The weakest link in the UK housing market right now

Property for sale in London © Getty Images
The house price slowdown is gathering pace in London

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This morning, we return to our favourite topic – the UK housing market.

The news this week has all been bad for people who think that high house prices are a good thing.

Or to put it another way, it’s been mildly promising for people who think that the national quality of life would be vastly better if we didn’t have to spend quite so much time worrying about the colossal, unforgiving chunk of variable-rate debt – or the unpredictable landlord – that stands between us and having a secure roof over our heads.

Let’s dig in, shall we?

The UK housing market is looking weaker than it has for a long time

Earlier this week, the Halifax house price index – one of the longest-running surveys – reported that prices had fallen by 3.1% in April. That was the largest monthly drop since 2010, and in fact, the second-largest drop on record (since 1983).

Now, that’s quite a headline-grabbing figure, but it’s not necessarily that reliable. These month-to-month readings can be spiky. But the annual figures also indicate a clear and ongoing slowdown. In the three months to March, prices rose by 2.7% year-on-year. In the three months to April, that slipped to 2.2%.

That means – as measured by Halifax at least – house prices are now falling in real (after-inflation) terms. Also note that prices have fallen quarter-on-quarter for each of the past three quarters. For now, at least, the slowdown is accelerating (if that makes sense).

Now, this morning, we have the latest survey from the Royal Institution for Chartered Surveyors (RICS). Every month, RICS asks its members to give their view on the temperature of the property market. And in April, they were the gloomiest they’ve been since late 2012.

At a national level, a narrow majority of surveyors reckon house prices are now falling. (RICS has a measuring scheme whereby a number above zero means a net balance of surveyors think prices are rising, and a number below zero thinks they are falling. The figure is currently sitting at -8, which is modestly negative). We haven’t seen that number in negative territory since November 2012 – and back then it was climbing out of a rut, rather than going into one.

However, most of the slowdown is in London and the south of England. Just as the post-2008 house-price recovery started in London and (very) gradually filtered out to the rest of the UK, so the slowdown appears to be doing likewise.

In London, the vast majority reported falling prices (the reading was -65, quite a deterioration on last month), while the reading in the southeast was also heavily negative. In the north of England and Scotland (and in Northern Ireland, whose housing market has taken a lot longer to recover than the rest of the UK), the market is still going up.

So of course, the question on everyone’s lips is – what’s next?

A house price crash still looks unlikely

We’ve looked at the reasons behind the UK housing market slowdown on several occasions in the past (this was the most recent). To sum up, commentators will often blame the political atmosphere (it’s Corbyn or it’s Brexit), or some other nebulous “feely” factor like the weather.

But people largely don’t buy or sell houses based on what might happen in the future. Instead, it’s the economics that affect them. And the point is that the economics are turning rapidly against property on many different levels.

Houses are, generally, too expensive, as compared with history, certainly in terms of what you need to borrow versus your income. Falling interest rates have maintained affordability, but left saving for a deposit as a huge problem. But that’s been the case for a very long time.

The biggest changes have been the removal of tax relief on mortgage interest for landlords; big hikes in stamp duty for the most expensive properties; and finally, the fact that interest rates are finally rising. Regardless of what Mark Carney and chums decide to do in the short term later today, the Bank of England interest rate is ticking higher, not lower.

So the UK housing market is being squeezed on all sides. Ironically, if prices fall, we’ll no doubt have the government claiming that it’s all to do with successful policies to get housebuilding up. In fact, it’ll be entirely to do with the price of credit and the death of the investment case for UK residential housing.

As I’ve pointed out in the past, the main barrier to a proper crash is that, ultimately, at the moment, most people can afford to stay put. So while transactions may be grinding to a halt – and those transactions that do take place will be fraught with haggling and lengthy chains – the odds of a 2008 or early 1990s-style plunge seem low.

Landlords are selling up – but rents aren’t rising

That said, given how much bigger the buy-to-let market has grown in the last two decades, I may be underestimating the effect of landlords selling up.

One point that landlords’ representatives kept making when the rules were being tightened was that they would just pass rising costs onto tenants, and that rents would go higher. Also, as landlords sold off, there would be fewer rental properties, which would also drive prices higher.

Well, on that front, here are a few choice quotes from London surveyors (listed at the back of the RICS report):

“Tenants are staying in the same properties longer. On renewal, landlords are not asking for higher rents.”

“Landlords are reducing rents to meet low levels of demand.”

“Market rents are still falling but now at a slower pace.”

A couple are more optimistic, but the overall tone is negative. At a national level, as RICS put it, “tenant demand in the three months to April was stagnant”, while the number of new properties for rent was also flat.

So hang on – the supply of rental properties is falling, but so are rents? How does that work? Well, the conclusion has to be – at least partly – that as landlords sell up, or stop competing with residential buyers to purchase new properties (down south, at least), then there’s more room for people who would have rented to buy a house instead.

