July marked the first time that UK house prices have fallen in more than a year, with the average price of a home being £293,221 – representing a 0.1% decrease month-on-month according to the latest report from Halifax. Although the average house price still stands at £30,000 higher than last year, the drop lowered the annual rate of growth from 12.5% to 11.8%.
As the Bank of England announced its biggest increase in interest rates in 27 years last Thursday – rising the UK base rate by 0.5 percentage points and taking it to a 13-year high of 1.75% -there are now worries that we are set to see a property market crash and even an impending recession. The report also showed that mortgage approvals have fallen for the last five months in a row – an indicator that housing market activity is cooling.
Properties in the UK are now more unaffordable than ever, with recent figures released by the Office for National Statistics showing that the average home sold in England cost the equivalent of 8.7 times the average annual disposable income – which is the worst affordability ratio in England since records began in 1999. There are signs of an increase in supply however, with the number of sellers in the property market increasing by 13% compared to this time last year according to Rightmove, although the number of available homes for sale remains 40% lower than in 2019. There are a myriad of obstacles facing the UK property market that have caused anxiety within the property world and worries of a market crash mirroring 2008 are prevalent.
David Hannah, Group Chairman at Cornerstone Tax discusses if the property market is ready to slow down:
“I don’t predict a property market crash in 2022. The surge in demand, even with rising interest rates, has represented an adequate amount of liquidity, which is a good sign. The crash of 2008 happened because of a sudden loss of liquidity in the international banking market and we aren’t in that same situation again. We have had the pandemic, and substantial government spending because of it which has increased interest rates. But the question has got to be – will the global lending system be able to maintain the liquidity that it lost in 2008? And I think the answer is yes it will. We are certainly not going to see, as some people have predicted, 20, 30 or 50% falls in UK housing.
“If we look at what has been going on – house price growth, retail inflation, energy costs surging, that’s going to put pressure on employers to raise wages. I believe wages will begin to rise, meaning real spending power may not actually decrease as much. Also, If you borrow a hundred thousand pounds today, the fixed figure of one hundred thousand pounds doesn’t rise in line with inflation. So, in five years time that debt is probably worth half what it is today. In high inflationary times with relatively low interest rates, it makes sense to borrow. The debt is being eroded by inflation, whereas the value of the asset (the house) is actually going up in line or ahead of inflation. It’s a way to make real returns
“The problem we do have is the rate of demand and supply. If builders are building and they’re over supplying, it will soften the increase and the appreciation in asset value. But, if the number of people wanting to buy houses continue to exceed the supply, then those prices are going to rise. We also have an open market in the UK which means not only are domestic purchasers and investors looking to buy, but we also have inbound investors. This means that even if demand cools domestically, international buyers could contribute to keeping prices high.”
