It didn’t make much difference: nothing calls for the end of a mania like a mercenary thrown in as an extra. House prices in the UK fell by 15% between January 2008 and May 2009.
I’m sorry to report that homebuilders are at it again: if you want your mortgage paid for a few years, a few grand to cover your legal costs, or even just a free fridge or furniture package, give one of them a call. I’m pretty sure they’re waiting on the phone. Why? Because they have to be again.
For example, Persimmon recently found that buyer cancellations have increased and weekly sales per site have decreased. Nationwide and Halifax both reported small month-on-month declines in nominal prices (so fairly large falls in inflation-adjusted prices) and the latest figures from the RICS Residential Market Survey fully reflect the market’s plight.
The net balance of appraisers reporting rising house prices over the past three months fell to -2 in October from +30 in September, according to RICS data. That’s the sharpest drop since the survey began in 1978. As Pantheon Macro Economics put it, this is pretty “clear evidence” that house prices are on the way down.
The volumes are also falling. The balance of new requests fell to -55 – not far from the nasty numbers seen in the global financial crisis when it hit -67.
In addition to home builders, sellers are also beginning to get the message: Zoopla reports that around 7% of homes currently on the market have reduced their prices 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 the end of the year – a level not seen since the dark days of free cars last time. Falling mortgage approvals pretty much always mean falling prices.
That shouldn’t surprise anyone. As interest rates rise, the monthly payments for a given amount of money borrowed increase, the maximum amount you can borrow decreases, and with it the maximum amount you can pay for a house. 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 for them — that actually drives prices. Mortgage rates rise, volumes collapse as the market adjusts, and then prices begin to fall. The dynamic is always the same.
And mortgage rates have definitely gone up. The average rate on 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 £250,000 25 year mortgage with an interest rate of 1.64% costs £1016 a month. One at 5.5% (rates have fallen slightly since October) costs £1535 a month. you have the idea Prices go up, real estate prices go down.
Of course there are complications here. A wealth tax, a council tax reform or a change to the capital gains tax regime for primary UK residents are all possibilities in the near future. This is in addition to a long list of adverse tax changes imposed on rental property owners. All of this is adding a negative overlay to the housing market, as is the cost-of-living crisis, as spending more on utility bills leaves less for mortgage payments.
A drop in mortgage rates (quite possible if the economy slows down) would cheer things up a bit. But we can also be encouraged by the fact that the majority of UK mortgage debt is held by those with the deepest pockets. As Berenberg analysts point out, the top 50% of households hold around 86% of mortgage debt and the bottom 30% just 5%. One might hope that some savings buffers at the top won’t mean a nasty round of 1989-1992-style defaults (home prices fell 20% in that crash).
Property bulls will also point to the fact that most house price swings in the UK resolve themselves fairly quickly. March 2020 hardly counts as a crash: by the end of the year, prices had even risen by 8.5%. None of the horrific Brexit-related crash predictions have come true. And even 2008 turned out to be little more than a slip-up for most: By 2012, prices reached record highs almost everywhere and then boomed. Buy the dip they will say. You can’t go wrong with UK property.
But there is a problem with this reasoning. Mortgage rates have not increased in 2008 and 2020; they went down. In 2007, the base interest rate was 5.5%. In 2008 it was 2%. In 2019 it was 0.75%. At the end of 2020 it was 0.1%. That won’t happen this time.
Sure, they can flatten out or fall easily. UK consumer spending is sensitive to house price shifts. (How can it not be that that’s pretty much all we’re talking about?) That makes the Bank of England even more surprised by house price weakness – 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 again by 50% plus? I do not think so. It’s not 2007, nor is it 2020. You may soon wish it were. In the meantime, if someone offers you a free car, just say no.
More from the Bloomberg Opinion:
• Will Sunak test the love of Britain’s top 1%?: Therese Raphael
• British families are already being plagued by camouflage taxes: Stuart Trow
• The BOE is nearing a pivot point and sending a signal to the ECB: Marcus Ashworth
This column does not necessarily represent the opinion of the editors 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 managing editor of MoneyWeek and contributing editor at the Financial Times.
More stories like this are available on bloomberg.com/opinion