Are UK house prices about to crash?

Haart estate agents window © Getty images
Have house prices reached their limits?

Among the many catastrophes that Brexit would inflict upon the British economy is a slide in UK house prices.

Prices would fall by 8% if we leave the EU. If we don’t, they’ll rise by 10% (this is over the next two years), reckons the Treasury. Ratings agency Fitch reckons prices could fall by 25% if we exit the EU.

Now, depending on which side of the home ownership divide you stand, you might view this as a good or a bad thing.

But in fact, Brexit is a red herring in this argument. The UK housing market is hideously dysfunctional, and the EU vote isn’t going to change that one way or the other.

So what does lie ahead for UK property? 

Forget Brexit – the UK housing market is slowing down anyway

All the jabbering about Brexit is clouding one fact about the UK housing market. It’s currently slowing down.

In the latest Royal Institution of Chartered Surveyors (Rics) survey, figures for April show that inquiries slid. Figures have rarely been this bad since 2008.

You can say that this is down to Brexit “uncertainty”. And maybe some overseas buyers have been putting off purchases related to potential job relocations. And it’s partly to do with buy-to-let tax changes kicking in (people who want to invest in buy-to-let brought their purchases forward, so you’d expect a slump now).

But I suspect it’s less to do with Brexit or buy-to-let, and more to do with the fact that house prices in the UK are wildly expensive.

Fathom Consulting (who has been bearish on the UK property market for a long time), has just put out a report: “The UK’s housing bubble: ready to pop?”

The nub of Fathom’s argument is simple. House prices are too damn high compared to wages. “Property prices would need to fall by up to 40%, or household income grow at ten times its current pace for the next five years, in order to bring the ratio back to balance.”

Fathom takes the pre-2000 average of average house prices to incomes, which was 3.5 times. At the moment, prices are roughly 6.1 times incomes. That’s very close to the 6.4 times we saw at the last crash peak.

As Paul Smith of the Haart estate agency put it in the FT: “We believe the nation has now neared the limit in terms of price increases.” And as Hometrack’s Richard Donnell adds: “At some point you have to run out of buyers.” 

The rise of the ‘mortgage zombie’

Of course, house prices have been insanely expensive for a long time. What’s interesting about the Fathom analysis for example, is that, even after the 2007/08 crash, the UK house price/income ratio never fell below five. Five is the peak we saw at the last big house price crash in the early 1990s.

What’s made the difference? It’s hard to conclude that it’s anything but desperate government and central bank intervention on the demand side.

In the 1990s, soaring interest rates (which were thanks to the European Exchange Rate Mechanism, that other Europe-related debate that a majority of economists were on the wrong side of, just for a change) saw house prices plunge and a lot of people lose their homes.

Following the 2008 crash, what kept things going (and kept the house price/income ratio above five), was interest rates falling to near-0%.

But now we’re trapped. As Fathom put it: “The housing market is likely to remain overvalued at anything other than near-zero interest rates.”

Worse still, we’ve pushed a load of other people on to the market, most of whom are only there with massive support from either the state or relatives. It’s a point made by Robin Hardy of Shore Capital in the FT. He talks about a market filled with “mortgage zombies”.

I’m sure that many people have felt like mortgage zombies on occasion, as they trog off to work in the morning with only the prospect of having to make that monthly millstone payment keeping them in harness.

But in this case, Hardy is talking about a problem cohort of buyers that has been created by the various forms of “assistance” handed to the property market since the crash.

People who bought using money loaned from parents. People who bought using money loaned from the government. People in part-ownership schemes. In essence, most of these people have virtually no equity in their homes. So if they sell up, they may have to pay back the non-mortgage loans they got that enabled them to buy their first house.

That makes it tricky to move, given that your next step up the property ladder (or the next layer of millstone around your neck, depending on your preferred metaphor) is much higher (or heavier) than the initial one. Moving expenses have also surged in the last few decades (such as stamp duty, for example). In short, you need a lot more buying power to keep moving on up.

If your wages haven’t improved significantly, and you only managed to buy your first home by borrowing virtually 100% of the money (if not from the bank), then moving house is unlikely to be an option.

You’re running to stand still, and you’re only stuck where you are in the first place because credit (even if it’s from non-traditional sources, it’s still credit) is so easy to come by. That means it won’t take much of a rise in rates to land you in trouble.

Intervention works – until it doesn’t

What does all of this prove? It doesn’t prove that house prices will plunge imminently. But it does make it clear – to my mind anyway – that the housing market is dependent purely on artificial life support.

