As property prices fall and the shockwaves from the September mini-budget are felt, industry voices are beginning to wonder if a housing market crash is on the horizon for the UK. Here, PBC Today explores the reasons a housing market crash may-or may not- happen
As we all know, a strong demand to buy and a limited supply of available properties tends to keep prices healthy, averting the chances of a housing market crash. But the recent Rightmove House Price Index found that the average price of a property coming to market had dropped by nearly £5000.
PMI data also shows a slowdown of housebuilding since May 2022, indicating less properties coming to the market.
The impact of the September mini-budget
Chancellor of the Exchequer Kwasi Kwarteng’s mini-budget on 23 September sent shockwaves through the financial and construction sectors, with plans to scrap the cap on banker’s bonus scrapped- and corporation tax and national insurance facing severe cuts.
The response from the market was swift, as the value of the pound plummeted to a 37-year low against the dollar, and performing similarly against the Euro and in Asian markets.
The International Monetary Fund even issued a statement, saying it was “closely monitoring” the situation in the UK and urging the Chancellor to “re-evaluate the tax measures”.
The Bank of England has since announced it will take preventative measures in a gilt purchasing operation. The Bank will will carry out temporary purchases of long-dated UK government bonds, to “to restore orderly market conditions”.
Industry responses to this unprecedented move have been generally lacklustre:
BoE is floundering here
— Neil Wilson (@marketsneil) September 28, 2022
How does the September mini-budget affect the housing market?
Despite the BoE’s measures, interest rates may still rise, as the Bank acknowledged in it’s statement. This is already having an impact on ordinary people as banks are temporarily suspending their mortgage loan products- HSBC, Santander, Skipton Building Society, Virgin Money and Halifax have already done so and others are expected to follow.
In a statement, HSBC said: “In order to ensure that we stay within our operational capacity, from time to time we need to limit the amount of business we can take each day. Our broker products will be available again tomorrow.”
Santander commented: “We will be removing our 60% and 85% loan to value products for new customers and increasing other rates for new and existing customers from 10pm this evening.”
“Customers who have already applied by this time will not be impacted. We continually review the products we offer in light of market conditions.”
HSBC also temporarily withdrew its new business residential and buy-to-let products on Tuesday.
Gary Wright, co-CEO of payment technology firm flatfair, said: “While those currently renting may be wishing for recent macroeconomic shocks to cause a dip in house prices, the fact is that higher mortgage rates means many buy-to-let landlords will be tempted to pass on the higher costs to their tenants.
“In the midst of a punishing cost of living crisis, private sector rents rising any faster won’t be sustainable. And yet both Labour and the Conservatives have reiterated pledges to increase the proportion of homeowners, despite climbing house prices continuing to put ever more people out of the reach of the housing ladder. There’s an underserved demographic in current political discourse – Generation Rent.”
The cost-of-living crisis is impacting buyer’s ability to save as housing stock contracts
Whilst the drop in property prices shown in the summer indices could be a typical summer dip in prices as affluent buyers focus on other recreational expenses, a large proportion of potential first time buyers and renters looking to move into homeownership are facing an onslaught of increased costs from the cost-of-living crisis.
Factors such as the rising energy price caps are impacting their ability to save or prove they can afford a mortgage. A lack of government support as Help to Buy comes to an end only compacts these issues.
The end of Help to Buy
The 2013 Help to Buy scheme, which allowed first time buyers to secure a mortgage with only a 5% deposit, is coming to an end in March 2023 and applications will no longer be accepted after October 2022.
As general inflation and rising interest rates continue to push prices up and there is no support from the government, many buyers will be priced out and demand will drop significantly.
A forecast from the American bank Citi predicted inflation would rise hit 18% in 2023, the highest level in nearly half a century and resulting in the rate of price rises for consumers to be at nine times the Bank of England’s target.
Schemes such as First Homes and Deposit Unlock are designed to fill the gaps left by the end of Help to Buy, but they are not perfect replacements.
Deposit Unlock, a collaboration between housebuilders and lenders, also offers a 5% deposit for new build homes and is supported by housebuilders, who pay for insurance to protect up to an additional 30% of the property’s value on behalf of their buyers to limit the risks for lenders.
But the scheme is not as generous as the equity loan scheme and will require salaries which are 10-15% higher. This will limit the number of suitable candidates and in turn reduce demand.
Will there be a repeat of the 2008 housing market crash?
It is worth remembering that the world has changed significantly since 2008 and the market has changed accordingly.
Having learned some lessons from 2008, banks are now much more stringent on ensuring potential buyers can afford their mortgage and properties aren’t as overestimated as they once were. This has reduced general risk in the market.
Post-pandemic, buyers have different needs and desires. Normalised working from home means a young professional or families can expand their search area from the city centre, seeking more rural locations and more affordable prices.
There is also a healthy transition in the market as older homeowners seek to downsize, continually renewing the market with more housing stock, often in desirable locations or condition.
Phil Tennant, chief operating officer of new iBuyer UPSTIX:
“All signs point towards demand tailing off, albeit from the frantic levels seen during the Covid boom. A cooler market in H2 means sale times will be drawn out even further, and some may even struggle to sell, particularly as higher rates make mortgages more difficult to acquire.
“This pressure will be much more acute in high-value markets in the south east, where affordability is already an issue. Landlords in particular who may be looking to realise equity gains made over the last decade or so would do well to move quickly.”
First Homes offers a long-term solution to the gap left by Help to Buy
Many homeowners are on fixed-rate mortgages and so won’t be affected by rising interest rates. In fact, it may inspire some canny buyers to move now and secure a favourable fixed rate for another five years, keeping momentum in the market.
The First Homes scheme offered by the government is similarly forward thinking, as it offers buyers a permanent 30-50% discount on a new home. This is designed to transform affordable housing, but it will take longer to see what impact it has on the market.
Gary Wright, co-CEO of payment technology firm flatfair:
“Even with interest rates creeping up, it’s still significantly cheaper to pay a mortgage than it is to rent. The issue is upfront capital – many renters struggle to find the deposit needed to buy a home.
“So why do we expect these same people to find five weeks’ rent – a huge sum, particularly in major cities – for a tenancy deposit? Payment technology has evolved past this point. We should be raising consumer awareness of deposit alternatives on the market, particularly as the cost of living crisis bites.”
We live in interesting times
If the past few years (or months, or weeks) have taught us anything, it is that things can change in an instant. As Liz Truss takes office and Simon Clarke has been chosen as the new Housing Secretary, both of whom will likely want to make an impactful statement on market and industry, new legislation could transform opportunities for first time buyers.
Equally, the cost-of-living crisis and global supply chain pressures means some people simply cannot afford to take risks or make investments. All these factors are sure to play a role in the changing face of the housing market over the next six months.
Harriet Clough
