Are we about to see the perfect housing market correction?

Couple looking in an estate agent's window © Getty Images
Both Halifax and Nationwide say that UK house prices peaked in December 2016

I’ve recently become a renter again, having been a homeowner for the last ten years or so.

I’d like to pretend that I’ve stepped off the housing ladder in a deliberate attempt to make a spectacularly ballsy bet on the direction of the UK housing market over the coming months.

The reality is far more prosaic. We had intended to buy, the deal fell through, and so we ended up renting.

That said, now that I’m getting up close and personal again with the insane dynamics of the British housing market, I’m inclined to pay even more attention to what’s going on than I normally do.

And it hasn’t escaped my notice that news on the house price front has been rather weak of late.

So have I got lucky? Or am I doomed to fall foul of the oldest mantra in British investment: “You can’t go wrong with bricks and mortar”?

The UK housing market is drying up

The Royal Institution of Chartered Surveyors (Rics) just issued a pretty downbeat report on the UK residential property market. Every month, Rics gets the street-level view of the property market from estate agents and surveyors around Britain. The figures for last month were among the weakest seen since the financial crisis.

Seller numbers are down, as has been the case for over a year now, notes Capital Economics. Over the long run, there are usually more than 60 properties on sale per surveyor. Last month, it was just 43.8. Falling supply is partly down to weak demand – no point on selling if no one is buying – and the survey confirmed that buyer numbers are down too – demand has been flat for five months in a row.

With both buyers and sellers going on strike, transactions are falling too – an estate agent’s worst nightmare, much more irritating than falling prices.

Rics members still reckon – on balance – that house prices are rising. This may reflect the fact that the survey is less swayed by London than simple house price averages – prices in London are weaker than in the rest of the UK right now.

However, both Halifax and Nationwide – who provide two of the longest-running data series – reckon that UK-wide prices peaked in December 2016.

So is this just a breather (after all, at the start of last year we saw the big rush to beat the second-home stamp-duty surcharge)? Or is the start of something more serious?

I’m not convinced there will be a house-price crash

Much as – for purely selfish reasons – I’d like to see prices fall by a decent chunk, I struggle to see how it would happen.

It’s pretty clear that prices in the richest parts of London peaked a while ago and in many cases have since dropped sharply. But a lot of those properties are special circumstances. There’s been a whopping great stamp duty increase on the highest-end homes. Conditions for overseas buyers have been made a little less hospitable.

And as my colleague Dominic Frisby highlighted ages ago, there’s been a glut of “luxe” developments that have little appeal to anyone other than the emerging-market property investor with money to burn. Not to mention the fact that the high-end London market is the one that had seen prices shoot up most dramatically. So there are some very good and specific reasons for that market to struggle.

As for the rest of the country – well, it’s less clear. There are still plenty of parts of Britain where prices have only just regained their previous financial crisis-era peaks (and we’re not even talking “real” – after inflation – terms there).

And the biggest threat to house prices in the UK – a rise in interest rates, and thus mortgage rates – seems distant for now. Yesterday, the Bank of England issued its latest inflation report, alongside minutes from its latest meeting, and it doesn’t seem to be in any mood to raise rates – certainly not this side of an election.

The Bank always likes to fudge things so that it doesn’t get too predictable (predictability is the enemy of central bankers – you have to be able to bluff convincingly if you really want to make the market do what you want it to). So it did warn that there might be call for a rate rise in the second half of the year, and that it wouldn’t tolerate inflation going too far above target.

But no one had joined Kristin Forbes in voting for a rate rise. The Bank was also downbeat on household consumption prospects, even although it reckons that first quarter GDP growth will end up being revised higher. The warnings about inflation also ring a little hollow given that it’s been above target for the past three months already, and the Bank expects it to hit 2.7% by June.

So a rate-induced slide in house prices seems unlikely. However, at the same time, the fact remains that prices are just too high, even with mortgage rates where they are today. High prices, low affordability – but no obvious trigger to force prices lower. What’s the answer?

The obvious solution – and perhaps the one we’ll get – is for prices to fall in “real” (after-inflation) terms, rather than nominal terms. So prices will fall relative to wages. Overall, the market stagnates, until wage inflation has allowed the price/income ratio to fall to something approaching a more reasonable level.

Meanwhile, “stranded” renters should benefit from last year’s rush to beat the stamp duty rise on second properties. Rents in many parts of the country – London particularly – have dipped amid a big influx of new rentals hitting the market.

An inflation-driven correction in the housing market would avoid all the problems you’d get with banks’ balance sheets if prices were to fall in nominal terms. It also solves the problem of reluctant sellers clogging up the market. People think in nominal terms, so they don’t care if the big round figure that they believe their house “should” be worth is actually worth 10% less in real terms than it was a year ago – as long as they get the figure they’ve “anchored” to on paper, they’ll be happy to sell.

