The UK housing market is definitely struggling – but will it tip over into a crash?

House prices in Britain have now been falling for three months in a row.

Last week, Nationwide which has one of the longest-running monthly reports on house prices said that prices had fallen by 0.2% in May. It's the first time that prices have fallen in three consecutive months since 2009, which of course was during the last house price crash.

Prices are still higher than they were last year up 2.1% on last May. But Nationwide now reckons that prices across the UK will grow by just 2% this year which would more than likely be a drop in "real" terms (ie after you consider inflation).

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So what's going on? Why is Britain's teflon housing market suddenly showing signs of weakness?

House prices are falling for some very specific reasons

I was talking to a friend at the weekend about the apparent sudden turn in the UK housing market. He was wondering if it had anything to do with concerns over Brexit or other political jitters.

He's not alone. Plenty of reports talk about the impact of "uncertainty" on house prices. But I must admit, I've never found uncertainty to be a satisfying reason for asset prices going up or down. The reality is thathuman beings have to cope with uncertainty every single day. But they also have to make decisions and get on with their lives regardless.

Investor sentiment can certainly exaggerate a move in markets sometimes it even takes over. Those are the times when someone with a clear head can make an absolute killing.But vague talk of "animal spirits" or "confidence" implies that there is an unknown mood effect that moves markets, quite independent of underlying conditions. And that, I don't agree with.

In my experience,significantshifts in investorsentiment are based on practical changes in the real world the fundamentals.I'm not saying that prices are never out of line with the fundamentals indeed, I'd argue that they are always out of line with the fundamentals, it's just a question of extent.But I am saying that big changes rarely, if ever, result from something as nebulous and hard to measure as a shift in confidence. Prices don't start falling just because everyone happens to wake up in a bad mood one day.

So when it comes to the housing market, what's changed recently? In short, a lot.Since April last year, anyone buying a second home had to pay an extra 3% in stamp duty. And fromApril this year,the taxation of buy-to-let properties began to change drastically. Mortgage interest relief for landlords is being slashed between now and 2020.

In other words, it has become significantly more expensive to buy second homes and buy-to-let properties. And it has also become more expensive to own a buy-to-let property.Thisis all on top of various other changes since the end of 2014 that also made it a lot more expensive to buy high-end property (which have already long since sent the top end of the market reeling).

Basic economics suggests that when you make something less affordable, demand falls. That's how a market balances out.So we don't need to blame Brexit the reason for falling prices is staring us in the face.

Why don't rising house prices ever seem to hit demand?

"But hang on a moment", you might well argue. "The price of houses kept going up in the old days, and it never made a difference to demand. Why change now?"

It's a good question. Rising house prices don't necessarily make a property less affordable. All that really matters is the monthly payment.

If a buyer believes that they can afford to pay £1,000 a month on a mortgage, then that's pretty much what they'll pay.The size of loan that can be purchased with that £1,000 a month will vary depending on interest rates and banks' willingness to lend. So as long asthe availability of credit expands to allow buyers to purchase ever-bigger home loans for that same £1,000 a month,house prices can keep rising.

But the recent legislative changes are different. They don't hit the credit side of the equation. Instead, they hit where it hurts. Higher stamp duty means higher upfront costs. A buyer might be able to add £10,000 on to the end of a 25-year mortgage without wincing too much. But add it to the cash sum they have to raise upfront, and suddenly you've got a problem, and one that can't be easily circumvented by a reliance on credit.

Meanwhile, a fall in mortgage interest tax relief translates into a very big change in the sorts of returns a property needs to generate to make a buy-to-let investment worthwhile.

Say your tenantcan afford to pay £1,000 a month. Before the changes, that covered your interest-only mortgage payment and average annual maintenance costs, with enough left over to make you feel comfortable about the risk of void periods, plus a bit of profit on top.

Now your tenant can still only afford to pay £1,000 a month (if they could afford £1,200, they'd be renting the bigger place up the road). But your higher tax bill means that your cushion against voids is gone, and in fact, after accounting for maintenance, you're running the home at a loss.

In short, the process of buying a property has been made significantly more expensive for a specific group of buyers who, until now, have been very active in the market. If you want to know why prices are now falling particularly in the areas hardest hit by these changes well, there's your answer.

We're looking at an adjustment, rather than a house-price crash

So we're saying that we know why prices are dipping. Is this likely to continue?

My short answer is that I don't think these changes alone are enough to crater the market. I think that would take higher interest rates and tighter credit, and I'm not sure where that will come from.

The government's goal with the changes to stamp duty and landlord taxation was simple. They want home ownership to go up (a long-standing goal of the Conservative party). Home ownership can't rise if every time a first-time buyer finds a flat they can afford, a landlord with tax advantages beats them to the punch. That's now changed.

But all you're really doing is substituting one group of buyers for another group. Some landlords will be forced sellers now, but probably not on the scale you'd need to drive prices down dramatically.

It's probably fair to say that first-time buyers have less buying power than the average landlord. So maybe that adjustment will put a bit of a dent in prices. But banks are still keen to lend against property. So they'll likely just recalibrate their mortgage offerings to give more buying power to new homeowners and less to landlords.

The overall effect might be to shift demand from London (where it's expensive) to further north (where it's less expensive and keen landlords might still be able to find yields that almost make sense). So the affordability gap between the two might fall, as prices ease off in London and pick up elsewhere.

But much as I'd like to see house prices fall I still think the more likely outcome for now is that affordability improves (with wages growing faster than house price inflation), rather than we see massive UK-wide house price falls.

Of course, that does assume that interest rates remain low and mortgage lending remains expansive. I struggle to see why that would change right at the moment but never say never.