It’s something to keep an eye on. But the squeeze on landlords is only getting harder. Mortgage interest-rate relief continues to taper for the next two years, while regulations around health and safety and the like are getting tougher.

The pendulum has swung decisively against the amateur landlord, and I don’t see that changing. As more of them get squeezed out by unexpectedly high tax bills, this looks like the weakest spot in an already fragile market.

  • Lebowski1975

    “So the UK housing market is being squeezed on all sides. Ironically, if prices fall, we’ll no doubt have the government claiming that it’s all to do with successful policies to get housebuilding up. In fact, it’ll be entirely to do with the price of credit and the death of the investment case for UK residential housing.“

    Could not agree more. Demand is reflection of people’s ability to pay the going rate. Which is exactly why the government’s ill-advised help to buy scheme has only made things worse for first time buyers. When the price of credit increases – which it will, sooner or later – then demand will fall. I do think there will be significant house price correction, however, simply because there are too many amateur buy to let landlords on slim margins which will only get slimmer as mortgage tax relief is reduced over the next couple of years. Add to that falling prices and increasing interest rates and there will be a stampede for the exit. As for forced/distressed sellers how many of these amateur landlords can afford the voids while their property remains on the market for months on end?

  • AndrewTurvey

    “In the three months to March, prices fell by 2.7% year-on-year. In the three months to April, that slipped to 2.2%.”

    You mean rose by 2.7%?

  • Timothy Stroud

    Why anyone wants to be an amateur landlord is beyond me. Nightmare tenants,
    increased regulation, depreciation, changes in tax policy etc etc. Why bother?
    Much easier to sell up and invest in some decent investment trusts which pay
    quarterly dividends, and don’t phone you up at 10 pm on Saturday night to
    complain about dripping taps.

    • echoBeach

      There are or were at least good reasons. I first rented out my home in the 80’s when I went to live abroad. For me it was important to maintain an anchor in this country in case things didn’t work out.

      I then came back for a year to a different part of the country, bought again and then rented out that property as well. When I went back overseas I got married and we decided to buy another initially to let with a view to moving into it ourselves on our eventual return which we did. All this time the income kept mounting up enabling us to pay off mortgages at an accelerated rate. Over the years we have sold off all three of these properties partly to fund the mortgage on our current home. Lastly because of the anticipated drop in house prices in 2007.

      Luckily before George Osborne’s shenanigans.

      • Timothy Stroud

        Fair enough !

  • EngFan

    The reason why prices aren’t going up while Landlords are selling is because tennant’s who are desperate to own are buying the BTL properties and living in them (freeing up the property they were renting).
    Quite often they are purchasing the very same property that they have been renting.
    It is not like a renter is going to purchase a property and then leave it empty. Only the Chinese do that.

  • michael flynn

    The big mistake commentators make is to use averages. London and the South East skew things dramatically so the use of averages across the country is pointless.

    London and the South East may be getting squeezed on all sides but this is NOT the case in the North. Houses are very affordable. There is plenty of room for first time buyers and professional buy to let landlords. Applying what is happening down South to the North is ridiculous.

    Even couples on the minimum wage can afford to buy houses. 95% mortgages are freely available. Decent houses can be bought for less than £60,000. Houses at £60,000 only require a deposit of £3,000. God help us all if a couple can’t save the paltry sum of £3,000.

    Houses in the North are 25% lower in real terms than they were 10 years ago. If that doesn’t make them affordable I don’t know what does. Anyone who claims they can only afford to rent and not buy in the North are speaking out of their backsides.

    I will continue to buy as many houses as I can for the next couple of years before we have our boom. I would advise anyone that wants to sort their financial futures out to do the same. Slagging off housing as an investment is just plain stupid. Leverage is what makes buying houses such a brilliant investment. Those who slag off housing also know nothing about economic cycles. A boom will occur in the North and will start in the next year or 2.

    Take my advice and fill your boots now and you too can become a multimillionaire like what I’ll be. Don’t say I didn’t tell you.

    • Kevin Hoque

      Your boom might be a bust in a few years. Don’t say I didn’t tell you.


      • michael flynn

        There’s no may about it. The boom will be followed by a bust as this is all part of the economic cycle. I’ll be selling at the top of the boom and buying again at the bottom of the bust.


  • Doug Harris

    If you want a chance to buy a home in the UK. Then put a cap on all speculative buyers including foreign and British alike. There are shed loads of other investment options for them – but their are not loads of residential homes available to buy. I would love to buy my own home – but I just cant afford it. The prices are moving so fast that I cant even keep up with my savings rate to maintain a 10% deposit target. And no chance of getting any interest on savings either. Are the government interested in the average UK worker – having a secure roof over thier head without having to worry their young children having to resettle elsewhere in yet another school becuase the lease ran out or the rent went up — absolutely not!!