never mind by how much.
We also don’t tend to see price movement in house price indexes for 4 to 6 months after the fact. That’s because there’s around a 12 week completion time, a 2 month lag on housing registry data.
Why UK House Price News Have Been Wrong About House Price Falls?
Back in January I said that house prices were going to crash. I informed my readers that housing was in a late stage bubble. Later in August I explained why inflation was going to cause a UK house price crash. My reasoning behind a UK house price crash was due to two reasons:
- Inflation would force policy makers to increase interest rates. This would negatively impact mortgage holders and the affordability of first time buyers.
- Buy to let landlords would be significantly impacted and would start to sell their properties. This would reverse the shortfall of uk housing stock.
At this point, most estimates in the UK house price news were that “growth would level off” or “house prices would remain stable”.
Why The Forecast For The UK Housing Market Has Been Wrong
The UK news on the housing market has failed to give early warning signs on UK house price falls in price. House prices need to be understood within the context of the cost of borrowing. There has been a failure to understand how intrinsically linked the multiple asset bubbles were to the near-zero base rate. This includes not just the UK housing market but housing as a global commodity and has resulted in:
- High elasticity around buyer affordability and profitability due to the low cost of borrowing, this includes residential buyers, buy to let landlords and commercial landlords.
- That low interest rates have allowed individuals and business to accumulate vast amounts of debt and leverage. This has driven the buy-to-let bubble.
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Secondly, there has also been a failure to acknowledge the root cause for lack of shortage in the housing market. Whilst there was a slowdown of construction following 2008 recession, much of the housing stock was then acquired by a narrow demographic. How this might be redistributed due to a changing economic environment has also not been considered. The shortage of UK housing stock is a result of:
- The value of buy-to-let mortgages expanding from circa £300bn in value (2007) to over £900bn in 2022.
- At one point in 2022 landlords were buying up 1 in every 10 properties in the UK.
Finally, there has been a lack of appreciation of what would cause a redistribution of housing stock:
- 68% of 2.74 million landlords are over the age of 55. This same demographic face a £70,000 retirement portfolio shortfall. One in 10 are using their buy-to-let investments fund their retirement.
- It’s estimated landlord profits will slump to just £7 when they re-mortgage this year. As the base rate increases, buy-to-lets may even start costing them money.
- Landlords and residential owners in retirement may be forced to sell to prop up their retirement lifestyle. Especially the inflation drives up the cost of living. This problem will be multiplied as asset prices enter a bear market and the value of their retirement portfolio falls.
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Why UK House Prices Are Going To Crash
The low rates are what lead to a house price bubble and rampant speculation in global housing markets. The rising interest rates are also what killed house prices in the 1990s. We are now shifting from an economic paradigm of ultra-low interest rates to normalised rates. This significant and rapid change in the base rate is what has caused prices to fall at the fastest rate in 14 years.
Mortgage burden is now at its highest rate since the 1990s when the UK experienced it’s worst ever housing crash. The share of people’s income going towards a mortgage is now around 25% to 30%. Remember, that’s excluding a £200-300 increase in energy bills this winter. This figure is also before the latest rate hikes. As the current base rate hikes hit mortgage rates, this burden will increase.
If the base rate is currently 3.5% and the market expectation is for 5.5% then there is another 2% to be added we could be looking at another £200+ per month being added to the mortgage burden. If inflation does not start to come down, it could yet go higher.
Landlords Plan A Mass Exodus From The UK Property Market
In fact, Simply Business’s UK Landlord Report 2022 found that 49% of landlords have sold a property in the last year or are planning to sell. 50% are worried about further regulation of the rental market and that these rental reforms are the biggest threat to the market (34%). Of those that are selling up 20% are selling because of said rental reforms.
Buy to let mortgage products have been heavily restricted and rates have soared. As a consequence Ratings agency Moody’s estimate that more than 25% or buy to let mortgage lets could fall below the 110% lower threshold for rental-income-to-interest payment. This means they’ll likely effectively be loss-making. The greatest impact will be seen in London and the South-East where landlords are overleveraged. Also in Scotland, where 6-month rental caps have caused a mass exodus of landlords.
