Are house price forecasters finally justified in using the C-word?

As we reported in September [1], the property market continued to boom despite the direst predictions of experts. But given recent global events, is there a reason for pundits to predict a crash?

In our last blog on this subject seven months ago, we largely came to the conclusion that things would, largely, turn out as they have so far. That is, no spectacular stampede to exit the housing market and, having sifted thoroughly through a wide range of historical metrics and commentaries on your behalf, we remained unruffled in the face of the economic headwinds.

Despite alarm bells ringing from many quarters, the nation was steadily experiencing the most unlikely property boom in history, thanks mainly to low-interest rates, the Stamp Duty holiday and changing work habits. According to the Halifax Price Index [2], in the two years since the lockdown began in March 2020…

Average property prices rose

18.2%

And the average house price rose from £239,176 to  

£282,753 

Although, as we pointed out last time, nobody buys an average house in an average area – so we need to look at how those figures break down into house types and regions.

Well for one thing, it’s clear that the ‘race for space’ continued right through that 2 year period, so bigger houses gained popularity. The prices of flats, according to Halifax, increased by a mere 10.6% or £15,404 since March 2020, compared to the average price of a detached property, which jumped 21.3% or £77,717 over the same term.

And while Halifax (along with Nationwide) is considered one of the most reliable indices of house prices, they’re weighted by transaction volume (which can skew our view of prices because houses sell at varying values) and are based on a small volume of sales, so we should also ground these respected figures against Land Registry data (based on actual transactions), which has the ONS stamp of approval:

…but while we’re splitting the data out, the good news for our investors is that price growth has been significantly higher for new build properties:

However, the race for space didn’t mean buyers deserted London altogether. Halifax [2] says prices in the capital are up by 5.9% year-on-year, with an average price of £534,977. But whereas Wales was until recently the strongest performer in annual growth terms, it’s finally been overtaken by the South West – now up 14.6%, its highest annual growth rate since September 2004, at a record regional average price of £298,162. Homes in the Principality are still pushing record levels, though – at an average of £211,942.

Scotland also hit a new record of £194,621 – although the growth rate is now slowing, at 8.2% from 9.3% last month. The South East continued to boom, with growth of 11.6% and an average price of £385,790.

But of course, before March this year, all we had to worry about was a global pandemic, supply shortages and some after effects of Brexit.

Since then, you wisely point out, the world has revolved again. On the one hand, the threat of the pandemic has broadly receded (in England, at least), and on the other, the global fuel crisis has thrown the damp cloak of inflation over the world’s economies.

At which point, we ran out of hands as Mr. Putin rolled up in his tank, with his ruinous attitude to real estate.

So we felt it was time to sift the tea leaves again and give you our revised opinion, if any, and those of the Doomsters and Gloomsters who coloured our last blog (there were precious few Boomsters). What are their thoughts now?

First up, Savills (whom you may remember predicted a 10% price drop in 2021), are a little more circumspect than they were then. In January, they posted a blog [3] explaining away their former pessimism thus:

“…at the beginning of the pandemic, we were looking at how housing markets had reacted to previous recessions. That was until it became clear that the experience of lockdown was causing a behavioural change in terms of what people wanted from their home which, together with the substantial support the Government provided to the economy, sparked an unexpected mini boom in the housing market.”

As a result of this, they were reasonably chipper going into 2021, predicting five year growth to 2025 of  21.1% [4] and this continued to the summer:

“at the half year point we upgraded our house price forecasts from +4.0 per cent to +9.0 per cent for 2021.”

However, by November, their 5 year prediction had chilled to 13.1%:

Still, in February 2022, despite the rumble of guns from the East, they reported that lack of stock meant demand showed no signs of abating [5], although they showed some concern that the rise in living costs would squeeze the spending power of upsizers in high value areas, with the shadowy observation that “realistic pricing” may become more important. However, they felt the ‘Race for Space’ would “remain a core component of the market going forward”.

Frances Clacy, Research Analyst at Savills, commented:

“The imbalance of supply and demand, coupled with existing high levels of property wealth, will continue to fuel price growth in the coming months, despite the recent rate rises.

“However, some cohorts are feeling the squeeze on finances more than others as high levels of price growth has eroded affordability in some areas, particularly in high value locations.”

We feel bound to point out, however, that all the above prophecies were aired before the Ukraine war really kicked off, and before the massive fuel hikes, labour shortages and rising interest rates. We’re not holding our breath for a new update any time soon, given the volatility of world affairs.

