The world’s hottest housing markets are faltering – is the UK next?

New Zealand’s house prices peaked in November and have fallen by 5% since

(Image credit: © Hagen Hopkins/Getty Images)

published 23 May 2022

At MoneyWeek, we’ve long pointed out that one of the most important factors driving house prices higher has been low and falling interest rates.

When interest rates fall, you can borrow more to buy a house; most homebuyers borrow to their limit to get the best house they can afford. In practice, they’re not worrying about the overall price, they’re worrying about the monthly payment.

A drop in the price of money means a given monthly payment will buy you a bigger home loan, and so more money goes into the housing market, and house prices go up. It’s practically a mechanical relationship.

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Well – interest rates are now going up.

So the obvious question is: when do house prices start to crater?

The UK is not one of the world’s most vulnerable housing markets

I’ve said this before, but It’s easy to get parochial when thinking about house prices.

For all that we carp about the British being obsessed with property, this is absolutely not a UK-only problem.

In fact, although it may seem hard to believe, given how expensive property is, we’re not even near the top of the pile when it comes to house price risk right now.

A recent article in The Economist contains a very nice table which shows that Britain only ranks 13th of 20 countries in its house-price risk table. Sweden, the Netherlands and New Zealand comprise the top three, with famously-overpriced Australia coming in at five, similarly expensive Canada in at seven, and the US joint eighth place (with Denmark).

In the two pandemic years (taking average prices from the end of 2019 to the end of 2021), British house prices have “only” risen by around 18%; prices in New Zealand by contrast, are up by 46%.

In Britain, the share of homeowners who own homes with mortgages outstanding is about one in three. Again, New Zealand stands out as being double that.

Britain has a very low proportion of mortgage-holders on variable-rate loans. In Norway (fourth on the vulnerability list), 94% of loans are variable rate. In the UK, it’s below 10%. That said, apparently about half of those who have fixed mortgages are on two-year loans – so that’s not as reassuring as it may sound at first.

Finally, in terms of overall indebtedness, the UK is again mid-table. Borrowers in the most vulnerable countries are far more over-extended than we are. Given that the cost of necessities has been rising and continues to do so, that bodes ill for people struggling to keep up with their payments.

In short, high property prices are a global problem. Some countries and areas are worse than others, but overall, the global drift lower in interest rates in the last 40-odd years has helped to inflate prices in the majority of economies.

For me, this implies a couple of things. One, if we have a house-price crash over here, we’ll have plenty of company. Two, if you want to get an idea of just how vulnerable housing markets are to rising interest rates, we probably just need to look at how our riskier cousins are doing.

Prices in Canada and New Zealand are already slipping

On that score, the answer is pretty clear.

The Bank of Canada started raising interest rates from 0.25% in March this year – they’re now up to 1%.

Last month, house prices in Canada fell for the first time since April 2020 according to one popular measure, while sales volumes are down by more than 25% on the year. Sales have fallen across 80% of local markets, according to Financial Post.

That’s a wobble and a half, and it’s clear what’s causing it – concerns about rising interest rates. Yes, there are plenty of other economic concerns, including the rising cost of living. But it’s a fear of rising mortgage rates that are really rattling the market. Analysts are starting to roll out their predictions of 10%-20% corrections.

It’s a very similar story in New Zealand. The central bank there has been raising interest rates for a bit longer than elsewhere because New Zealand managed to avoid most of the Covid pain. It first started hiking rates in October, raising from 0.25% to 0.5%. Now rates are at 1.5%.

As for house prices? They showed an almost immediate reaction. Prices peaked in November and have been edging lower since, and are down by 5% since then. Transactions fell by 30% in a single month in April.

Again, economists are starting to talk about 20% falls. That’s a crash – but at the same time, it would only return prices to early 2021 levels, which implies that perhaps prices have further to fall.

Is Britain heading for a house-price crash?

Returning to the UK, it’s not obvious from the latest Rightmove data that there are any jitters. This month, asking prices hit another fresh record high, and are up 10.2% on last year.

However, while our market is probably slightly less sensitive to rate changes than the above two, it’s only a matter of time. Estate agents are already breaking out the “muted activity but soft landing” excuses.

That doesn’t necessarily spell a crash: rising rates are one side of the equation – they affect demand for houses (in terms of the potential price paid). But for crashes to happen, there need to be forced sellers, otherwise what happens is that sales volumes crash (which happens quite quickly), but prices go into a form of stasis. No one wants to sell their home at a loss, so they just don’t move.

Forced sellers are mostly a recession phenomenon. A recession is very possible; it’s also not set in stone. So for me right now, the jury is out on whether it’ll be a slowdown, or a crash.

What could stop a slowdown? At this point, I think the main thing that could spark a rally now would be the same thing as we saw in 2005.

Central banks panic because they think that inflationary pressure is going to give way to recession. As a result, they start to relax monetary policy again. Homeowners and vendors breathe a sigh of relief, while frustrated first-time buyers give up holding out for a crash and decide to leverage up as much as they can, and buy.

I think this is extremely possible. As soon as markets get a sniff that central banks might relent through fear of recession, you have a trigger for “buy the dip” psychology returning with a last-gasp vengeance.

But absent that, I think we’ll see tougher times ahead.

As I’ve said many times before, if you’re buying a home to live in, then you shouldn’t try to time the market. The important thing to focus on is your personal circumstances: is this the right home for you? Does it work with your commute? What are the schools like? And all the rest of it.

But just be cautious when thinking about your immediate circumstances for the future, and don’t overstretch yourself. You might be able to fix your mortgage but your living costs aren’t likely to stop rising for a while yet.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.