It’s not a solution that will make anyone particularly happy – buyers don’t get bargains and sellers don’t get life-changing sums for sitting on a pile of bricks. But it might be the least damaging one.

  • Jimmy O’ Goblin

    John,
    Could it be we are experiencing the mid-cycle slowdown?
    I urge you, and all MoneyWeek subscribers, to read the cover story in MoneyWeek issue 694 from 6 June, 2014. For me, it remains the best cover story in the history of MoneyWeek.
    In short, I think we are approaching the mid point in the 18 year cycle. House price slowdown/ slight falls, and a correction in the stock markets (Dow at 23000?). After that, it’s back to the races. Rising interest rates will not dampen the economy; they will fuel it…house prices too! So make sure you buy your house before then.
    Regards
    JOG

  • AlexH

    Slow down appears to be caused by uncertainty and shortage of supply. I wouldn’t hold my breath waiting for a cheap house in London. Many can still remember the 80’s crash, jingle mail and smart investors picking properties at massive discount prices. No one is going to fall for that one again. Find the house that you love/afford and buy it quick. This feels like the lull before prices start to move up again.

  • catweazle_1962

    Maybe we should ask Housepricecrash.com their expert opinion, they have been predicting property prices to crash for two decades now LOL

  • catweazle_1962

    One of these days I will look at housepricecrash.com and their millions of predictions over the years and they will get something right, won’t hold my breath though

  • Banst

    I do not agree with many other commentators and the author. I believe that a correction of say 50% possible (in those areas where prices doubled in the last 7 years they could return to 2010 level). I believe that in many areas the major reason for sharp price rises was speculator demand as houses were viewed as sure-win lottery ticket. Back when financial crisis started house prices fell by up to 10-20%, and the government interfered with the free market by quickly inflating them, in some areas by over 100% and hence creating a perception that house prices have full support of the government and can not fall. There is currently a realization that sky high prices damage life of younger generation and overall public perception of the issue is such that I would doubt that the government will continue inflating prices. Given that a significant portion of housing demand in the uk is speculatory once house prices start falling they could fall a lot. The state of the Economy and future outlook is also very poor. Fr example the engine of house price rises – the high incomes in the financial sector are taking three hits: 1. financial crisis – salaries are just not rising many redundancies; 2. offshoring – many jobs moved/being moved to India etc. 3. Brexit many jobs will move to Europe. I for certain hope that my job moves to Europe and I am allowed to move with it – this way I would benefit from a more reasonable housing market, more reasonable pension, more reasonable education finance for children, more reasonable working hours, no :housing ladder” nonsense.

  • Banst

    I agree regarding “housing shortage” nonsense. Yes when prices are rising then apart from needs and wants based demand there appears a third type of demand – speculatory. Speculatory demand is extremely difficult to satisfy at times – tulip crisis is a prime example. As long as UK property ownership is viewed as one way bet we can have 1000 square meters per person in the country and prices will continue to be sky high due to speculatory demand by “Buy to leave”. On the other hand we can have a massive shortage of housing but if house ownership is no viewed as a one way lottery ticket prices could crash to reflect incomes and affordability.

  • crazydave789

    buy to letters need to be driven out of the market with a crash that allows new buyers back onto the ladder IMO.

    london needs a good 50% crash.

    • Peter Edwards

      Housing crashes are worse than stockmarket crashes we don’t need them.

      A long period of stagnation is preferable, but will not happen not easy for elites to game.
      Central Banks have used extraordinary monetary policies to keep the economy going ( i mean enrich themselves and masters) and have not exhausted these yet, indeed their only constraint now will be political.

      When we do have a crash it will be a proper global reset, because all the major regions on earth have dysfunctional economies.
      China, Europe, America all have run up eye watering debt.
      Canada, Australia & Belgium housing markets make the UK’s look sane.

      This is what happens when one dogmatic view gains currency, the right think they have won the argument but they will lose the war…

      • Banst

        No, I do not agree. Better to have a crash so that the irresponsible suffer the pain and the economy is given a chance to recover. What was done in 2007-2008 was horrible – it would be much better to allow the market to take its course. We would have a had a very horrible crash but after that we would be on the way up. Stagnation for several decades is horrible – just look at Japan.

  • catweazle_1962

    It is hilarious,Housepricecrash.com after more than a million doom laded predictions are now using this article as proof of a crash on their site LOL

  • Marta F

    I would opt for rising markets where properties have already reached down-to-earth prices, such as villas and houses for sale in Spain. Those who find a retirement home should not think twice, Spain is clearly offering great opportunities as you can see in forsaleinspain.co.uk