Gloomster No.2 was Knight Frank, who in 2020 predicted a 7% drop, but who also managed a little smile as the improbable boom continued. Their Head of Residential Research, Tom Bill, recently agreed with Savills that “the strength of demand remains unwavering for now” [6], the number of new UK prospective buyers in November and December 2021 being “63% higher than the average between 2015 and 2019”. Nevertheless, Tom was also unable to resist pointing a trembling finger at the clouds on the horizon, predicting that borrowing costs may put a “dab on the brakes” (but no more) later in the year. However, the main difference between early 2020 and now, he maintains, is inflation – predicted to breach 7% this year. This will both put a direct drag on house prices and increase pressure on the Bank of England to raise interest rates.

The mood of the financial markets bears this out, agrees Tom’s managing partner, Simon Gammon, with the 2 year Swap Rate (a leading indicator for mortgage rates) flipping above the five and ten year rates for the first time in living memory [7].

What this tells us, Gammon says, is that “there is more risk on a two year horizon than there is on a five or ten year one, meaning the market thinks the next two years will be very unpredictable”. But he points out that what’s different now to any other time in history, is that “wages are out of control, interest rates are vulnerable, (and) inflation is soaring to levels which are unique to Covid 19.” Hmmm.

But overall, the mood at Knight Frank is relatively sporty, the return of air travel providing a puff of wind beneath the market’s wings. On balance, then, they predict that housing will “somewhat counter intuitively for the second year running, have a strong 12 months”.

Lloyds Banking Group (who originally predicted a 5-10% drop), have also warmed up considerably in their outlook. Mortgage Director Andrew Asaam said in January [8]:

”Throughout the pandemic a combination of rising inflation and historically low interest rates meant that many first time buyers were forced to save for higher house deposits than they may have bargained for.

“The good news looking into 2022, though, is that 95% mortgages are once again available to first time buyers. And despite higher inflation and an increase in interest rates, average rates on those mortgages hit a record low in 2021, and continues to remain at low levels”.

He also pointed out that the combined fertiliser of furlough payments and lockdown saving had helped people grow their deposits anyway. So all in all, Mr. Asaam expects the rise to continue, but to flatten out to around 1% this year, although he iced his words with the rider that this would depend on “a number of factors”.

This mild optimism, of course, is tempered by Lloyds’ announcement on 27^th April that while borrowers’ arrears are still below pre-pandemic levels, it was braced for a rise in defaults as the cost of living crisis bites [9].

Nationwide, meanwhile, reported that prices continued to accelerate from 12.6% in February to 14.6% in March [10]. Their Chief Economist, Robert Gardner, commented in March that he was surprised the market kept its momentum “given the mounting pressure on household budgets and the steady rise in borrowing costs”, but it had done so thanks to a combination of robust demand, limited stock, unemployment at 3.9% and accelerating wage growth.

He further commented that mortgage approvals stayed at nearly 10% above pre-pandemic levels in February – around 71,000. This may also, he said, be partly down to lockdown savings enabling people to save more easily for deposits. He estimated that…

“households accrued an extra c£190bn of deposits over and above the pre-pandemic trend since early 2020, due to the impact of Covid on spending patterns. This is equivalent to around £6,500 per household, although it is important to note that these savings were not evenly spread, with older, wealthier households accruing more of the increase”.

However, Gardner agreed with his peers that “the housing market is likely to slow in the quarters ahead”.

Well, if you keep making a prediction often enough, it’s got to come true eventually, eh, Bob?

Elsewhere, predictions vary, but are similarly modest. Zoopla’s runes point to 3% growth this year [11], while Tim Bannister, Director of Property Data at Rightmove, expects a slowdown in the second half of 2022, as “base rate rises, higher inflation and higher taxes begin to weigh more heavily on buyer sentiment.” He predicts prices will rise 5% in 2022, with steadier 3% growth in London [12].

But looking at the Land Registry’s latest regional figures the slowdown is already dramatic in most parts of the UK except London.

To remind you, this was the June table we showed you last time:

In February, the picture looked like this:

As you can see, the South West and the Northern regions are currently still beating the national average, but London is outstripping them all, despite the predicted Covid escape to the country.

This relative buoyancy in the capital prompted estate agent Chestertons to urge London buyers to be prepared to act fast [13]. Their market analysis for January pointed to “51 per cent more buyers entering the market and 35 per cent more property viewings compared to January last year”. This coincided with 8% fewer homes on the market compared with January 2021, triggering bidding wars. Homeowners responded by digging their heels in, with 44% unwilling to drop their asking prices.

Chesterton’s Chief Executive, Guy Gittins, commented:

“Last year, we saw many house hunters feeling left in limbo as the impact of the pandemic created a strong sense of economic uncertainty. Since then, buyer confidence has clearly returned and there has been a drastic increase in demand for houses and apartments alike.

