Ireland is falling. The US is plunging. After 15 years of house price growth and five years of house price bubble [1], is the UK housing market aksi turning downwards? Will Elvis finally be spotted [2] on the moon?
Prices are certainly stalling, with a drop of 0.4% in London [3] last month according to the Land Registry. Not much after the stupid and socially divisive rises of recent years, but a start for those who’ve been astonished by their resilience.
Property indices never plunge suddenly in the UK; in previous downturns at least, they’ve more been chipped away at, like rental tenants wearing down a once-pristine buy-to-let flat. If prices do fall substantially, it’ll be through 0.5-1% a years (and with some positive months), not via a quick plunge back to sanity levels. (If you want to see the last five year crash in slow motion for yourself, you can download full house price data going back decades [4] from HBOS.)
What’s more significant I think than the slight price wobble is that mortgage lending is being reigned in [5]. If a banker is somebody who will lend you an umbrella when it’s sunny and then ask for it back when it rains, our banks see a monsoon ahead.
Now, a reduction in mortgage lending has previously been a great indicator of UK house price falls. But previously, such as in the late ’80s crash, that’s been because demand has dropped as people don’t want to buy houses any more. This time, mortgage supply is being constrained by banks trying to cut back on lending, either because of the risk or because of a lack of finance, even as they’re overrun by new customers who would have previously gone to the effectively neutered Northern Rock [6]. So who knows how it will play out.
A further interesting new bear point concerns remortgaging. Nobody thinks about this in normal times as anything other than a formality and a chance to cut costs. But this time around, some buyers coming off very keen fixed or discount rate deals who have little cash are finding they are unattractive to the lenders offering lower rates. As a result, the rate they can remortgage is a sharp step upwards.
In extreme cases, the more unappealing mortgage holders might struggle to find a mortgage at all, or at least not one without punitive and unaffordable interest payments, which would then mean they’d have to sell their homes at the prevailing market price.
You don’t need to be the Governor of the Bank of England for the words ‘vicious circle’ to spring to mind.
House price falls are now the consensus view
When even an estate agent starts predicting 15% falls [7], we’re in new territory. After years of calling the market wrong and looking like a Wally (it was a word fashionable back when I first turned bearish on property… ok, slight exaggeration!) I’m wary of putting my cojones on the line, even now. But it really does look like the fat lady might be loosening up for a bit of shrieking.
How far will they fall? By my reckoning London house prices are 40-50% overvalued [8]. Nominal falls might be partially masked by inflation over a period of years, but 25% or so lower from here by the time we reach the trough would seem entirely possible.