UK housing market is getting desperate once again

IN 2008, if you wanted a new car, you could get one free – as long as you were prepared to buy a house. 

The global credit crunch was well underway and no one really wanted to buy a house from the UK’s nearly bankrupt house builders. That did not sit well with the nearly bankrupt house builders. So they started offering incentives – cash back, free kitchens, taking over buyer mortgage payments for a year or two – that sort of thing. In Scotland, one developer even offered buyers mad enough to buy into an obvious housing crash a “free” car –  a £15,000 Mercedes (US$17,810 by today’s conversion). Cala Homes went further: their incentive package offered £30,000 worth of cash, carpet and landscaping.

It didn’t make much difference. Nothing screams end-of-a-mania more than a Merc chucked in as a perk. House prices across the UK fell 15 per cent between January 2008 and May 2009.

I am sorry then to report that the house builders are at it again. If you want your mortgage paid for a couple of years, a few grand to cover your legal costs or even just a complimentary fridge or furniture pack, give one of them a call. I’m pretty sure they’re waiting by the phone. Why? Because, once again, they have to be.

Persimmon recently noted, for example, that buyer cancellations are up and weekly sales per site are down. Nationwide and Halifax have both reported small declines in month-on-month nominal prices (so quite large falls in inflation-adjusted prices), and the latest numbers from the RICS Residential Market Survey display the market’s miseries in full.

The net balance of surveyors reporting rising house prices in the last three months fell to -2 in October from +30 in September, according to the RICS data. That’s the largest drop on record since the survey got going in 1978. As Pantheon Macro Economics put it, that’s pretty “clear evidence” that house prices are on the way down.

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Volumes are falling too. The new enquiries balance fell to -55 – not far off the nasty numbers seen in the global financial crisis, when it reached -67.

Beyond the house builders, sellers are beginning to get the message too: Zoopla reports that around 7 per cent of houses currently on the market have seen their prices cut by 5 per cent or more. No wonder the bribes are back. All this, says Pantheon, is consistent with monthly mortgage approvals falling below 40,000 by the end of the year – a level we haven’t seen since the dark days of free cars last time around. Falling mortgage approvals pretty much always mean falling prices.

This shouldn’t come as a surprise to anyone. When interest rates go up, the monthly payments on any given amount of borrowed money go up, the maximum amount you can borrow goes down and so then does the maximum you can pay for a house. And, contrary to popular belief, it is not the supply of houses but fully financed demand for houses – what people can afford to pay for them – that actually determines prices. Mortgage rates go up, volumes collapse as the market adjusts and then prices begin to slide. The dynamic is always the same.

And mortgage rates have most definitely been going up. The average rate for a three-year fixed-rate mortgage rose from a mere 1.64 per cent in January (practically free money) to just over 4 per cent in September and then to 6.01 per cent in October. A 25-year £250,000 mortgage on a rate of 1.64 per cent costs £1,016 a month. One on 5.5 per cent (rates have slipped back a little since October) costs £1,535 a month. You get the idea. Rates up, house prices down.

There are complications in here, of course. A wealth tax, a rejigging of council tax or a change to the capital gains tax regime on primary homes in the UK are all possibilities in the near future. That’s on top of a long list of disadvantageous tax changes being imposed on buy-to-let property owners. This all adds more of a negative overlay on the housing market, as does the cost-of-living crisis, since spending more on energy bills leaves less for mortgage payments.

A fall in mortgage rates (entirely possible as the economic weakens) would cheer things up a little. But we can also take heart from the fact that the majority of mortgage debt in the UK is held by those with the deepest pockets. As the analysts at Berenberg point out, the top 50 per cent of households have around 86 per cent of mortgage debt and the bottom 30 per cent a mere 5 per cent. One might hope that some savings buffers at the top will mean no nasty round of 1989-1992 style defaults (house prices fell 20 per cent in that crash).

Property bulls will also point to the fact that most house price wobbles in the UK resolve themselves pretty quickly. March 2020 barely counts as a crash: Prices were actually up 8.5 per cent by the end of the year. None of the horrible Brexit-related crash predictions came to pass. And even 2008 turned out to be not much more than a blip for most people: Prices were back to peak levels pretty much everywhere by 2012 and positively boomed after that. Buy the dip, they will say. You can’t go wrong with UK property.

Yet there is a problem with this argument. In 2008 and in 2020, mortgage rates did not go up; they went down. In 2007, the base rate was 5.5 per cent. By 2008, it was 2 per cent. In 2019, it was 0.75 per cent. By the end of 2020, it was 0.1 per cent. That’s not going to happen this time around.

Sure they may flatten or fall slightly. Consumer spending in the UK is sensitive to house price shifts. (How can it not be given this is pretty much all we talk about?) So the more surprised the Bank of England is by house price weakness – and what is the BOE not surprised by these days? – the more likely they will pull back from the current tightening cycle.

Mortgage rates may fall back to 4.5 per cent or the like. But fall by 50 per cent plus again? I don’t think so. This is not 2007, and it is not 2020 either. You may soon find yourself wishing that it was. In the meantime, if someone offers you a free car, just say no. BLOOMBERG

The writer is a senior columnist for Bloomberg Opinion covering personal finance and investment. Previously, she was editor-in-chief of MoneyWeek and a contributing editor at the Financial Times. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.