Landlord Profits Slashed
Landlords across the country face making profits of over £2k to loss making by the end of 2023. Especially in London where they are expected to make a £3,687 loss. The Telegraph estimates that these homes account for 8% of all homes in London. However, ONS statistics indicate that 27% of people in London privately rent. These rental homes and are likely to flood the market as investors rush to cut their losses, driving house prices down further.
The 2022 Simply Business report also highlights that energy efficiency rules and proposed changes also have landlords scared. Landlords have had to comply with energy efficiency regulations since 2018, but proposed changes to minimum standards could mean rental properties need further costly improvements. 40% of Landlords think this would cost them between £1,001 and £5,000. 27% between £5,001 and £10,000, 19% over £10,000. This makes many buy-to-lets even less viable.
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How Much Are House Prices Going To Crash In 2023?
The worst is yet to come for the UK Housing Market. So, what is the forecast for the UK Housing Market? Are housing prices still on track to crash. The current prediction for the UK Housing Market is that house prices will fall 8% according to Halifax. This is likely to be a very conservative estimate. In fact, the consensus at present generally seems to be around a 5-10% decrease in house prices.
- Knight & Frank: 5% house price fall in 2023.
- Savills: 10% house price fall in 2023.
- OBR: House prices to fall 9% by 2024.
The impact of base rate increases are on houses prices is on a 5-6 month lag. The 2.3% fall in UK house prices are likely the result of the August rate increases. The September to December rate increases are yet to be priced into the UK housing market. This means that circa 1.75 basis points are yet to be priced into the market. In the sense that we haven’t seen the reported damage of these rate hikes.
These may have an accumulative impact and cause a snowball of house price falls. Add to this, the fact that the impact of winter is yet to be seen on household finances, the spring may bring about much stronger house price falls. As property becomes higher risk, this will increase the probably of a fear-based panic sell-off. The final stage of the bubble.
Based on what history tells us about the media and banks being so far behind the curve when it comes to house price estimates, the above estimates are likely to understate the real problem. It could be much worse than an 8% fall in UK house prices.
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UK House Prices To Crash By 31%?
The sudden reversal of risk free monetary policy has substantial implications. The real indicator of this house price crash will be the Bank of England (BOE) base rate. A 2019 BOE research paper has found that all house prices gains since 2008 can be tied to low interest rates. It is not supply and demand. House prices would never have reached the levels they have without these ultra-low interest rates, regardless of how much demand had increased. It is the cost of borrowing that most limits buyers affordability.
This Bank Of England working paper uses the yield on the 10-year index-linked gilt as representative of the UK’s “risk-free rate. The author’s model predicts that a 1% sustained increase in index‑linked gilt yields (or interest rates) would result in a fall in real house prices of just under 20%. The 10-year index-linked gilt yield in 2019 was circa 1.5% and is now at 3.6% (as of December 2022). Miles and Monroe also conclude “were real gilt yields to rise to 0% (levels last seen around 2011), this would imply a 31% fall in house prices.
In short, the low rates are what lead to a house price bubble and rampant speculation in global housing markets. We are now shifting from an economic paradigm of ultra-low interest rates to normalised rates. The last time there was a comparable upward shift in interest rates was the 1990s. This resulted in a UK house price crash of 37% in real terms between 1989 and 1995.
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What Has Triggered The House Prices To Crash?
It’s important to note that, this paper was published in 2019 and at the time the authors comment that “this calculation illustrates the sensitivity of house prices to changes in interest rates. But it does not suggest that house prices are likely to move lower. That would only be reasonable if a reversal of the 30 year downwards trend in safe real interest rates seemed likely. But measures of real interest rates in the UK and other developed countries show little sign of mean revision.”.
This signifies that it has taken the Black Swan event of Covid-19 to trigger inflation and interest rate revisions. The later of which is not set to expose the sensitivity of house prices to change in interest rates. As we are now seeing, this significant and rapid change in the base rate is what has caused prices to fall at the fastest rate in 14 years. The ultra-low rates facilitated the buy-to-let craze. Now the rates are increasing, Landlords are selling up and flooding the housing market with supply. The number of landlords selling properties has increased by 13% in four months.
