It didn’t make much of a difference: nothing cries the end of a mania more than a Merc thrown in as an advantage. House prices in the UK fell by 15% between January 2008 and May 2009.
So I’m sorry to report home builders are starting over: If you want your mortgage paid for a few years, a few thousand dollars to cover your legal costs, or even just a free fridge or furniture pack, give one of them a call. I’m sure they’re waiting by the phone. Why? Because, again, they have to be.
Persimmon recently noted, for example, that buyer cancellations are up and weekly sales per site are down. Both Nationwide and Halifax reported slight month-over-month nominal price declines (thus quite significant declines in inflation-adjusted prices), and the latest residential market survey numbers from the RICS show the miseries of the market in full.
The net balance of surveyors reporting rising house prices over the past three months fell to -2 in October from +30 in September, according to RICS data. It’s the biggest drop on record since the survey began in 1978. As Pantheon Macro Economics put it, it’s “clear evidence” that house prices are falling.
Volumes are also falling. The new balance of inquiries fell to -55, not far off the poor numbers seen during the global financial crisis, when it hit -67.
Beyond homebuilders, sellers are also starting to get the message: Zoopla reports that about 7% of homes currently on the market have seen their prices drop by 5% or more. No wonder the bribes are back. All of this, Pantheon says, is consistent with monthly mortgage approvals falling below 40,000 by year-end — a level we haven’t seen since the dark days of free cars last time out. Lower mortgage approvals almost always mean lower prices.
This should surprise no one. When interest rates rise, monthly payments on a given amount of borrowed money go up, the maximum amount you can borrow goes down, and so does the maximum you can pay for a house. And, contrary to popular belief, it’s not the supply of homes but the fully financed demand for homes — what people can afford to pay — that really drives prices. Mortgage rates go up, volumes crash as the market adjusts, and then prices start to fall. The dynamic is always the same.
And mortgage rates have certainly gone up. The average rate for a three-year fixed rate mortgage rose from just 1.64% in January (virtually free money) to just over 4% in September and then to 6.01% in October. A mortgage of £250,000 over 25 years at an interest rate of 1.64% costs £1,016 a month. One on 5.5% (rates have fallen slightly since October) costs £1535 per month. You had the idea. Rising prices, falling property prices.
There are complications here, of course. A wealth tax, an overhaul of council tax or a change in the regime for taxing capital gains on principal residences in the UK are all possibilities in the near future. This adds to a long list of disadvantageous tax changes imposed on rental property owners. All of this adds a negative overlay to the housing market, as does the cost of living crisis, since spending more on energy bills leaves less for mortgage payments.
A drop in mortgage rates (quite possible as the economy weakens) would brighten things up a bit. But we can also rejoice in the fact that the majority of mortgage debt in the UK is held by those with the wealthiest pockets. As Berenberg analysts point out, the richest 50% of households have around 86% mortgage debt and the poorest 30% only 5%. One would hope that some savings buffers at the top will mean there won’t be a nasty 1989-92 style run of defaults (housing prices fell 20% during that crash).
Property bulls will also point to the fact that most swings in UK house prices resolve quite quickly. March 2020 barely counts as a crash: prices had actually risen 8.5% by the end of the year. None of the horrific Brexit-related crash predictions have come true. And even 2008 turned out to be nothing more than a jolt for most people: prices had returned to record highs just about everywhere in 2012 and boomed positively thereafter. Buy the dip, they’ll say. You can’t go wrong with property in the UK.
Yet there is a problem with this argument. In 2008 and 2020, mortgage rates did not increase; they came down. In 2007, the base rate was 5.5%. In 2008, it was 2%. In 2019, it was 0.75%. At the end of 2020, it was 0.1%. It won’t happen this time.
Of course, they may flatten or fall slightly. Consumer spending in the UK is sensitive to house price changes. (How can we not be given that’s pretty much all we’re talking about?) So the more the Bank of England is surprised by weak house prices – and what’s not surprising the BOE these days? – the more likely they are to pull out of the current tightening cycle.
Mortgage rates may fall back to 4.5% or something like that. But fall by more than 50%? I do not think so. It’s not 2007, and it’s not 2020 either. You might soon find yourself wishing it was. In the meantime, if someone offers you a free car, just say no.
More from Bloomberg Opinion:
• Will Sunak test the love of Britain’s Top 1%? : Therese Raphael
• British families are already being hit by stealth taxes: Stuart Trow
• BOE moving towards rate pivot sends signal to ECB: Marcus Ashworth
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Merryn Somerset Webb is a senior columnist for Bloomberg Opinion covering personal finance and investing. Previously, she was the editor of MoneyWeek and a contributor to the Financial Times.
More stories like this are available at bloomberg.com/opinion