“To see new buyer enquiries of this scale at the beginning of the year is truly remarkable and a strong indication for the market to remain buoyant for at least the first half of 2022.”

So what forces could weaken house prices in 2022?

University of Reading’s Professor Geoff Meen, whom we quoted last time as saying the market is vulnerable to a shock at any time, has offered no new portents between the ‘end’ of the pandemic and the start of the war. Another of his observations at the time, however, was the effect of real income on house prices:

“As an approximation, a 1% reduction in real income has historically led to about a 2% reduction in house prices. So if incomes had fallen at the same rate as GDP (the orange line below), we may have experienced a double-digit fall in prices [14].”

Of course, they didn’t – but it’s possible we might we see a version of this effect later next year if the Office for Budget Responsibility (OBR) is correct. They predicted that real household disposable incomes per person will fall by 2.2% in 2022-23 as earnings fail to keep pace with soaring inflation [15], bringing about the biggest fall in living standards in any single financial year since ONS records began in 1956-57.

The Bank of England increased Base Rate to 0.5% in February, as inflation reached a 30 year high of 5.5% – and was at the time forecast to pass the 7% mark by June. It has now just increased Base Rate to 1.0% (the highest rate since the financial crash), which should dampen housing demand.

So, too, might the rise in building costs – reducing appetite for ‘doer-ups’ – and fuel prices, which may slow down the Race for Space, as the thought of heating bigger homes and commuting longer distances drives them to batten down the hatches.

Price growth would also be slowed by an increase in housing stock. Values have been shored up by what Property Mark tells us is the lowest ever supply of houses on record [16].

However, they recorded an 80% increase in housing stock in January, which could have a dragging effect on values [17].

We might also expect a boost in housing supply from landlords exiting the buy-to-let market, as they’re squeezed out by increased regulation and tax hikes. A recent survey found that 20% of landlords are planning to sell their property [18]. With an estimated 4.5 million privately rented properties in the UK, this could make quite a difference to the market.

So what do we think at CapitalStackers Towers? Well, irrespective of what everyone else is saying, we are bound to say that we are seeing some delays and cost escalations. The supply chain is certainly not fully healed following the pandemic (and even showing signs of stress from the Ukraine fallout). Even with the best borrowers and construction teams in the world – all it takes is for a site to run out of bricks (as one of CapitalStackers’ sites did recently) to bring things to a halt.

And of course, we’re keeping a weather eye on the UK Consumer Confidence Index – currently at its lowest for 14 years [19]. That’s always been our weathervane for sales.

Sean O’Grady in the Independent [20], concurs:

“consumer confidence is closely associated with movements in house prices, and on that basis, and the basis of the trends in wages and interest rates we’re likely to experience in the coming months – a housing crash is pretty much an inevitability.”

…as does Matthew Fish at Harrisons Estate Agents in Bolton, who said:

“With less money in people’s pockets, people’s inclination to spend the money they do have could also be curtailed” [21].

Then again, for those who remember his namesake Michael’s 1987 hurricane prediction, how worried should we be?

Is it time to worry about affordability?

Possibly – particularly at the bottom end of the market, where more buyers are sensitive to cost of living rises.

Sales of cheaper homes have plummeted as rocketing costs cut demand on the lower rungs of the housing ladder, precipitating a fall in sales of less expensive homes [22].

Simon Rubinsohn, Chief Economist at the Royal Institution of Chartered Surveyors said:

“A larger share of the burden of the cost of living crisis will be on people with lower incomes. It will affect the ability of many renters to get on the housing ladder. Their ability to save will be constrained at a time when interest rates are going up [23].”

However, again we feel the need to temper the hysteria with a little perspective. Granted, affordability is now worse than a couple of years ago, but not even as bad as it’s been in the last 10-15 years – and it’s nowhere near the apogee that precipitated the 2007-8 crash.

Away from the lower rungs, there remains considerable variation in affordability across different occupational cohorts.

Andrew Wishart of Capital Economics, who predicted that prices would rise last year (although only half as high as they did), uses mortgage rates as a predictor. The feeling in his water is that prices will drop by 5% over 2023-24 [24], because the cost of borrowing will squeeze people’s ability to make ever-higher bids.

However, Mr Wishart said: “We are not expecting a repeat of either 2008 or 1990, when house prices fell by about 20pc. First, while the house price to earnings ratio is roughly the same now as in 2007 we do not anticipate a return to pre-financial crisis mortgage rates of 6pc, so the cost of mortgage repayments will remain much less of a burden.

“Second, strong pay growth means a modest fall in prices will be enough to return the house price to earnings ratio to a more sustainable level.”

