Don’t fall for the property crash headlines
With forecasts for doom and gloom in the property market, it's hard to escape the negative headlines. So, we've taken a deeper look at the hype and hysteria around a possible crash. In this post, we share the realities of the market right now to give you a fresh and realistic perspective.
It’s going to be carnage. Absolute carnage. In fact, don’t even bother getting out of bed for the next twelve months. Stay indoors, shut the curtains, hide under your duvet, and pray that homes will be worth anything at all in just over a year’s time. The property crash apocalypse is upon us.
Alternatively, we could take a deep breath, look beyond the headlines, adopt a broader perspective, and remain thoughtful and philosophical. Yes, we could have all done without Kwasi Kwarteng’s mini-budget. But the market isn’t sunk just yet. Not by a long shot…
Hype and hysteria
Sadly, it’s hard to escape negative headlines these days. After all, the media’s job is to grab people’s attention. And a headline stating that “the market’s going to crash catastrophically” will inevitably get more clicks and shares than a headline that expresses a more nuanced position with a milder outcome.
As a result, we’ve endured all kinds of sensationalist claims about a prospective property crash, with newspapers giving exposure to the experts with the most extreme views. Take this headline, which expresses the views of Graham Cox from the Self-Employed Mortgage Hub:
“Unless we are very lucky and inflation falls much more quickly than predicted, I don’t see any other outcome than a sizeable fall in house prices – possibly 20%-plus over the next two to three years. I’ll be accused of being a doom-monger, but if you use simple maths and common sense, how can house prices not fall?”
If we buy into the above analysis then we might as well give up now. The UK is about to embrace a perfect storm where high inflation, higher interest rates, higher mortgage repayments, tighter lending, and a squeeze on household budgets create property Armageddon.
The mini-budget poured fuel on this fire. The fallout saw nearly 300 mortgage deals withdrawn by banks and building societies as forecasts predicted a jump in the Bank of England’s base rate to 6%. Andrew Wishart, the senior economist at Capital Economics, foresaw a significant drop in buying power as a result, and told the sector to brace for a house price slump of 10-15%. Even the Royal Institute of Chartered Surveyors (RICS), declared the end of the UK’s 13-year property boom and warned of an impending 10% property crash. Yikes.
Jumping the gun?
The good news, however, is that there’s little hard evidence that doomsday is on the way. At least not yet. For example, much has been made of the fact that enquiries to agents were an alarming 21% lower a fortnight ago than they were this time last year. However, if one zooms out, they’re still a healthy 24% higher than they were in 2019. This doesn’t sound like property crash territory to us.
Similarly, we’ve read that 23% of properties are now being reduced before attracting a buyer. Surely this is a sure-fire sign of an impending crash? Well, not really. Before the pandemic, 32% of properties were reduced before being sold. And the market has only gone in one direction since: up.
Our conclusion, therefore, is that a widely predicted ‘cooling’ in the market, which was even predicted by our very own Residential Expert Mark Hayward, doesn’t necessarily mean that we’re on a one-way highway to Hades. After all, the price of properties coming to market was up nearly 1% month on month to a new record of £371,158 recently. What’s more, house prices grew by more than 15% nationwide over the year to July 2022, despite the pandemic, Brexit, the war in Ukraine, and every other spanner throw in the direction of the sector’s crash-defying wheels.
Reasons for optimism
Although it’s fair to warn that the wider effect of economic uncertainty might not have filtered through into the figures yet, we also shouldn’t forget that the economic outlook has been uncertain for quite some time now. And yet no property crash has been forthcoming.
Therefore, let’s give some much-needed exposure to experts with a more optimistic take: Rob Dix, the co-founder of Property Hub believes that future interest rate rises won’t be as dramatic as many are predicting; therefore things will soon settle down and prices will continue to rise. Meanwhile, Fred Harrison, who believes that the market always follows an 18-year cycle, sees little reason to doubt his model. He thinks the market will go down in 2026 and isn’t too disturbed by recent events.
We should also be glad that the government has taken some action to prevent a property crash. Yes, the mini-budget forced the Conservatives’ brain trust - we were tempted to write ‘brain Truss’ here - into an embarrassing series of U-turns, but one of the few policies that survived was the raising of the stamp duty (SDLT) threshold from £125,000 to £250,000. This equates to a saving of up to £2,500 for an average home mover.
Of course, the SDLT tweaks are even better news for first-time buyers, who won’t pay stamp duty on the first £425,000 of their purchase (as long as its sale price isn’t more than £625,000). This equates to a saving of £11,250 once relief is factored in.
Although the danger is that interest rate rises might wipe off these savings, we shouldn’t forget the STLD is now much, much lower than it used to be: before former chancellor George Osborne’s 2014 renovations, first-time buyers paid £12,000 in stamp duty on homes costing £400,000. Now they’re paying just £3,750. This bodes extremely well for the sector.
Property crash and burn?
So are we headed for the mother of property crashes - the kind of crash that will lay waste to the sector and allow the harbingers of doom to smile smugly and gloat, “we told you so”? Well, it’s possible. After all, nobody really knows what’s going to happen. If economists were any good at predicting the future, and therefore averting disasters, then the word ‘recession’ wouldn’t exist.
However, there’s no reason to panic. For starters, the market currently seems more resilient than it did in 2008 when the last property crash occurred. On that occasion, mortgage borrowing got out of hand and very high loan-to-value lending went unchecked; therefore, many homeowners found themselves in negative equity when prices began to fall and sold at discounted rates in a hurry. High loan-to-value mortgages were totally withdrawn back then. This time, they’ve only been temporarily withdrawn to be re-priced.
The other main reason for optimism is basic economics: one of the main features of the property market in recent times has been a chronic lack of stock. And can something that’s in such short supply ever really crash? The fact remains that people will always need to move - whether it’s through divorce, relocating for work, or because they need to upsize or downsize - therefore it’s likely that demand will continue to exceed supply.
Consequently, we don’t believe that today’s uncertainty will send the sector to hell in a handcart, wheelbarrow, or any other contraption. The most likely outcome is that people will simply delay moving until things settle down. This isn’t brilliant news, of course, but it’s an awful lot better than an apocalyptic property crash. What’s more, high inflation will surely attract more foreign property investors, which again would prop up prices.
The bottom line is that crashes usually occur when people are forced to sell en masse. Therefore, unless interest rates really do rise to 6% or more, and there are swathes of repossessions, there’s absolutely no point assuming the worst. So let’s talk the market up rather than down. I’m sure we can all get down with that.