That’s a political decision. Until the political calculus shifts – ie, more people would vote for falling house prices than wouldn’t – then chances are the government will try to keep things going.

But it’s also a good reason to expect that – whatever happens with Brexit – the Bank of England is going to be extremely wary of hiking interest rates.

As my colleague David C Stevenson outlines in the current issue of MoneyWeek magazine, that situation could potentially last for a very long time. That’s bad news for income seekers. He thinks he has a solution – and one that doesn’t involve piling into the buy-to-let market.

You can find out more by subscribing to MoneyWeek magazine – find out more here.

  • Guy Doh

    Even if prices fall by 30%, that’s not back to 2007 levels. In the SE anyway. Affordability was stretched then when the credit dried up, it’s only going to be worse this time.

  • Dan C

    Price to salary multiples are only useful when considered alongside the cost of money.
    Comparing prices and ratios at ZIRP levels to when rates were at 5% is almost meaningless.
    Rates can’t go up now – if anything they will likely go negative in the next few months after the referendum, and then the multiples will climb more, the government will create more assistance programs to get people onto the “ladder”, and prices will pick up their march to the stratosphere.
    This will continue for an extended period until the whole thing implodes – probably in such a manner that benefits the haves at the cost of the have-nots.

    • Dan C

      I see that Societe Generale has given up on the Bank of England raising rates from the record-low of 0.5 percent and it expects that the U.K. central bank’s next move will be a cut in 2019.

  • The rise of the mortgage zombies. Over the weekend, my friends and I were talking about the increasingly shrill desperation we’re hearing from the financial industries we’re hearing at the moment. We’re all in a similar boat; mid-thirties homeowners with £80,000+ household incomes and small children. We should be the bread and butter for a lot financial products and services, but we’re not.

    All of us are having our disposable incomes squeezed by large mortgages and rising costs of living. Most of us are still servicing debt acquired at university and the early years of developing our careers. Companies call us up to try and hawk their wares, asking if we have £5-10k to invest and we don’t. They ask when we might have it and we say in 2030 or when our parents die, whichever is soonest.

    Thatcherism has eaten itself and the country is going to have to pay the bill at some point. The problem with piling debt after debt onto all but the richest is that you end up with a young middle class that earns good money but has very little spending power, and that’s a toxic combination for any economy.

    • Monsieur Ramboz

      Excuse my ignorance, but what has Thatcherism got to do with high house prices and middle class debt?

      • Pedro the exile

        Nothing-you just chuck it in the discussion (any really) when you are looking for a convenient & lazy excuse for your own problems of your own making.

        • rory

          I would have to disagree. Before Thatcher the vast majority of people either bought a house to live in or rented one from the social (Government subsidised) sector. Private rentals were very, risky and therefore a highly marginal activity. Everybody knows that Maggie sold off the council housing stock, but what they might not realise is that this was replaced by throwing housing benefit at anyone brave enough to offer private tenancies – yields on private rentals in the 80’s were over 20%. ASTs and then BTL mortgages were then inevitable as the general public realised what was going on and wanted in on the action. However the problems now are not entirely of her making, I believe we would now have a stable, mixed property market if: 1. The money raised from council house sales had been used to build new means tested social housing and 2. excessive profits from the ensuing national pastime of property speculation had been properly taxed.

  • Stephen

    London property prices defy logic and are having a toxic effect on the people and the character of this city. But, without any insult intended to the author, this piece is totally pointless – apart from generating lots of comments – as articles on property always seem to.
    Money week has an APPALLING record on this subject – predicting a crash / slow down / burst bubble for almost eight years now. As editor in chief, Merrin Somerset Webb recently said in rare but welcome acknowledgement: ‘We are always bearish on property prices – and we are always wrong!” and that was just before she bought a pied-a-terre herself in London..

    We have had affordability, inflation, deflation, impending interest rate rises, the End of Britain, GREXIT, China, and now BREXIT as well as myriad other reasons offered in support of MW’s peculiar anti -property bias over that time.

    Will they be right this time, Who knows? One day for sure – but at what cost in the meantime? The truth is, nobody knows and in all likliehood we will see another piece along the same line in a few months giving some other reason why a crash is imminent.

    For readers’ sake, it might be better to stay away from the subject – unless the point is all those hits each property piece generates..

