What will trigger the fall in house prices?

UK house prices are still in a bubble. But if it is to burst, there must be a trigger. Merryn Somerset Webb looks at what that might be, and reflects on what could well be the worst financial decision she has ever made.

We've just bought a house. It is exactly the kind of house we have long wanted to live in, so we are thrilled. But I am also pretty sure that, while buying it might be a good thing for family stability, it will also be the worst financial decision we have ever made.

You don't need to know that the average house price is still well over five times the average income or that the average first-time buyer was forced to put down a deposit of £50,000 in March, or even that more than 80% of adults under 30 are unable to afford to buy any kind of house in the UK, according to the National Housing Federation to know that house prices are still in bubble territory. Instead, you just need to look in an estate agent's window. That usually does it.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

That said, markets keep showing us that things can stay at the "wrong" price for years. So, saying that house prices are too high isn't necessarily the same as saying they are going to fall. For that, we need a trigger of some kind such as the subprime crisis that kicked off collapse in the US and a mini shock in our own market.

It is always tricky to spot the trigger in advance, but there does seem to be an unusually dangerous number of contenders at the moment.

Advertisement - Article continues below

Might it be the funding gap? Mortgage approvals for house purchases are still exceptionally low, yet mortgage lenders are even now warning that they could get lower thanks to a £400bn funding gap currently being filled by the Bank of England support schemes introduced at the peak of the financial crisis. These schemes will soon end and the new government has made no mention of extending them. Perhaps it will. But if it doesn't, the past few years of mortgage drought might in retrospect look like something of a credit bonanza.

Might it be interest rates? The OECD has suggested that rates in the UK should move up to 3.5% by the end of next year to stamp out inflation. I don't think that is particularly likely Mervyn King, the governor of the Bank of England, has made clear that he will keep rates low to support the Con-Lib coalition as it cuts spending.

But what if rates did rise? Right now, the average standard variable rate offered by most banks is about 4.5%. A 3% rise in rates (from the current 0.5%) would take that up to 7.5%. That wouldn't exactly push up demand.

  • Why UK property prices are going to fall 50%
  • When it will be time to get back in and buy up half price property

But we don't necessarily need rising interest rates for mortgage rates to go up again. All we need is another interbank trust-leaching global crisis like the one in Europe, perhaps. Note that Libor the rate at which banks lend to each other and the rate from which many price their mortgages has been creeping up again as risk aversion kicks in across the eurozone. The rise so far has been pretty modest relative to that seen during the Lehman Brothers collapse, but if panic sets in, it might not stay that way.

Other triggers might include falling real wages and an expected rise in unemployment as the government slashes its way through the public sector, and rising taxes do for more service businesses.

Advertisement - Article continues below

There is also a new entrant into the mix: the coming rise in capital gains tax. We don't know how high this will go, but most people with a second home or a buy-to-let investment are likely to face a much higher tax bill on their gains than they had expected. That means they are probably running the numbers on selling right now.

A house bought for £100,000 in 1985 would now be worth £490,600 on Nationwide numbers. Sell it today and you'll pay CGT of £68,500. Sell it at 40% and, assuming no inflation allowances, you'll pay £152,200. That suggests you should get out now even if you can only do so at below what you think the market price should be. Sell the £490,600 house today for £450,000 and you'll still clear more post-tax than if you waited and sold at 40%. Even my mother is at it her buy-to-let properties are joining the glut coming on to the market this week.

So, all in all, I'm not holding out much hope that our much-loved new townhouse will make our fortune.

However, if you insist on buying, there is one thing I would recommend: do as we did and use a good search agent. It strikes me as very odd indeed that people go into a market in which they are not expert and spend hundreds of thousands of pounds, even millions of pounds, without taking advice from someone with their interests at heart (i.e. not an estate agent). A search agent will know houses are coming on the market long before they hit primelocation.com.

Given that the property business is a magnet for charlatans, take recommendations on search agents where possible we used Saint Property in Scotland.

Good agents will pay for themselves several times over. Ours did which at least means we will lose less money on our purchase than we might have otherwise.

Advertisement - Article continues below

This article was first published in the Financial Times




Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Equity release

Equity release: how to tap your house for cash

The pros and cons of releasing equity from your home compared with moving to a smaller one
10 Feb 2020

Will Britain close its doors to immigrants post-Brexit?

Details have not yet been forthcoming, but Britain will soon have a new immigration policy. What will that mean for businesses and investors?
8 Feb 2020
House prices

Is the jump in house prices just a Brexit bounce, or is it more durable?

UK house prices rose sharply in January. Some of that is down to the end of Brexit uncertainty – but not all. There is a real risk that prices will ke…
7 Feb 2020

Most Popular

Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020
Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020
Investment strategy

Just five assets matter for investors. Here's what they are

Every investor’s needs are different – but most can be met by the right combination of five investments
11 Feb 2020

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020