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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
Will the Autumn Budget impact investment markets?
Keir Starmer has warned the Autumn Budget will be “painful”. Will it impact investment markets and should you tweak your portfolio before 30 October?
By Katie Williams Published
-
TSB fined £10.9 million over ‘woeful systems and controls’ for struggling customers
News The Financial Conduct Authority issued the fine for historic failings by TSB after mortgage, loan and credit card customers were treated unfairly
By Marc Shoffman Published
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
-
Best investing apps
We round up the best investing apps. Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go?
By Ruth Emery Last updated
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
By Henry Sandercock Last updated