UK Housing Market Takes Desperation Once Again

Kiran

In 2008, if you wanted a new car, you could get one for free – as long as you were ready to buy a house.

The global credit crisis has taken hold and no one wants to buy a house from an almost bankrupt homebuilder in the UK. That doesn’t sit well with a homebuilder who is nearly bankrupt. So they started offering incentives – cash back, free kitchens, taking the buyer’s mortgage payments for a year or two – that sort of thing. In Scotland, a developer even offered the buyer crazy enough to buy into the crash of the obvious housing car “free” – a £ 15,000 Mercedes ($ 17,810 by today’s conversion). Cala Homes goes further: Its incentive package offers cash, carpets and landscaping for £30,000.

It’s not much of a difference: Nothing screams end-of-a-mania more than a Merc thrown in as a perk. House prices in the UK fell by 15% between January 2008 and May 2009.

Sorry to report that the realtor is at it again: If you want your mortgage paid off for a few years, a few grand to cover your legal fees or even just a free fridge or furniture package, give one of them a call. I am sure they are waiting by the phone. Why? Because, again, they should.

Persimmon recently noted, for example, that buyer cancellations are up and weekly sales per site are down. Nationwide and Halifax both have reported small declines in month-on-month nominal prices (so quite large falls in inflation-adjusted prices), and the latest figures from the RICS Residential Market Survey show the miseries of the market in full.

The net balance surveyors reported rising house prices in the last three months fell to -2 in October from +30 in September, according to RICS data. It is the largest decrease in the record since the survey took place in 1978. As Pantheon Macro Economics put it, it is pretty “clear evidence” that house prices are on the way down.

Volumes are also down. The balance of new inquiries fell to -55 – not far from the nasty number seen in the global financial crisis, when it reached -67.

Beyond home builders, sellers are also starting to get the message: Zoopla reports that about 7% of homes currently on the market have seen their prices cut by 5% or more. It is not surprising that they bribe again. All this, Pantheon says, is in line with monthly mortgage approvals falling below 40,000 by the end of the year – a level we haven’t seen since the last dark days of free cars. Falling mortgage approvals pretty much always means falling prices.

This should not surprise anyone. As interest rates rise, the monthly payment on the amount borrowed from the loan increases, the maximum amount you can borrow decreases and so does the maximum you can pay for the home. And, contrary to popular belief, it’s not the supply of homes but the fully funded demand for homes – what people can afford to pay – that really determines prices. Mortgage rates rise, volumes fall as the market adjusts and then prices begin to slide. The dynamics are always the same.

And mortgage rates have most definitely gone up. The average rate for a three-year fixed rate mortgage rose from just 1.64% in January (practically free money) to over 4% in September and then to 6.01% in October. A 25-year mortgage of £250,000 at a rate of 1.64% costs £1016 a month. One on 5.5% (the rate has slipped back a little since October) costs £ 1535 a month. You get the idea. Rates go up, house prices go down.

There are complications here, of course. A wealth tax, a council tax rejigging or a change to the capital gains tax regime on primary homes in England are all possibilities in the future. It is on top of a long list of adverse tax changes being imposed on buy-to-let properties. This all adds up to more negative overlays on the housing market, such as the cost of living crisis, as it costs more energy bills to pay the mortgage.

A fall in mortgage rates (all possible as the economy weakens) will cheer things up a little. But we can also take heart from the fact that the majority of UK mortgage debt is held by those with the deepest pockets. As analysts at Berenberg pointed out, the top 50% of households have around 86% of mortgage debt and the bottom 30% only 5%. One can hope that some savings buffer above will mean no nasty round 1989-1992 standard style (house prices fell 20% in the crash).

Property bulls will also point to the fact that most house prices in the UK resolve themselves quickly. March 2020 barely counts as an accident: Prices actually rose 8.5% by the end of the year. None of the predicted Brexit-related crashes have come to pass. Even 2008 turned out to be nothing more than a blip for most people: Prices returned to peak levels pretty much everywhere by 2012 and positively boomed after that. Buy the dip, they would say. You can’t go wrong with a British property.

Yet there is a problem with this argument. In 2008 and 2020, mortgage rates did not increase; they went down. In 2007, the base rate was 5.5%. By 2008, it was 2%. in 2019 it changed to +0.75%. By the end of 2020 it will change to +0.1%. This will not happen this time around.

Sure they can flatten out or fall off a bit. Consumer spending in the UK is sensitive to shifts in house prices. (How can this not be given that this is pretty much what we are talking about?) So the Bank of England is more surprised by the weakness of house prices – and what is the BOE not surprised by today? – the more likely they will pull back from the current tightening cycle.

KPR rates can drop back to 4.5% or so. But falling by 50% plus again? I didn’t think so. This isn’t 2007, and it isn’t 2020 either. You may soon find yourself wishing that it was. Meanwhile, if someone offers you a free car, say no.

More From Bloomberg Opinion:

• Is Sunak going to test the love of Britain’s Top 1%?: Therese Raphael

• British Families Have Been Hit by Stealth Taxes: Stuart Trow

• The BOE Edging Towards a Rate Pivot Sends a Signal to the ECB: Marcus Ashworth

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Merryn Somerset Webb is a senior columnist for Bloomberg Opinion covering personal finance and investing. Previously, he was editor-in-chief of MoneyWeek and contributing editor at the Financial Times.

More stories like this are available at bloomberg.com/opinion

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