It was the collective groan that heralded the beginning of the end of Liz Truss’s ephemeral tenure as prime minister.
The pound had fallen and yields on government debt surged after Kwasi Kwarteng announced unfunded tax cuts in September’s mini Budget. When Truss’s chancellor hinted this was merely an amuse bouche, the markets really took fright. Borrowing costs shot up.
A woman in the audience of BBC’s Question Time said she had just been quoted over 10 per cent for the mortgage she needed to buy her first house. The rest of the audience gasped. Some visibly flinched. A few weeks later, Truss was making her valedictory speech.
At times, it feels like this country’s obsession with house prices leads us to dissect each single twist and turn of the market in every region of the country. But those audience members instinctively understood the nub of the issue. Zoom back a little to gain a bit of perspective and there is a single, inviolable truth about the housing market: property prices are inversely correlated to interest rates.
When rates are low, mortgages are cheap and house prices rise. When they go up, debt becomes more expensive, demand collapses and the market is forced to adjust. If that basic fact sometimes gets forgotten it’s because we have been living in the former state – a low interest rate environment – for over a generation and a half.
A working paper published by the Bank of England in 2019 concluded that almost all of the rise in average house prices relative to incomes between 1985 and 2018 was the result of “a sustained, dramatic, and consistently unexpected decline in real interest rates as measured by the yield on medium-term index-linked gilts”.
Well, that era is over. At the end of 2021, the Bank of England base rate was 0.1 per cent. But in an attempt to tackle rampant inflation, policy makers have ratcheted it up 10 times since. The rate currently stands at 4 per cent. There will almost certainly be more rises to come.
While that isn’t very high by historical standards, it is much higher than many are used to. As Andy Haldane, the former Bank of England chief economist, said last year: “We have a whole generation of mortgage holders who have scarcely seen a rise in interest rates. It will be a massive shock to the system.”
Today’s homeowners have such big mortgages that interest rates at 6 per cent would cause as much pain as those of 15 per cent did when the market crashed in 1989.
Mortgage rates, which had been picking up steadily last year, spiked sharply following Kwarteng’s mercifully brief time in charge of the nation’s finances. They’ve eased a little since but still remain high compared with recent memory. This time last year, Halifax was offering the cheapest mortgage ever: fixed at 0.83 per cent for two years. Now the same bank is offering the same mortgage at 4.95 per cent, which would cost an extra £4,916 a year to service.
The average new two-year and five-year fixed mortgage rates (for a loan to value figure of 75 per cent) were 5.4 per cent and 5.1 per cent respectively in December, according to Bank of England data. That’s roughly triple what they were a year ago. Two-year mortgage rates haven’t been this high since October 2008.
So, when will rising interest rates start hurting property prices and how severe will the pain be?
The answer to the first question is that it has already started. Prices are down 3.5 per cent from last summer’s peak if you take an average of the two main measures produced by Nationwide and Halifax. This is the biggest drop over an equivalent period since 2009. Approvals also ended last year at the lowest level since the immediate aftermath of the financial crisis (if you exclude the weirdness that occurred during the pandemic).
This is a global phenomenon. Interest rates are cranking up all over the world. In Sweden, house prices have fallen by 17 per cent from last year’s peak. But in the UK, Brits are nurtured on wall-to-wall property programmes, construction accounts for 6 per cent of all economic output and housing accounts for a full half of all household wealth. A price correction will have severe knock-on implications for consumer confidence and the wider economy.
It’s likely that we are currently living in the lag – a delay between Wile E Coyote running off the cliff and gravity starting to take effect. At the moment, many in the property industry are desperately pawing fresh air trying to convince themselves and everyone else that we haven’t run out of road or that the landing will be soft.
It’s certainly worth taking the blizzard of statistics and data that will be churned out in the next few months with a hefty dose of salt. We’re in the phoney war period. Buyers and sellers are in a stand-off, with the former unprepared to commit until prices fall, and the latter unwilling to drop their price – yet. Reports from the front line during this period will be misleading, because they will be based on just a tiny sample of transactions.
