The UK housing market is in deep freeze – but will that mean lower prices?

Estate agents must be feeling pretty gloomy right now.

House prices are mixed across the country. But a far bigger problem is that no one wants to buy. According to the latest survey from the Royal Institution of Chartered Surveyors (RICS), new buyer enquiries have fallen to their lowest level since the tail-end of the 2008 crash.

The stock of houses on estate agents’ books meanwhile, is at a ten-year high. Conditions in London are particularly bad, but the malaise appears to be spreading.

Rising supply plus low demand would normally spell falling prices.

But the UK housing market is anything but normal…

The housing market is freezing over

The latest survey from RICS indicates that there’s not much action in the housing market right now. Transactions appear to be near-frozen. And I’m not surprised.

It’s entirely understandable that people are nervous about making the biggest purchasing decision of their lives at the best of times, and this is far from being the best of times. I’m not usually one to argue that worries about the political picture might be deterring people from making certain consumption decisions. Those usually boil down to the specifics of an individual’s financial situation.

But there are elements of today’s politics that could be dissuading people from doing anything until the outlook is clearer. I’m not talking about the current display of abject muppetry we’re witnessing in the government. That’s not unprecedented by any means (look to the waning years of any long-serving administration and you’ll see the same sort of stuff).

But other political issues are a bigger deal. Some people are nervous about Brexit, there’s no doubt about it. I can’t say that I am one of them, but there is clearly a contingent of people out there who really do feel that leaving the European Union is akin to the world ending.

The other issue – and one that I suspect looms larger in most people’s minds – is the notion of Jeremy Corbyn getting into power. If you’re thinking of buying a house, at what are undeniably elevated prices, then it’s got to be unsettling to think that an anti-capitalist party might be on the verge of taking the reins. Your taxes might go up (so your salary go down); your mortgage payments might go up too (if all that “wargaming” for a crash in the pound isn’t just bluster); and as a result you could end up with a house that’s worth a lot less than you paid for it, all being funded by a monthly bill that’s a lot higher than you can really afford.

All that said however, even Corbyn isn’t the biggest issue here. The economic environment is steadily turning into one in which owning a house is a little less appealing than it was. Interest rates are twitching higher. Taxation on property as an investment is being made less favourable. Prospects for tenants are very, very slowly beginning to improve (rents aren’t soaring; letting agency fees are on the verge of being banned).

In short, looking at the residential housing market right now, there are at least as many arguments to get out as to get in.

On the other hand, for most people, there’s no need to sell. Interest rate rises could stop here. That could be it for a very long time. That means mortgage payments are still very affordable. Employment is strong, which means that most people feel relatively secure in their jobs. There is no “push” factor forcing people to sell.

And as a result, as always happens when a market starts to turn, there’s a lot of resistance from potential sellers. Most have “anchored” their price expectations to the highest possible value – the price their neighbour got six months ago, or their own mental calculation of whatever double-digit gain the Nationwide house-price index says that they’ve made since they bought, plus a bit extra for all the work they’ve done on the property. If they don’t get that price, then they will not sell.

The stalemate will continue until one side or another gives up

So where do we end up? We’ve seen these tug-of-war scenarios in the housing market several times before. This one reminds me a bit of 2005. Back then, house price inflation – which had spent all of 2004 in double-digit territory – flattened out and it looked as though the market was finally going to turn.

Instead, in August 2005, the Bank of England suffered a fit of nerves, and cut interest rates (which had been on a rising path) by a quarter of a percentage point from 4.75% to 4.5%. It sounds ludicrous (and there were other factors at play), but it helped significantly to reignite confidence. The following month, the rate of house price inflation bottomed out at 1.8% and then steadily re-accelerated, right up until the credit crunch hit in mid-2007.

What will happen this time? The Bank of England can’t do a lot (imagine the look on Mark Carney’s face if they had to cut interest rates again); if anything, it’s been trying to make it a tiny bit harder to get mortgages.

The political calculus has shifted somewhat too. Politicians are still tone deaf enough to back housebuilder subsidy schemes like Help-to-Buy, but they are also getting to grips with the idea that there’s a growing contingent of voters who would rather see house prices fall than continue to rise exponentially.

In all, it depends on how long the stalemate lasts. Give it long enough and sellers will accept that markets have peaked, and they’ll recalibrate their expectations. They’ll get over the pain of missing the top of the market and focus on getting the best price possible, rather than the best price ever. Equally, if something happens to inject more fuel, then sellers will get their hope back, buyers will panic, and the market will pick up again.

