Are UK house prices about to crash?

Among the many catastrophes that Brexit would inflict upon the British economy is a slide in UK house prices.

Prices would fall by 8% if we leave the EU. If we don't, they'll rise by 10% (this is over the next two years), reckons the Treasury. Ratings agency Fitch reckons prices could fall by 25% if we exit the EU.

Now, depending on which side of the home ownership divide you stand, you might view this as a good or a bad thing.

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But in fact, Brexit is a red herring in this argument. The UK housing market is hideously dysfunctional, and the EU vote isn't going to change that one way or the other.

So what does lie ahead for UK property?

Forget Brexit the UK housing market is slowing down anyway

In the latest Royal Institution of Chartered Surveyors (Rics) survey, figures for April show that inquiries slid. Figures have rarely been this bad since 2008.

You can say that this is down to Brexit "uncertainty". And maybe some overseas buyers have been putting off purchases related to potential job relocations. And it's partly to do with buy-to-let tax changes kicking in (people who want to invest in buy-to-let brought their purchases forward, so you'd expect a slump now).

But I suspect it's less to do with Brexit or buy-to-let, and more to do with the fact that house prices in the UK are wildly expensive.

Fathom Consulting (who has been bearish on the UK property market for a long time), has just put out a report: "The UK's housing bubble: ready to pop?"

The nub of Fathom's argument is simple. House prices are too damn high compared to wages. "Property prices would need to fall by up to 40%, or household income grow at ten times its current pace for the next five years, in order to bring the ratio back to balance."

Fathom takes the pre-2000 average of average house prices to incomes, which was 3.5 times. At the moment, prices are roughly 6.1 times incomes. That's very close to the 6.4 times we saw at the last crash peak.

As Paul Smith of the Haart estate agency put it in the FT: "We believe the nation has now neared the limit in terms of price increases." And as Hometrack's Richard Donnell adds: "At some point you have to run out of buyers."

The rise of the mortgage zombie'

What's made the difference? It's hard to conclude that it's anything but desperate government and central bank intervention on the demand side.

In the 1990s, soaring interest rates (which were thanks to the European Exchange Rate Mechanism, that other Europe-related debate that a majority of economists were on the wrong side of, just for a change) saw house prices plunge and a lot of people lose their homes.

Following the 2008 crash, what kept things going (and kept the house price/income ratio above five), was interest rates falling to near-0%.

But now we're trapped. As Fathom put it: "The housing market is likely to remain overvalued at anything other than near-zero interest rates."

Worse still, we've pushed a load of other people on to the market, most of whom are only there with massive support from either the state or relatives. It's a point made by Robin Hardy of Shore Capital in the FT. He talks about a market filled with "mortgage zombies".

I'm sure that many people have felt like mortgage zombies on occasion, as they trog off to work in the morning with only the prospect of having to make that monthly millstone payment keeping them in harness.

But in this case, Hardy is talking about a problem cohort of buyers that has been created by the various forms of "assistance" handed to the property market since the crash.

People who bought using money loaned from parents. People who bought using money loaned from the government. People in part-ownership schemes. In essence, most of these people have virtually no equity in their homes. So if they sell up, they may have to pay back the non-mortgage loans they got that enabled them to buy their first house.

That makes it tricky to move, given that your next step up the property ladder (or the next layer of millstone around your neck, depending on your preferred metaphor) is much higher (or heavier) than the initial one. Moving expenses have also surged in the last few decades (such as stamp duty, for example). In short, you need a lot more buying power to keep moving on up.

If your wages haven't improved significantly, and you only managed to buy your first home by borrowing virtually 100% of the money (if not from the bank), then moving house is unlikely to be an option.

You're running to stand still, and you're only stuck where you are in the first place because credit (even if it's from non-traditional sources, it's still credit) is so easy to come by. That means it won't take much of a rise in rates to land you in trouble.

Intervention works until it doesn't

That's a political decision. Until the political calculus shifts ie, more people would vote for falling house prices than wouldn't then chances are the government will try to keep things going.

But it's also a good reason to expect that whatever happens with Brexit the Bank of England is going to be extremely wary of hiking interest rates.

As my colleague David C Stevenson outlines in the current issue of MoneyWeek magazine, that situation could potentially last for a very long time. That's bad news for income seekers. He thinks he has a solution and one that doesn't involve piling into the buy-to-let market.

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