The many various forecasts about the future direction of the UK house market range from the merely bad to the truly apocalyptic. Banks, estate agents and property experts have predicted that rising interest rates and the cost of living crisis will result in prices falling by between 5 per cent and 10 per cent this year.
But there’s definitely scope for further nasty surprises. The average mortgage rate rose from a record low of 1.75 per cent in 2020 to 3.68 per cent at the end of last year. That translates into a 26 per cent increase in monthly payments on the average new mortgage, according to Capital Economics. Andrew Wishart, the senior property economist at Capital Economics, says there are signs that borrowers have already reacted to higher rates by taking out smaller mortgage loans. He has calculated that if the average mortgage rate settles around 4.5 per cent, which is not a particularly outlandish prediction, the average loan-to-income ratio will have to fall from 3.3 to 2.5 to bring mortgage payments back to their historical norm.
“That would imply a drop in mortgage size from £234,000 to £176,000, and assuming no change in the size of deposits, a subsequent fall in house prices of 17 per cent,” says Wishart. “Admittedly, the relationship between the two is not exact and we doubt the drop will be that large. But house prices have further to fall.” Ouch.
S&P Global Ratings, the world’s largest credit rating agency, believes that property in London and the south-east could be overvalued to the tune of 50 per cent and that rising interest rates will result in a “sticky, gradual decline” of house prices over the course of almost three years. Double ouch.
For many, the most accurate picture of the state of the housing market (and the place to find pretty reliable forecasts) is the Royal Institution of Chartered Surveyors’ (RICS) monthly residential market survey. This is where estate agents come together, under the cover of anonymity, to tell the truth.
The picture painted by the most recent surveys is decidedly grim. The net balance of surveyors reporting rising house prices in the prior three months fell to -2 in October from +30 in September, according to the RICS data. That was the largest drop on record since the survey was established in 1978.
The January survey showed new buyer enquiries had slipped to -47 per cent, the ninth successive negative monthly reading and the weakest since April 2009. This all amounts to fairly “clear evidence” that house prices are on the slide, according to Pantheon Macro Economics.
Yeah, yeah, yeah, the property bulls might say, but look at the last two times there were big falls in UK property prices: the market bounced back pretty quickly. Prices took a lurch at the start of the pandemic in 2020 but were actually up by the end of the year. Blink and you’d missed it. And, even after the horrible crash following the global financial crisis in 2008, property prices had made back all the lost ground by 2012. The lesson people learned is that it pays to buy in the dip.
All true. But, you have to remember that in both 2008 and 2020, the Bank of England reacted to worsening economic conditions by cutting interest rates. In 2007, the base rate was 5.5 per cent; a year later it was 2 per cent, then slipped to almost zero and remained there until the most recent round of rises started to kick in just over a year ago.
Things are likely to be a little different this time; those scanning the horizon for signs of the cavalry’s imminent arrival are likely to be disappointed.
Central banks all around the world are acutely mindful of the damage that a decade and a half of quantitative easing and record low interest rates have done (not least in artificially pumping up the value of assets like property) and are desperately keen to return to more normal monetary policy.
And, for the time being, the Bank of England is in firefighting mode. Its primary concern for the coming months will be taming inflation. Just this week, Catherine Mann, who sits on the committee that sets interest rates, said more must be done to clamp down on rising prices and dismissed talk of a looming “pivot” to easier monetary policy. As and when Threadneedle Street wonks do decide to cut interest rates it will be because the economy is absolutely tanking – not a particularly conducive environment in which to go shopping for your new abode.
What about the Government then? The Conservatives brand themselves the party of homeowners and famously haven’t ever met a policy designed to prop up the housing market they didn’t like, including Help to Buy, lifetime ISAs and stamp duty holidays, to name but a few. It’s entirely possible that the Government may come up with, say, a mortgage tax relief or something similar this time round.
But there’s a sense in which the political calculus is shifting. For one thing, the Treasury doesn’t exactly have much money to splash around at the moment.