That’s not terribly helpful, I realise. But the point is, you can’t predict these things. You just have to carefully consider your own financial situation, how important it is to you to own rather than rent, and the risks involved in each path, and then make a decision from there, trying to screen out the political turmoil and the headlines.

However, one thing I would say is that I don’t see the environment for buy-to-let landlords getting any easier. So if you’re thinking of investing specifically to rent out a property, then I have to tell you, that looks like a bad idea and has done for quite some time.

Politicians may bottle out of actively pursuing policies that drive house prices down, but amateur landlords are rapidly becoming one of the now-myriad unacceptable faces of capitalism. Expect no quarter to be given, and don’t make any assumptions over what they will or will not do.

  • Interesting peice. Thanks John. And yes, house prices do indeed tend to be ‘sticky’ on the way down – until owners ‘re-calibrate’ and whilst none of us knows what’s coming I simply can’t wee where the buying pressure can come from this time!

    • ElRoberto

      The “sticky” price is in reality almost no-one selling. Sellers have a right to a rising market, and a right to ignore a falling one. they guard these rights jealously.

      When markets fall, seek out the repossessions. They cannot reject the best offers.

      And of course, buying pressure? More political corruption of which the Conservatives from Osborne have actually managed to outdo Brown – q unbelievable. The main trigger for the GFC was a mix of deregulation and govt underwriting mortgage debt. Each simply meant more and more debt to buy houses. Let’s take the worst policies in economic history, repeat them only more so: Help to Buy. They are bringing it back. Those who defend this govt – among them MW – lack credibility. I used to be a big fan of MW. Not anymore.

  • Charlie D

    My mum has her house up for sale but has had almost no viewings. She had 3 estate agents’ valuations, which were all identical. The estate agent she chose now says it is over-priced, and she needs to drop the price by £100k if she wants to sell. She would be happy to do this, but she needs to find another property that is also priced to reality, not the fantasy pricing of estate agents in competition with each other to win listings. Trouble is, when she looks into buying other houses, the estate agents try to tell her, as a buyer, that the market is strong and she should not expect much of a discount from sellers. Therefore, until other sellers and their estate agents also get real, she cannot lower her price to sell, or else she will likely end up the loser, or else homeless. What is she to do?

    • Karl Crompton

      Sounds like a pricing stand off orcestrated by the estate agencies. A great recipe for a sudden price correction.

  • smspf

    Since Manchester housebuilding is virtually exploding right now, I cannot see how total book value could possibly drop. The reality is that overall asset values in this region are highly likely to double in the next five years.

    • ukmartyn

      I’m not sure that cause and effect logically pans out.

      • smspf

        So you agree. What else do you know about the Manchester market?

  • Alex Green

    I currently live in the beautiful Island of Madeira, we have been here for just over Two years, it’s flown over. I was the instigator of the move, but now my wife looks at the
    Negative points, the magnificent Supermarkets in the UK, the Herefordshire countryside, etc,etc, she’s winning me over. But looking at the housing market in the U.K. It’s obviously overvalued, Half a million buys you a standard 4bed builders showhome. I very nearly invested in a builders showhome leaseback investment, six p.c P/A, now looking back I think the value of the property over 3 years might have
    dropped, so I declined. Portugal of course has still got a lot of debt, and the housing market is still stagnant, I think the wise thing to do is stay in the sun for a while longer, I still have the benefit of the tax freedom being a non habitual resident, I don’t understand why more retirees haven’t taken up the opportunity. Madeira looks
    like a busy holiday destination all year round, it doesn’t reflect the financial situation
    that Portugal is in, housing prices dropped a lot in the financial crisis, but appear to
    have turned a corner now the mainland is not as fortunate. I think the UK property market is heading into bubble mode.

    • ElRoberto

      That half million got you a 2 bed “cosy” flat in Trotter country Peckham last year.

  • ElRoberto

    Blaming Corbyn is a bit rich, but par for the course. How about the last three governments have manipulated prices ever higher (deregulating and allowing banks to lend recklessly, followed by money printing, negative interest rates, and double mortgages – what else is Help to Buy).

    I would hope a Corbyn government brings all this rigging and corruption to an end: massive council house building programme, end Help to Buy, let rates rise at least a full 1% point, rent controls after years of effeticely rigging rents up, and best of all imhope the replacement of bus rates and c tax with LVT.

    For all the feartalk of anti-capitlaism, what has negative interest rates and powerful property developers limiting supply got to do with “free” markets? A swing in t he other direction would bring some much needed balance. Which is more than can be expected from any “pro-capitlaist” party of the past 20 years. And the result is an economy built on record levels of debt that would collapse at the merest whiff of a real positive interest rate.

  • ElRoberto

    Ditch the estate agents. There must be opiions online nowadays