The end of cheap money, soaring energy prices, and an inflationary crisis mean there could be a house price crash in the UK. This is hard to believe, given that Nationwide recently revealed the average house prices increased for the 11th consecutive month. With prices rising to a record high of £271,6131. This might have lead you to ask how realistic the prospect of a house price crash in the UK is.
The UK is about to enter a recession, which causes house prices to fall in reaction to higher unemployment or lower income. One key economic driver of house prices are also interest rates. With the surging cost of living and increasing inflation rates, the housing bubble looks set to burst.
Many experts dismiss 2022 being a repeat of the 2008 housing crash. That house prices will not crash because of the lack of supply vs demand. They also conclude there are not the same systemic issues as last financial crisis. Which makes the concept of a house price crash in the UK a hot debate right now.
What Has Caused House Prices To Surge?
Record low interest rates since for the past two decades has caused house prices to boom. According to European Commission research, house prices have risen by 45% since 2010. Recent events have added fuel to this fire.
The Covid-19 Pandemic essentially caused the housing market to freeze. The government came up with a few initiatives to kick-start the housing market. This is because if house prices were to fall, it’s fan base (boomers and the 1%) would be deeply unhappy.
In July 2020 it launched a stamp duty holiday scheme, which exempted the first £500,000 of property sales from stamp duty.
Next came the government-backed 95% mortgage schemelaunched in April 2021, which aimed to help secure a mortgage with just a 5% deposit.
Both of these policies added fuel to the housing crisis. The first policy was designed to help existing home-owners and multi-property owners to buy more property. The second encouraged first-time buyers to over-leverage themselves in debt. This is in order to buy the overvalued property of existing homeowners or developers.
The Bank of England has also paradoxically pushed ahead with plans to scrap the affordability test. Which makes you consider the level of political influence on ‘independent’ Policy makers. Ultimately, the policies are designed to help the Rent Seekers and older generations with high levels of homeownership.
This is because property values are politically charged and a house crash in the UK could cost you the election. For example, 62% of those over 65 own a home. They are also significantly more likely to vote conservative. Therefore the government will do anything is cant to avert a house price crash.
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Will There Be A House Price Crash In The UK?
The most recent data, contradicts the idea that their will not be a housing correction. With house prices falling by -1.5% across the UK and -3.4% in London. This equates to a fall of circa £5,000 and £20,000 respectively.
This is because the Bank Of England has been forced to make consistent rate increases since December 2021. Which is in response to inflation hitting a 40-year high. Higher interest rates combined with the increased cost of living is putting pressure on affordability.
Interest rates have risen from 0.25 to 1.75, the highest level since 2008. This has done almost nothing to dampen inflation. As a result, there are more 50-point-basis point rises on the cards as inflation threatens to hit over 18.6%. This is significantly over the BOE estimates of 13%.
The Bank Of England have been much slower to react to inflation that other countries around the world. New Zealand are already at a base rate of 3% (from a low of 0.25%). This has already resulted in quarterly house price fall of 2.5%. CoreLogic’s head of research suggests these losses could extend to 28% at the current base rate.
What’s more is that New Zealand’s inflation rate as of July was 7.3% and the UK’s is already close to 10%. Demonstrating how far behind the interest rate requirements we potentially are.
Whilst the Bank suggests this will be the peak, their slow response to inflation suggests otherwise. The truth is that nobody has ever trailed an experiment of such vast money printing. Especially in a time of record low interest rates and productivity. All combined with a time with such severe supply chain shocks.
As a result, this makes predicting the level of inflation extremely difficult. Which then means, the interest rates are a challenge to predict. Which of course, makes predicting a house price downturn challenging.
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Find more statistics at Statista
Soaring inflation is core feature of the majority of global economies right now. As such, there will also be a global correction in the interest rates. The soaring house prices we have seen around the world due to low interest rates may all come crashing down.
There has been a significant shift in sentiment in the past month or so. For example, in London, there has been a return of Gazundering tactics on an estimated 50% of sales. This is where buyers requesting sellers slash an agreed price just before exchange, without valid cause.
House price growth predictions have also become increasingly negative. For example, Canadian firm Desjardins estimates a -23% decline in house prices by 2023.
The Buy To Let Industry Will Be Hit Hard
According to some experts, the demand for quality housing still far outstripping the supply. This makes a house price crash in the UK unlikely. However, the unprecedented rebalancing of the base rate may cause a price decline. This will result is severely restricted affordability.
This comes at a time of significant rental market reforms. This makes it more difficult for landlords to pass increased mortgage costs onto the tenant. The prospect of rental caps to protect tenants will also destabilise the market. The rental reforms are essential in avoiding mass homelessness, as renters are unable to pay the rent. At the end of the day there will be a ceiling on how much renters pay.
This will make the buy-to-let industry becomes less profitable or even costly. Which could flood the housing market with supply as landlords try to exist the market. After all, the reason there is such a low inventory of houses on the market, is because they have all been snapped up by second home owners.
These properties are then leased back to Millennials and GenZ. For example, 1 in 6 Boomers in the US own a second home. There are 76.4 million Boomers in the US alone. That’s a lot of houses!
Conclusion: Will House Prices Crash?
The tightening of monetary supply means that people’s affordability cannot be expanded to keep up with growing house prices. As Policy makers such as the Bank Of England attempt to tame inflation with rate hikes, money becomes more expensive to borrow. Low rates have allowed for greater and greater borrowing over the past two decades.
Mortgage payers will have substantial sums added to their monthly repayment. On a £300,000 house, each 1% increase in mortgage rates increases the monthly mortgage payment by £100. In this unprecedented era of money printing, we do not know how many rate hikes will be needed to bring inflation down. Therefore, we do not know how much mortgage repayments will increase.
The Final Stages Of The UK Housing Bubble
It is clear that at some point in 2022 we reached a peak in the house price bubble. The recent decline in prices suggests we are now on the other side of the peak. Maintain-stream media sentiment has also changed, with one headline states “Homeowners to lose £47k off value“.
The Consumer Affairs (in the US) survey found that 65% of respondents said a recession would force them to sell their homes, with 82% fearing that a housing crash would leave them owing more on their mortgages than their homes would be worth. All of which suggests that fear is spreading in the housing market. – This is likely to lead to a drop in prices.
When you factor in behaviours such as Gazundering, a decline in seller sentiment and falling affordability. This could trigger the later stages of a bubble: panic selling. This is something I predicted back in January 2022 and In June 2022 I also highlighted the risk that millions could end up in negative equity.
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Further Resources:
https://www.forbes.com/advisor/mortgages/real-estate/will-housing-market-crash/
https://www.weforum.org/agenda/2022/08/house-price-rent-europe/
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