  • DemiGod

    In USD, UK house prices have fallen and will continue to fall as the GBP continues it’s downward spiral with the Euro. Foreign money has been moving from central London to US for a while now, and it has to do with the EU contagion. Voting to stay in the EU is a vote for increased volume of foreign capital leaving both the UK and the EU (opposite to remain arguments). I have already lost confidence in government and when the majority lose this too, GBP will collapse. BoE will put up rates too late and will have to put them up to eye watering levels to stem capital outflows. This will cause lower property prices, prices only held up as a protection against government. House prices in pounds will be lower, but priced in USD they will be significantly lower. It is interesting that most main stream media believe a Brexit would cause GBP to collapse (even those who vote leave). Perhaps, but markets have an uncanny way of doing the opposite of what the majority think. Maybe a Brexit will result in a short term downward blip in GBP. But Remaining in the EU will cause a long term loss of confidence, lack of ability for the UK compete and therefore lack of inward investment. Lack of inward investment, from remaining un competitive will collapse GBP and long term trigger higher rates, which as we know mean lower house prices.

  • The Common Man

    i wonder how many articles moneyweek has done on “housing prices about to crash” and how often they actually did crash?Also do you mean London or the UK as a whole because there is a big difference in different parts of the country.And do price have to “crash” or will they just slowly go down?

  • Pedro the exile

    I think this is an important and critical observation in where the property cycle is. I have a young nephew who has bought a new build using HTB at 25%-he barely managed to scrape together enough to cover the fees and the reality is that a lot of these new build HTB are over valued anyway(even in a generally over inflated market).So basically he “owns” a house but in reality 75% is owned by the bank & 25% by the Government and his cost to earnings ratio is probably about x5 .He has 2 young kids and everything is on loan-cars on PCP,furniture on “a deal” etc etc.Public sector worker with no chance of substantial pay rise in the foreseeable future.
    So in the absence of yet more house price inflation(in which case-who is he selling to)he’s stuck on a debt treadmill for at least 25 years.If interest rates rise(yeah I know the chances of substantial rises in the immediate future are small but in the medium term if rates are still at 0.5% then he’s not getting either a pay rise or being bailed out by inflation-you can’t have it both ways) .He’s certainly not “trading up” that’s for sure.
    Short estate agents!!!
    “People who bought using money loaned from parents. People who bought using money loaned from the government. People in part-ownership schemes. In essence, most of these people have virtually no equity in their homes. So if they sell up, they may have to pay back the non-mortgage loans they got that enabled them to buy their first house.

    That makes it tricky to move, given that your next step up the property ladder (or the next layer of millstone around your neck, depending on your preferred metaphor) is much higher (or heavier) than the initial one. Moving expenses have also surged in the last few decades (such as stamp duty, for example). In short, you need a lot more buying power to keep moving on up.”

  • MD

    Personally I expect soon the introduction soon of 50 year intergenerational mortgages (already in UKIP’s manifesto as policy), negative interest rates and a subsequent ‘crack-up’ boom of even higher real estate prices – then implosion, followed by decades of decline and stagnation.

    In fact – just like the Japanese market.

    There’s only ‘pent-up demand’ for real estate when prices are going up…when they’re going down, that evaporates quickly for reasons which should be obvious, but seem not to be apparent to many; but I guess we see what we want to.

    • Dan C

      Agree with your sentiment exactly, however in nominal terms I don’t think prices will be allowed to fall. I expect BoE & Gov will tolerate consumer inflation of over 10% p.a. created through helicopter money and minimum wage increases, couple with negative rates (most salaries will converge towards the new minimum btw).

      BoE/Gov simply can’t allow anything else to happen – the banks would fail if property prices fell the 60% required – so it will be stopped by any means possible. Luckily the young haven’t cottoned-on to the fact that we have sold them down the river. Hopefully that will continue, because if they do suddenly wake up and realise the extent to which we’ve stitched them up, the whole show will implode spectacularly.

      • Pedro the exile

        If we get more enforced wage increases plus >10% inflation(localised in UK) then £ will tank completely causing even more inflation and rates will have to hiked dramatically..Also businesses will be queuing up to shut down & relocate to a more benign environment. Ultimately the illusion that BoE/Gov are in control in a globalised economy will be shown up as exactly that.So it s a lose /lose situation-the only question marks are over timing and rate of decline but ,as Agent smith says so memorably in Th eMatrix..”that,is the sound of inevitability”

        • rory

          I agree, the £ has been tanking since WW2, we all thought the 70’s was the end game, until the family silver came out to be sold. Now that there is nothing left (except a few bits of Kensington & Chelsea), the next ‘good idea’ – i.e. ‘helicopter money’ may truly be the end, or the beginning of the end.

    • majestic whine

      Totally agree. Same cause (easy credit + demand from speculation) and same result as soon as one and then the other dries up over here.

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