Until very recently, the UK housing market was at its strongest before the EU referendum.
It is good to be optimistic, however, that said we must not delude ourselves to the reality we face.
Few commentators, nevertheless, are making upbeat predictions for our housing market performance for the next 12 months.
Now there is a contraction of first-time buyers who are stung by the difficulty in getting low-deposit mortgages and the looming rise in unemployment.
However, Boris Johnson has recently said he would “turn generation rent into generation buy” via a return to 95% mortgages for first-time buyers.
This can only happen if the mortgage regulations are relaxed or as an alternative by providing direct government subsidies for first-time buyers adding to the various help-to-buy schemes.
Things are getting worse and not better
Several months living with COVID-19 we are now seeing a clearer picture of the impact of COVID-19 has had on house prices. With the government intervention like the ongoing stamp duty holiday and the possibility of another national lockdown, the housing market could fluctuate in the months ahead.
The Land Registry’s UK House Price Index is a reliable barometer for house prices which is based on sold properties. It works on a two-month lag, so the latest available figures are for August.
The HM Land Registry figures reveal the price of a property in the UK increased by 0.7% month-on-month and 2.5% year-on-year in August 2020, to reach £239,196.
This might not last as the steam runs out of the broader economy. Experts believe the market (including house price growth) is likely to slow down once the government’s COVID-19 financial support to businesses employers, employees and the stamp duty cut comes to an end.
The Halifax says our housing market will eventually feel the effects of the economic downturn, with ‘greater downward pressure on house prices in the medium-term’.
The Nationwide opinion is that the winding down of government support schemes could ‘dampen housing activity’.
The Centre for Economics and Business Research (CEBR) predicts house prices could fall by 14% in 2021.
If we look at the broader picture now, things are getting worse and not better.
Many countries are already predicting a downturn in their housing market. At the bottom of this page, I have placed links to articles for 4 significant economies as a point of reference.
If we study the previous UK housing market crashes, we may get an idea of how serious the current crisis could get.
A 2020 housing market crash could be the worst market correction ever seen in the UK, according to Mr Richard Woolnough.
The Mr Woolnough, a bond manager at M&G’s, believes house prices went up significantly ahead of the downturn. There is a chance they could decline to record lows, worse than seen in previous housing market crashes.
Mr Woolnough said: “History suggests that when the UK housing market crashes, it tends to fall about 25%-30% from peak to trough in real terms, but given that UK house prices rose about 270% from 1995 to end of 2007, there is a risk that this crash could be worse,”.
IMF says UK housing 30% above model
“How far could UK house prices fall? The IMF said last autumn that UK house prices were 50% above where models suggested they should be, although this month, the IMF reduced that to 30%,”.
“Nobody knows how far prices could fall, as there is a considerable margin for error on long- term economic predictions.
“I believe this projection is likely to worsen because the banks are becoming increasingly reluctant to lend, which means mortgage approvals, and therefore house prices, could fall much further,” he said.
Recent data reveals that properties in London remain the most expensive at an average of £477,000, compared to the average of £247,000 in England.
Mr Howard Archer, a chief economic adviser to the forecasting group EY Item Club, said: coronavirus looks likely to slam the breaks on growth.
Mr Sajjad Ahmad, the CEO of the British Landlords Association, said: “The financial turmoil of the early ’90s and Lehman Brothers are ones I remember well. The property crash of the early ’90s, where we were kicked out of the ERM, is etched in my memory”.
Covid-19, the clouds hovering over us “What I see now with the Covid-19, the clouds hovering over us, are worse than the crash of the 90S, or Lehman Brothers”.
“The Chancellor urgently needs to do some clever quantitative easing, to be micro-targeted, for us to stand any chance of avoiding a major housing market crash”.
“It is apparent quantitative easing is taking place, the question is, is it feeding through, to where it is needed?” Small companies need a cash injection “Self-employed, and directors of small companies need a cash injection, as quickly as possible”.
He added: “US politicians, have been debating giving up to $1000, to $2000 to every adult. This may sound radical, but it highlights the seriousness of our predicament. This Covid-19 disaster is global; the results may be akin to the great depression of 1929 if our politicians do not act quickly.” he said.
Lenders factoring in crash
Some major UK lenders are already factoring in a housing market crash. In a message sent to mortgage brokers this morning, Halifax said it would no longer offer any mortgages with a “loan-to-value” (LTV) of more than 60%. This means, only buyers who can provide a 40% deposit will qualify for a mortgage.
UK housing market crash of 2008
The failure of Lehman Brothers left $700bn (£538bn) of liabilities which in turn created a seismic shock to the global financial system. The money markets around the world froze, and banks and companies in the developed economies suddenly found they could not borrow money to operate.
The US Federal Reserve, Chairman Ben Bernanke, called it “the worst financial crisis in global history”.
Central banks were compelled to lend to banks, on an enormous scale in order, to prevent a wave of financial sector bankruptcies of institutions even bigger than Lehman Brothers. Such a general collapse would have meant, all around the world, wages not being paid, cash machines not operating, panic and civil upheaval.
Gordon Brown’s private concern at the time was “If you can’t buy food or petrol, or medicine for your kids, people will just start breaking the windows and helping themselves it’ll be anarchy”.
Some of our banks, like the RBS group, were eventually bailed out, with unprecedented volumes of taxpayer’s money, to restore confidence, to the financial markets.
The 1990’s Housing Market Crash
The UK recession of 1991, in a nutshell, was due to high-interest rates, falling house prices and an overvalued exchange rate. Membership of the Exchange Rate Mechanism (EMR) from 1990 to 1992 was a fundamental factor in keeping interest rates much higher than was prudent.
What causes housing market crashes?
It is a period of falling house prices when there is a decline in demand for buying houses, and more people are trying to sell houses.
The main reasons for a housing market crash include:
A rise in interest rates
This is unlikely as we are likely to face a worldwide depression. However, historically a rise in rates will increase the cost of mortgage payments and make buying a house less affordable.
If homeowners take out fixed-rate mortgages, they may be insulated from interest rate rises for 2-5 years this of course depending on the mortgage term.
In the UK we have seen rising interest rates in the late 1980s and 2005-07, and this caused a sharp rise in mortgage payments as % of income.
In both 1991 and 2007, the UK experienced a housing crash after a peak in mortgage payments.
House price to earnings
This is a significant concern right now. One major factor determining the underlying affordability of housing is the ratio of house prices to earnings. A good indicator of a housing market crash is a rise in the ratio of house price to average earnings. People spend more on housing cost than on living costs.
In 2007, the ratio of UK house prices to earnings reached 5.4 and in London was over 7.0. The housing crash saw ratios fall. From 2009, the ratio of house price to earnings ratios recovered, and in London, it reached all-time records.
In 2020 some parts of London the ratio is currently as high as 37 and some parts of the south-east the ratio is 18.
Author: Marc Attwater
Date: Original 26th of March 2020. Updated 1st of August 2020
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