Will the housing market crash? We have been asking the question for two decades now as prices have climbed to ever higher multiples of earnings. But apart from a few months in 2008 and early 2009, when prices did slide appreciably, it never seems to happen. Stock market corrections come and go but nothing will seem to dislodge housing from its inflated heights.
Having just gone through the most unlikely property boom in history, however – in which prices have surged throughout a pandemic – it is worth asking again. If we really have reached the end of the age of ultra-low interest rates that would remove the engine that has driven the long housing boom of the past three decades. You have to be in your mid-50s at least, now, to remember the days of double-digit mortgage rates. It is safe to say that today’s house prices would not be sustainable in such an environment. Many people would be spending their entire salaries servicing their mortgage.
If you are waiting for a housing crash in order to get your toes into the market, however, don’t get too excited. With inflation at a 30-year high, the Bank of England’s base rate is widely-expected to rise further from its current level of 0.5 percent – the bank’s monetary policy committee only narrowly voted against raising them to 0.75 percent at its February meeting. Markets, however, are not expecting rates to peak at much higher than 1 percent. And, with the global economy in shock from the invasion of Ukraine, don’t be surprised if further rises in rates are suspended for the moment as the Bank begins to wonder whether the world could be thrown back into recession, with all the deflationary forces that would entail.
Are conditions right for a crash? Relatively fewer properties are now held on high loan-to-value ratios than in the past. The era of 95 percent mortgages effectively ended with the credit crunch in 2007, since when only a limited number of such loans have been issued, mostly to first-time buyers under government incentive schemes backed with taxpayers’ money. In the second quarter of 2007, 52.4 percent of mortgages had a loan-to-value ratio of over 75 percent, 9.3 percent were over 90 percent and 5.5 percent were over 95 percent. The corresponding figures for last year were 40.3 percent, 3.9 percent and 0.3 percent. Moreover, more homes are now mortgage-free than was the case during 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. It means there will be fewer distressed sellers than was the case 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. George Osborne began to discourage buy-to-let investment with a three percent surcharge for properties bought as anything other than a main home. Since then, the government has withdrawn tax advantages and piled on costs for investors. Now, landlords are steadily being forced to upgrade the Energy Performance Rating of their properties before being allowed to let them – which could land investors with bills of tens of thousands of pounds in the worst cases. So, might investors be inclined to get out of property, dumping huge numbers of homes on the market?
One certainty house owners can rely on is that the government and bank of England 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 this week the Bank of England has proposed to relax the 'stress tests' that banks are expected to apply when deciding on mortgage applications – with the result that borrowers could find themselves able to take out larger mortgages, and applying inflationary pressures to house prices.
Compared with the stock market, things happen at glacial pace in the property market. We don’t have daily property market index like we have a FTSE index. It is a much longer and more expensive process to sell a property than sell a bunch of shares, which means we are unlikely to see panic grip the property market in the way it often does in stock markets. Where people have invested in property it has often been with the intention of remaining in for the long haul. Many landlords can be expected to bear quite a lot of pain before they are moved 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 as a surging stock market. For now, conditions do not look good for further rises in the housing market, and stagnation in prices is looking more likely. That said, few would have imagined the strength of the market over the past couple of years – so I wouldn’t want to bet against a rising housing market.