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House Price Forecasts Are Based On Bank Of England Base Rate Predictions
Many house price forecast are based making an assumption on the Bank Of England Base rate. For example, the OBR report stated the base rate, “will peak at 5% in the second half of 2024 – the highest since 2008 and 1.8 percentage points above the peak in its March forecast, before falling back slightly to 4.6% by the forecast horizon.”.
This may be based on the Bank of England’s projected base rate and inflation levels. The problem is that this has been wrong a number of times. The projected base rate in February 2022 was 1.75%, we’re now at over double that rate. In August the market expectation increased to 2.75%. This shot up to 4.75% by early September before the mini budget and 5.5% after. These views were over 2 months ago. The Bank Of England recently stated that future rises are likely to be in-line with market expectations. They also indicate that further rate rises will be needed.
There is a strong link between the money supply and inflation. If the money supply rises faster than real output, then prices will usually rise. The quantum theory of money allows us to calculate the level of inflation from monetary supply and GDP. I am NOT going to do that now!
Let’s use a simple calculation instead.
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The Bank Of England Money Printing Craze
Over Covid The Bank Of England printed over £500 million, £360m was printed as part of quantitative easing program. This is nothing. The BOE balance sheet went from around £496 billion in 2019 to around £980 bn by the end of 2022. This means that the UK printed 3 to 4 times more than it printed 2014 and 2019 (circa £189 bn). Let’s be honest, the entire decade after 2008 hasn’t been a quiet one for the money printers. Since 2008 the balance sheet has increased from just under 24bn to almost 900bn.
The United States and most other developed nations did this too! Assuming it was a normal year or productivity and the Bank Of England printed 4x the usual amount of money. As they did in in 2020 to 2022, then we should roughly expect 3-4x the usual amount of inflation (from 3% to 9% or 12%). As we know, it was not a normal year for productivity and the pound has weakened considerably since. At one point, 13% was the expected peak, although it is now forecast at around 11%.Which puts our crude calculation around those estimates.
The Debt Trap In The UK Housing Market
The issue is that a recession would make real production and GBP fall. Factors which drive the inflation rate. As we come off the BOE’s addiction to printing money, we are struck between a rock and a hard place. The Bank of England may raise rates and this may crash the economy, causing lower productivity and further falling of living standards. Alternatively, the policy makers will blink, won’t raise rates and inflation will continue to climb; causing further falling of living standards. As Nouriel Roubini states are in a debt trap.
All of which means that inflation could continue to climb. There is also a risk that the steep reverse in interest rates could cause a number of economic dislocations and fracture the economy. Especially if anything like what occurred with ILDs in the UK GILT market occur with US treasuries. This could cause a 2008 style credit crunch as liquidity is drained from the market.
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House Prices To Crash: Winter Has Come For The UK Housing Market
After a 10 year spring-summer for the housing market, winter has arrived. With an abundance of supply about to be injected into the market, along with frail affordability, house prices are set to crash. The phantom wealth of baby boomers is set to evaporate with their retirement incomes.
The panic selling from accidental landlords will force down UK house prices. The 8% that is currently predicted over the course of the year, will likely multiply as this happens. This is because retirees will need to replace their familiar rental income with a cash injection.
For most of the UK private rent accounts for around 20% of the market share. If 1 in 10 landlords sell up, that’s 2% of the market up for grabs. If 50% plan to sell then 10% of all properties in the UK will flood the market. At a time of severe lack of affordability, supply is going to significantly outstrip demand. All of which leads me to conclude the housing market is going to crash.
So, will the house prices go down in 2023?
A combination of higher interest rates and a shortage of mortgage products will drive force many landlords to sell. This will flood the market with supply. This will be at a time when there is high mortgage burden potentially increasing residential sales. Unfortunately, this will be at a time of lower affordability and a restriction of the credit. Therefore, house prices will need to fall in real terms for income ratios to catch up.
It is plausible we continue to see 2-3% falls in house prices over the course of the year. By mid-2023 you might then forecast that the UK house prices will fall by 20%. Based on the Bank Of England model a 1% rate increase would see a 20% fall in house prices. In a scenario where rates increase to the predicted peak of 4.5%, house prices falling 20% could be very modest expectation.
