Are house prices heading for a fall? Here are two reasons why they might be

The UK housing market contains structural vulnerabilities

One financial topic grips the collective British mind like no other. I’m not talking about Brexit. Good Lord, no. The vociferousness of the Leaver/Remainer spats pale into insignificance next to the emotions stirred by today’s topic.

I’m talking, of course, about house prices.

Growth in house prices stalls

In March, UK house prices were up by 3.8% on the previous year, according to Halifax. That’s hardly a crash. But it is the slowest growth rate seen since May 2013, which does demonstrate just how perky the market has been in recent years.

In all, the annual rate of house price growth has more than halved in the past 12 months. And zooming in on a shorter period, Halifax reckons prices have been flat since February (wow – a whole two months!) while Nationwide reckons prices fell last month.

Does this mark some sort of turning point, or is it just a brief pause for breath in the relentless rise of the UK property market?

Let’s start by pointing out that there’s no question that UK house prices are expensive. Those numbers are heavily skewed by London, of course. But overall, according to the Office for National Statistics, the average house costs 7.6 times the annual average salary. That’s at or near record levels.

Meanwhile, levels of home ownership in the UK are at their lowest since 1985. You could argue that this is because members of the millennial generation favour a flexible lifestyle that values renting stuff over buying it – AirBnB and couch-surfing over mortgage slavery.

Or you could be realistic about it and accept that it’s nothing to do with some far-reaching culture change or the “sharing” economy, but entirely down to the fact that, at current prices, property ownership is beyond the reach of more people than ever before.

So houses are expensive. But like the US stockmarket, houses in the UK have been expensive for a very long time. So the question is: what could change that?

I’m not sure. I’m wary of making big calls on this topic because the resilience of the UK property market – or at least, sections of it – is apparently logic-defying.

However, there are two big points of vulnerability that I wonder about – neither of which have much to do with Brexit, you’ll be glad to hear.

Two big structural vulnerabilities in the UK housing market

Firstly, there are the changes in buy-to-let taxation. There is absolutely no question about it – the government has made buy-to-let far less appealing financially.

The added stamp duty charged on second homes is one factor. But more important in the longer term is that the ability of landlords to offset their mortgage interest bill against their rental income has been restricted.

As a result, sums that once added up, based on optimistic assumptions and a lot of leverage, no longer work out. Some landlords will be forced to sell, while many potential landlords will abandon the idea of taking on their own buy-to-let.

How much difference does this make to the market? There is one historic example we can draw on that might give us a clue. Back in the day, it wasn’t just landlords who got tax relief on mortgage interest. Your average homeowner got it too.

Then, in 1988, amid an epic housing boom, then-chancellor Nigel Lawson decided to heavily restrict Miras (mortgage interest relief at source) – but not right away. He gave buyers a few months to get on board before the changes kicked in.

As a result, there was a rush to buy, which helped drive prices higher – comparable, perhaps, to the rush to buy second homes seen at the start of last year, before the stamp duty surcharge kicked in, in April 2016.

Of course, because demand was dragged forward, sales then fell. And to make matters worse, interest rates were marching higher too. House prices peaked in 1989, then crashed.

Are there parallels today? Interest rates don’t look likely to fall further. They don’t necessarily look likely to rise a lot either. But that takes me to the second point of vulnerability.

House prices are unaffordable at a time when mortgages really can’t get much cheaper than they are now. Access to mortgages could certainly be expanded, by loosening credit standards (which I think would be a mistake, but has happened before). But the Bank of England doesn’t seem keen to allow that to happen.

Beyond that, the government continues to come up with schemes and scams to subsidise housebuilders’ profits with taxpayers’ money, all in the name of “helping” first-time buyers to take on debts that imperil their financial health. But will it continue to do so, given public discontent with house prices?

Like I said, it’s a tough call. However, one man is a lot less equivocal than I am – our regular contributor Jonathan Compton looks at the state of the UK housing market in this week’s issue of MoneyWeek (out on Friday). His conclusions aren’t pretty.

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