For another, there’s a growing realisation that past measures didn’t so much help people to buy houses as help people who already owned houses. Lastly, there appears to be a shift in public attitudes. In February 2020, only 38 per cent of Brits thought a drop in house prices was a consummation devoutly to be wished for, according to YouGov. By the end of last year, that proportion had risen to 50 per cent. Indeed, only one in 20 of those surveyed a couple of months ago thought rising house prices were a positive development.
Many homeowners have noticed the distorting effect that spiralling house prices are having on UK society. Lucian Cook of Savills estate agents says even older, Conservative-voting households are starting to realise house price growth is a “double-edged sword”.
On the one hand it increases their wealth (on paper at least); on the other, they worry about how their children or grandchildren will ever be able to get themselves on to the housing ladder. “More older households are coming to the realisation that higher house prices mean their children’s ability to buy a home is increasingly dependent on them and their willingness to live in a smaller home,” says Cook.
The more enlightened Conservative MPs may be worrying about the same thing. Duncan Lamont of asset manager Schroders says the value of British homes relative to earnings has more than doubled since the 1990s: “Affordability has deteriorated dramatically for first-time buyers. This has contributed to home ownership rates falling to levels last seen in the early 1980s.”
A generation risks being left stranded in rented accommodation, delaying marriage or starting families, and making the traditional journey towards the right-hand side of the political spectrum. Some Tories are beginning to wonder whether, whisper it quietly, price falls might not be such a bad thing after all.
There’s no doubt UK property is nosebleed-inducingly expensive. The pandemic ultimately ensured there was a last hurrah to the housing boom as everyone was confined to quarters, forced to stare at the same four walls for months on end, and unsurprisingly started to crave a little more space and a bigger garden.
The average price of a UK home rose by £50,000 in the two years following the start of the pandemic in March 2020 to a shade under £270,000, according to Nationwide. House prices have climbed to more than nine times the average salary, a ratio not seen since 1876, according to recent analysis by Schroders. In London, homes now cost 12 times earnings.
On the flipside though, high prices provide one of the few silver linings amid all the gloom that give reason to hope that an outright crash can be avoided. Even a reasonably large fall in the coming months would only take the value of properties back to where they were quite recently.
Earlier this week, for example, Lloyds bank said it expects house prices to fall by about 7 per cent this year. That would result in the value of an average property returning to levels seen in the third quarter of 2021 in cash terms (although high inflation means the real terms fall will be more substantial). Lloyds said this meant most of its customers would still have “very positive equity”.
As Oxford Economics points out, the amount of equity that British households own in their property is at a record high compared with both overall housing wealth and incomes. What’s more, the vast majority of mortgage debt is owed by wealthy households. The top 50 per cent richest households owe roughly 86 per cent of all outstanding mortgage debt while the poorest 30 per cent owe just 5 per cent, according to Berenberg analysts.
At the moment, household finances, with people having built up savings during the pandemic, are in reasonably good shape (although they will deteriorate over time the longer the cost of living crisis goes, inflation erodes disposable income, the economy slows and unemployment starts to tick up). This should mean that most people have the flexibility to sit tight and ride out the downturn – perhaps by switching to interest-only mortgages for a while.
UK banks are well capitalised and have not been offering crazy mortgages on tiny multiples of income and with very small deposits as they did in the lead up to the financial crisis.
Lenders are still smarting from the reputation damage they suffered back then and will therefore be extremely reluctant to foreclose on borrowers, repossess properties and flood the market with homes. This was the negative spiral that caused prices to really crash in the early 1990s. The Bank of England’s stress tests means we know lenders can weather house prices falling by up to 31 per cent from peak to trough.
Falling prices may also stop empty-nesters from selling their large homes with unused bedrooms and downsizing. This would result in a further squeeze on the already extremely constrained supply of housing stock in the UK. Might this in and of itself help maintain a floor to the coming price falls? Will that in turn keep the spectre of negative equity, mortgage arrears and repossessions at bay?
On such delicate and uneasy equilibriums will the housing market balance in the coming months and years.
Track the crash: Check the latest UK housing market data and see where prices might go next
Bagikan Berita Ini
0 Response to "We have entered a property ice age – here's what's coming next - The Telegraph"
Post a Comment