Is the UK heading for a housing crash?

Rising interest rates and the cost-of-living crisis threaten to trigger a sharp drop in UK house prices, according to expert forecasts.

The property market has boomed over the past decade, with the price of an average UK home reaching a record £286,079 last month – up by 1.1% from March.

And despite fears of a pandemic-induced property crash back in 2020, prices have “rocketed” by around 20% over the past two years, creating a “fresh affordability crisis in the UK’s property market”, said This is Money. The chasm between house prices and average wages is now comparable to that “seen just before the financial crisis” in 2008.

This continued climb against the backdrop of Covid shows that “Britain’s housing market is completely unhinged from economic reality elsewhere”, said the i news site’s housing correspondent Vicky Spratt. Repeating “a question I have asked repeatedly”, she added: “How long can this go on and how worried should we be?”

Quite possibly now that mortgage lenders are reducing the valuations they are asked to fund

There have been predictions of the collapse of the housing bubble for years now, but house prices are still rising, interest rates are still fairly low compared to what they've been in previous years, anyone remember the horrors of the 80's?

Increased house prices are due to immigration, accumulation of housing stock by certain groups of people and the lack of newbuilds. Until the social situation is changing I don’t believe house prices will reduce much. Investing in brick and mortar is still the best defence against inflation.

Any existing mortgage borrower since 2013's MMR will have had their affordability stress tested at a mortgage rate up to 7%.

The traditional measure of property affordability - ie average price divided by a single average wage is now rather old hat.

Firstly cos DCLG say 75% of FTBs are couples - many of whom will have 2 full time wages to generate higher borrowing.

FTBs typically buy at around 60% of average price in most cases.

Payable mortgage interest rates for the past decade are now around 1/3rd of the payable rate which was in place for the final 3 decades of the 20thC - and in both 1978 and 1990 mortgages rates hit 15% albeit transiently in each case.

With such low rates as we have today - and with average existing mortgage being around £140k - it is no surprise that servicing the average existing mortgage costs little more than Social Rents.

In Surrey a new build Housing Assoc 2 bed flat has Rent at £1000 pcm - the same as FTB mortgage payments on a £228k loan for FTBs in Greater London (who have an average £100k deposit - and £60k gross earnings).

Nationally the average FTB borrows around £120k with repayments at around 20% of gross household income of £38k with a 25% deposit - with mortgage servicing cost around 20% of gross earnings - same as applies for Greater London FTBs.

Whilst debating the state of UK housing market - one can not ignore what is happening in the Private Rental Sector (PRS).

The last annual edition of English Housing Survey (EHS) flagged that PRS had in previous year decreased in size from 20% to 19% - whilst that drop means of course that the sector now has 5% fewer rentals than in the previous year.

Various Govt interventions are to blame - Section 24 was announced in 2015 and now acts to largely tax Landlords not on the usual Net Profit basis - but on a far greater bias to gross Turnover basis.

Hence with an increase in Landlord costs - the inevitable result is Rents also get increased.

Govt also seems intent on removing Section 21 (so called no fault eviction). Some groups will rejoice at removal of S.21 - but this does mean that Landlords now have their hands tied in the event of anti social behaviour by a Tenant - so if neighbours complain to Landlord - he/she can only refer them to the Council to take action. Reason being that the alternative Section 8 Notice mandates a very high burden of proof and witness statements - latter likely to be withheld due to fear of retaliation.

Some reports are suggesting that 11,000 rentals are being removed from sector every month - whilst demand is growing.

At the same time - new investment in the PRS is majorly discouraged via the 3% SDLT surcharge (4% in Wales) as well as the extra challenges in regaining possession.

This could well mean that more young adults may be forced to remain in parental home - unless they can afford to buy.

Likewise Social Rental Sector (SRS) has since 1980 deceased in size by 33% in nominal terms and by 45% in percentage terms (overall UK housing stock has increased since 1980 by around a quarter).

Childless working age singletons/couples have always been at back of a long queue in in terms of accessing SRS - with most working households also being put on back burner via the 1977 change to needs-based allocation in SRS. Latter was further reinforced via the 2013 law change which allows Councils to refer homeless households to PRS.

CircusMaximus 14-May-2022 09:39
The property market has boomed over the past decade, with the price of an average UK home reaching a record £286,079 last month – up by 1.1% from March.

It's not the average UK home price, isn't it the "average price of a UK home" that's quoted.

I appreciate that we can tell a lot about trends etc based on averages (but statistics can pretty much tell you whatever you need them to depending on how they're calculated), but it never ceases to amaze me why the average price of a UK home is always quoted as a market barometer.
They might as well say the average price is the same as 10 Olympic size swimming pools, or 14 London double decker buses, or 5 football fields.
They would all have as much meaning when looking at the whole of the UK.
Unless you took a snapshot of every single property you'd be hard pressed to even accurately assess the average price within the Borough I'm in let alone Greater London as a whole where prices can vastly differ even a few miles down the road when you cross into another Borough.