Advertisement

House prices in the UK are now falling – but will they crash?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the slide and where the market will go from here.

House prices in the UK are falling – and not just in “real”, after-inflation terms.

For the first time in eight years, one of the country’s biggest house price indices has recorded a negative annual house price gain.

Or, as we non-estate agents put it, house prices fell.

Is this the start of an avalanche? Or a mere blip in the ever-rising trajectory of UK residential property prices?

The ingredients for a house price crash

Last month, UK house prices fell by a whopping 0.1% compared to June 2019, according to the latest report from building society Nationwide. Prices fell by 1.4% during the month, and by 1.7% in May. That leaves the average house in the UK now priced at £216,403 (precisely).

Advertisement - Article continues below

This is the first time that – judged by Nationwide data anyway – we’ve seen a fall in UK-wide house prices since December 2012.

It’s no wonder that prices fell. There are a lot fewer transactions happening, for a start. As Robert Gardner of Nationwide points out, even though sales picked up in May compared to April, they were still down by about 50% on the year. Mortgage approvals were hit even harder – down by 86% year-on-year in May.

Advertisement
Advertisement - Article continues below

And of course, we’re in the midst of a massive pandemic, unemployment has surged, and we’ve no idea what will happen next.

And yet – I’m not convinced we’re heading for epic falls of the sort that some of you out there might be rooting for (understandably, I get how frustrating it is to feel that you can’t own a home at all, or that you have to bet your entire future on it).

Advertisement - Article continues below

To be very clear, as I know this topic arouses strong emotions in just about everyone: I would prefer it if house prices were lower.

Being able to a) afford to buy a house and b) pay it off within a reasonable amount of time, so as not to have some huge sword of Damocles hanging over you for the majority of your working life, would be beneficial to us all: it would improve labour mobility; it would free up a fair chunk of spending money and thus be good news for the economy; it would diminish general stress levels.

But that’s all “I wish”. We need to look at the world as it is. And the truth is that I’m not sure how we get there from here. It would be time-consuming, politically tricky (reforming the housing market will always create losers in the short term), and therefore a nettle which is unlikely to be grasped any time soon.

Advertisement - Article continues below

As for the current situation, a big crash would require at least one of these two things: tighter credit conditions, or a sharp rise in longer-term unemployment. Both of these factors would create forced sellers, and both would reduce the number of potential buyers out there.

Advertisement
Advertisement - Article continues below

Are we likely to see them? I don’t think we’ll see sufficiently tighter credit conditions. It’s true that many lenders are wary of dishing out mortgages to those with low deposits. They’re worried about exactly the thing we’re writing about here – falling house prices, and rising unemployment.

If you’re concerned that house prices will fall, you want to lend to someone with a big deposit, so that they’re the ones who take the hit first. So if you’re a first-time buyer, or someone who needs a specialist loan (for example, if you’re self-employed) coronavirus has made it harder to buy.

But at the same time, rates on loans for those with big deposits or who are remortgaging are going ever lower. I noticed you can now get a ten-year mortgage for less than 2%, for the first time ever. So if you already own a property, there’s no prospect of “payment shock” any time soon.

Advertisement - Article continues below

In other words, if you want to sell, you might struggle to do so at the price you want. But no one is going to be forced to sell by rising interest payments.

What about employment? This one is trickier – it’s probably the biggest question mark of all. It depends on lots of things including how quickly the economy bounces back (I’m on the optimistic side of forecasts when it comes to this, but I may be wrong), and also on how long it takes those who are made redundant to regain their feet.

Advertisement
Advertisement - Article continues below

One thing I’d point out though is that the government has already spent huge sums on propping up the economy. If you think it’s going to let a full-on house price crash take hold with politically toxic headlines about repossessions and the like (not to mention the impact on the banks), I suspect you’re in for a surprise.

Advertisement - Article continues below

So overall, a 2008-style crash still strikes me as very unlikely.

The wildcard – the rental market

One wildcard is the rental market. If you’re renting, particularly if you’re in a big city, then now is the time to go shopping for a new place. With holiday bookings drying up, a lot of AirBnB landlords have apparently had to join the long-term lettings market, boosting supply.

As a result, various surveys suggest that rents have fallen in London (and some people I know have definitely bagged good deals). So if your tenancy is up for renewal, there’s no harm in having a look and either moving or using it as leverage in any rent negotiations.

Clearly, I wouldn’t suggest buying a property to rent out as an investment, but I haven’t been keen on that idea for a very long time, and I see no reason to change that view yet.

As for would-be buyers – it’s possible that we might see a batch of rental properties hitting the sales market and driving up supply, although it’s worth remembering that a lot of that has already happened in the wake of the buy-to-let tax changes.

So if you’re trying to buy a place to live in and you’re able to do so, then I certainly think it’s worth being punchy in terms of offers. Just bear in mind that the person on the other side of the table is more likely to be influenced by personal circumstances, rather than headlines about Covid-19.

We’ll be keeping a close eye on the housing market in the next few months (get your first six issues of MoneyWeek magazine free here, if you don’t already subscribe). But for now, I don’t foresee a lot of fireworks.

Advertisement
Advertisement

Recommended

UK house prices may be heading for a Boris bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Are UK house prices really on the rebound?
Property

Are UK house prices really on the rebound?

The latest house price data from the Office for National Statistics paint a picture of a housing market that is showing signs of rallying. That's not …
15 Jan 2020
Have UK house prices turned the corner?
House prices

Have UK house prices turned the corner?

The average price of a house in the UK rose by 0.8% on the year in November, the fastest pace since April.
5 Dec 2019
Money Minute Wednesday 4 December: Britain's economic sentiment and American job figures
Economy

Money Minute Wednesday 4 December: Britain's economic sentiment and American job figures

Today's Money Minute looks ahead to the UK's latest all-sector PMI survey, and America's private payrolls report.
4 Dec 2019

Most Popular

Can the recent rally in sterling continue?
Sponsored

Can the recent rally in sterling continue?

A "double top"  – a very recognisable pattern – is forming in in the US dollar. Dominic Frisby explains what it is, and what it could tell us about st…
3 Aug 2020
UK banks have had a shocking week – so it’s probably a good time to buy
UK stockmarkets

UK banks have had a shocking week – so it’s probably a good time to buy

Lloyds Bank reported a £676m loss this week. And, with all of the UK's high street banks having a terrible time of things, bank stocks are detested ri…
31 Jul 2020
Gold bugs' dreams are coming true – but we could still see a V-shaped recovery
Gold

Gold bugs' dreams are coming true – but we could still see a V-shaped recovery

John and Merryn talk about how it's perfectly reasonable to expect a V-shaped recovery and to continue holding gold as well. Plus, inflation, staycati…
30 Jul 2020