Why UK House Prices are not Collapsing
The UK housing market has defied predictions of a major price crash. Despite rising interest rates and a cost of living crisis, average house prices remain close to record highs. In this blog post, we’ll explore the factors preventing a housing market collapse.
Introduction
Many forecasters predicted house prices would fall by 10-20% in 2022 due to rising interest rates and inflation. However, the latest data shows average UK house prices increased 0.2% year-on-year in August 2022. Prices in London are down just 1.4% from last year’s peak, while incredibly, Scottish house prices just hit a new record high.
Clearly, there has not been a mass exodus of home sellers triggering a price collapse. While these figures are not adjusted for inflation, the resilience of the market has still surprised experts. Let’s look at why a housing crash seems unlikely.
Low Mortgage Arrears and Repossessions
The majority of homeowners have large equity stakes in their properties, meaning prices would need to fall significantly before they were forced to sell at a loss. Low loan-to-value mortgages are now the norm – around two-thirds of new mortgages in Q2 2022 had LTVs below 75%.
Despite rising interest rates, mortgage arrears and repossessions remain low – only 1.3% of mortgages were in arrears in Q2, and repossessions were just 0.04%. This contrasts sharply with 2009, when repossessions were 10 times higher.
Most borrowers remain on fixed rate deals taken out when rates were lower. With large equity buffers and low arrears, forced sales driving down prices look unlikely.
The ‘Missing’ Generation of Homeowners
An interesting trend in the mortgage data is the drop in total mortgages, despite population growth. There are now 2.8 million fewer mortgages than in 2008, even though the population has risen by over 6 million.
Much of this population growth has come from immigration – adults needing housing. So why haven’t they become homeowners? This ‘lost generation’ of homeowners reflects barriers like high deposits and stamp duty faced by first-time buyers in the 2010s.
Government Schemes Prop Up Demand
The government has introduced various policies aimed at helping more people onto the housing ladder. These include 5% deposit mortgages, stamp duty discounts for first-time buyers, and the First Homes scheme offering discounts on new-build homes.
While well-intended, critics argue these policies have increased demand without significantly boosting supply. They have kept prices high rather than improving affordability. Second-time buyers face higher deposits and no stamp duty relief, disincentivising moving up the ladder.
Too Few Starter Homes Being Built
House builders focus on higher-margin family homes over cheaper starter homes. For example, just 15% of Barratt’s 17,206 homes built last year had 1-2 bedrooms. More were 3-6 bed houses unlikely to suit first-time buyers.
The five largest builders together added around 60,000 homes last year – just 0.2% of the total housing stock. Even if the government hit its 300,000 homes a year target, that would only increase supply by 1% annually. These incremental increases are unlikely to crash prices.
Pent-Up Demand from Immigration
Housing demand remains high, fuelled by high levels of immigration. Each new migrant requires housing, whether buying or renting. The UK’s failure to build enough homes to meet demand has created a supply-demand imbalance at the lower end of the market.
With demand outstripping supply, subsidised schemes artificially stimulating more demand, and tight lending keeping forced sales low, prices are likely to remain high. Only a large, sustained increase in supply could trigger a crash.
Conclusion
In summary, unprecedented government intervention in the housing market through demand subsidies, tight mortgage lending, and demographic pressures have bolstered house prices. A generational shift to homeownership was missed in the 2010s. While prices may stagnate or fall slightly, a drastic crash still appears unlikely without major increases in supply.