This morning, I wrote about the Office for Budget Responsibility’s (OBR) annual report on the state of the UK’s balance sheet. The report is a surprisingly interesting read, as these things go (have a look here yourself if you’re tempted).
There’s one area that I suspect lots of you will be keen to hear more about – and that’s what Britain’s fiscal watchdog reckons will happen to house prices in the wake of the coronavirus crunch.
Well, luckily it spelled out exactly what it thinks. In the best-case scenario, house prices will rise by 0.2% this year and 4.1% next year. In the worst-case scenario, they could fall by 2.4% this year and then 11.7% next year. (By the way, I appreciate that for some of you, “best” or “worst” depends on whether you’re a homeowner or not, but in this case the OBR is referring to the general amount of background economic damage – specifically the impact on household incomes – that results in these house price declines.)
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Do either of these (or somewhere in the middle) sound likely? Long story short, I think this is probably a good spread of potential outcomes, though I suspect that we’ll be closer to the “best-case” rather than the “worst-case”. Here’s why.
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What matters for house prices: jobs and credit
I’ve said a few times here that the main variables to watch with the housing market are unemployment and credit price and availability.
From a buyer’s point of view, employment and credit availability matter because: a) you need to have a job if you want to buy a house with a mortgage; and b) the amount you can borrow will be dictated by the money you earn from that job.
Mortgage availability and pricing matters to house prices, because people will typically spend up to their affordability limit on a new house, and that in turn is largely dictated by the amount a bank will agree to lend.
These two factors matter because: a) if you lose your job, you may be unable to pay your mortgage, and you may have to sell up; and b) if interest rates go up and you have a variable-rate mortgage, or you are about to come off a fixed-interest loan, then you might be in trouble if rates shoot up.
On the employment side, the risk is that sellers with no jobs are forced to sell or have their homes repossessed, while buyers lack the financial security to buy. Supply swamps demand, and prices fall.
However, this scenario seems unlikely. Unemployment will go up, no doubt about it, regardless of all the furlough retention schemes. So far we know that around one in six mortgage holders asked for a payment holiday during the initial three-month stretch of such holidays, so that gives us a rough idea of how many people might be struggling.
But in the absence of rising mortgage costs (we’ll get to that in a moment), it seems unlikely that a large number of people are in imminent danger of losing their homes. Also the political environment, and the fact that the banks really aren’t as free to act independently as they once were, makes it unlikely that repossessions will suddenly swamp the market.
I’m not saying that people won’t lose their homes. I’m not saying that a lot of people aren’t going to struggle. But what I will say is that the glut of homes required to drive a full-on, double-digit crash in prices seems highly unlikely to hit the market.
What about interest rates?
So what about the mortgage availability side of things? We can be pretty certain that interest rates aren’t budging, so the cost of credit isn’t changing much.
As for mortgage availability, one interesting factor here is the chancellor’s decision to put a stamp duty holiday in place. If you weren’t planning to buy or sell, then I’m not sure this will be enough to encourage you to do so (though it might, depending on the price point).
However, if you were in mid-transaction and you were wondering whether to call it off or not, you now have more of an incentive to complete. And if you were thinking about haggling on the price, you might be happy to simply pay the original asking price if you are saving up to £15,000 on the tax side of things anyway.
This might explain why Nationwide, for example, has now come out and reversed the decision it made – less than a month ago – to pull out of lending at anything above 90% loan to value (ie to anyone with a 10% deposit or less).
According to the FT, the lender says it will now “be doing significant volumes” of 90% LTV mortgages, targeting first-time buyers specifically.
Now you can certainly argue that any first-time buyer who can pull together a 10% deposit right now (even with the stamp duty bonus), and has a secure enough income to qualify for a mortgage, is probably a pretty good credit risk. But still, it shows an element of thawing in the market relative to a couple of months ago.
Sure, this is unlikely to be enough to push demand to the point where prices rocket across the UK (I certainly hope not). But it might mean that more transactions go through at slightly higher prices than they otherwise would have done.
House prices – neither crash nor boom
I sympathise with those who feel house prices are too high. I think all of our lives would be improved by a less dysfunctional property market. But we are where we are, the market is driven by the factors I’ve outlined above, and looking at them, it’s hard to see prices collapsing.
However, it’s also hard to see them going a lot higher (apart from isolated pockets of ultra-desirable countryside property, targeted by Londoners selling expensive flats with no gardens are vacating in case of future lockdowns).
In short, the OBR’s forecast looks about right, I reckon.
