Will the UK's property slowdown turn into a house-price crash?

As the cost-of-living crisis intensifies and interest rate rise, it is hard to see reasons for UK house prices to keep rising, says Merryn Somerset Webb.

Not falling, but definitely decelerating. That’s the story on UK house prices. Look at the headline number and you will see an annualised rise of 10.5% – or 74% over the last decade. Look more closely and you will see that while the monthly number is up for the 11th consecutive month, it’s by a mere 1%.

Mortgage approvals are falling – now slightly below their pre-pandemic average. Mortgage rates are rising – the average two-year fixed mortgage is up 0.69 percentage points since December, says Hargreaves Lansdown, and is now just over 3% for the first time in seven years. Finally, data from Zoopla suggests that 5% of properties saw a price cut in May (by an average of 9%). None of this quite screams crash, but it whispers slowdown – at a time when it is hard to see reasons for prices to keep rising.

The pandemic property panic is over. There are even mutterings that the exodus to the countryside might be reversing. And while most people are on a two-year fix so will not feel rising rate pain for some time, it makes sense for new buyers to think twice about taking on new mortgages into a cost of living crisis and a rising interest-rate environment. The question then is whether slowdown will turn to crash.

This doesn’t happen often: in the 90 years since 1931 there have been only 16 years in which we have seen nominal house-price falls. Even in the 1970s – the years we think of as endlessly crisis ridden –  houses served their owners remarkably well. House prices doubled between 1970 and 1973 and had quadrupled by the end of the decade (from £4,000 to nearly £20,000 at the end). If prices had risen only in line with inflation they would merely have tripled.

A store of value

Unlike most assets in the 1970s, houses ended up more valuable in both nominal and real terms. They acted as a hedge against inflation, a store of wealth, and also via the capital gains they made, a source of wealth. So well did they do that Kit McMahon, the former deputy governor of the Bank of England, noted that borrowing to buy a house is a “cheap, almost risk-free method of financing an appreciating asset with a depreciating debt”.

Still, the starting price always matters. In 1970, the house price/earnings ratio was around 4.5 times. Today it is more like seven times. That might be mitigated by much lower rates and access to credit, but it is still a big difference. So do earnings – look at the volatility in 1970s house prices and you will see they fluctuated with real wages. If we see real wage growth at levels that can withstand higher mortgage rates, we will see house prices rise. Finally, not all houses are equal in a time when real wages for workers are rising. In the 1970s big country houses took a nasty hit (as owners or buyers lost fortunes on stockmarkets), while smaller houses that were less costly to run and to travel to and from did not.

So think perhaps of the kind of country houses far from cities that have seen their prices soar in the last few years as the equivalent of growth stocks, says James Ferguson of MacroStrategy on our latest podcast. Smaller suburban or urban houses are more akin to value stocks. That might give you a clue as to the kind of house that might make it to the end of this decade as an appreciating asset financed with a depreciating debt.

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