Again, we should beware being drawn into predicting on the basis of averages. For instance, common sense might suggest that people in better paid professions can more easily afford the average house – but better paid people tend not to buy the average house, and so their ability to afford the kind of houses they want – or to match their peers – can still be an overstretch.

However, that still doesn’t point to a price crash. Another key difference between 2008 and 2022 is that nowadays, relatively fewer properties are on high loan to value ratios than in the past [25]:

LTV Ratio	Q2 2007	2021
>75%	52.4%	40.3%
>90%	9.3%	3.9%
>95%	5.5%	0.3%

Moreover, more homes are now mortgage free than in past property booms – the number of properties held with no mortgage overtook the number of homes with a mortgage for the first time in 2013-14.

This means there will be fewer distressed sellers than in the past, even if interest rates do rise appreciably. On the other hand, a third of homes are now owned by investors rather than owner occupiers – and the regulatory and taxation environment for them is becoming increasingly hostile.

The credit crunch in 2008 pretty much cut off the supply of 95% mortgages, save for those to first time buyers under government incentive schemes backed with taxpayers’ money. As they became more available (following their recent reintroduction by a few operators), the rates remained low throughout 2021.

Still – the pressure is mounting on mortgage payers. Nationwide reports in its affordability survey that the cost of a typical mortgage as a share of take home pay is now above its long term average in the majority of UK regions. Pre-pandemic, this was only the case in London. If rates for new mortgages were to rise, this would squeeze affordability further for prospective first time buyers.

But recent price patterns show that a rebalancing is starting to happen – most of the regions that saw the strongest growth are those where affordability remains at or better than the long term average. Despite the sharp rise in swap rates, mortgage rates have stayed close to all time lows.

This suggests that, providing the economy doesn’t falter significantly (which, of course, is by no means a given), the impact of a modest rise in interest rates for existing borrowers is likely to be low, given that only 20% of outstanding mortgages are on variable rates. Higher interest rates are likely at worst, then, to moderate growth in the housing market, and soothe price pressures across the economy more generally.

As we said in the last white paper, one near certainty house owners can rely on is that the Government will act fast to prop up the property market at the first sign of a collapse, just as Rishi Sunak did by introducing a stamp duty holiday in the early months of the pandemic.

Already the Bank of England has proposed relaxing the ‘stress tests’ that banks are expected to apply when deciding on mortgage applications – meaning borrowers could find themselves able to take out larger mortgages, and this could buoy up house prices if hearts start to flutter.

And even as we prepare to publish, the predictions are still coming thick and fast. The race to be first to predict a crash is in earnest. In a long and widely-researched article in the Telegraph on 8^th May, [26]young Tim Wallace (whose career started a couple of years after the 2008 crash) refers to many of the same sources that we do – including Andrew Wishart’s assertion that he doesn’t expect a crash. He also makes the point, as we have, that most homeowners don’t have a mortgage and most of those who do have fixed rates. And that debt interest now constitutes only 3.3% of household incomes today, compared with over 12% in the 1990s. He points to the comparative strength of the economy and the stringency of current stress testing. And yet he somehow manages to wind himself up to the conclusion that an “almighty” crash will almost certainly come (although he uses the word “eventually” twice in his final paragraphs. A crash will come, he concludes, just because.

He revisits the horror stories of 1989-93 and the late 2000s, citing those 19-20% tumbles without referring back to the germane economic differences between those times and now. Yes, mortgage rates will rise, but they’re a long way from being anything like those that expedited those crashes.

So could we see a housing equivalent of a stock market crash?

From the evidence to hand today, we think it’s unlikely. For one thing, it takes much longer and costs much more to sell a property than sell a bunch of shares, which means we’re unlikely to see panic grip the property market in the way it often does (and is doing now) in stock markets. When people invest in property it’s usually with the intention of staying in for the long haul. So we can usually expect landlords to bear quite a lot of pain before they’re pushed to sell. All of which makes a housing crash less likely than a stock market crash.

By the same token, house prices rarely rise with quite the enthusiasm of a surging stock market.

All of which leads us to a tentative conclusion – conditional upon what Harold Macmillan might have called ‘events, dear boy’. Statistics printed today can be rendered meaningless tomorrow by events.

For now, conditions don’t point to any further big rises in the housing market, and stagnation is looking more likely. The war and continuing pandemic-related supply chain problems in China are making big waves and are likely to do so for some time to come. This means the recent stellar performance of the market is almost certainly not going to continue and will be replaced by only modest growth – or even a modest fall.

In short, if we were to use a C-word, the portents point to ‘Correction’ rather than ‘Crash’. But however the future unfolds, the good news for us and for you, our investors, is that we’re not selling houses – we’re lending money against them. And someone else is taking the equity risk.