October Residential Comment – James Perris

“House Prices Overvalued by 30%” (Oxford Economics)

“House Prices to fall by 15%” (Credit Suisse)

“UK House Prices to fall by 10%” (Guardian headline)

“A plunge in house prices is now inevitable” (Telegraph headline)

Oxford Economics and others with opinions on current UK house prices all seem fairly sure that the housing market is plummeting downwards. But are they right?

When uncertainty happens, these economic bodies are always keen to preach doom and gloom. These were the opinions of the many experts and economists in various press reports a few months into the pandemic.

They were all proved wrong and house prices went up by 7% (Nationwide 2020).
These are the experts annual residential market predictions in the press and online over the last few years and the actual result:

There have been a few close calls, but generally the experts are pretty much all incorrect even though some of these companies spend significant resources predicting these house prices.

Another recent prediction by the UK Government was that house prices would fall by 20% due to Brexit. House prices went up.

So, I think what can be said with a strong degree of certainty is that we generally don’t know how to correctly forecast house price movements.

In my career I have been through the very painful 1990’s crash (almost 50% was wiped off house prices), the 2008 mini house price crash (a brief 10%) and the 2014 drop (20% fall at London upper tiers which have still yet to recover). I don’t recall anyone correctly predicting these falls.

From my own thoughts on the residential market over the years I have got some wrong and some right.

  • I bought property in 1988 and the market crashed. Wrong decision.
  • I bought as many properties as I could in the early and mid-nineties, as prices were so cheap. Right decision.
  • I stopped buying in 1999 as I thought the market was overheating. Wrong decision.
  • I sold property in 2006 as I felt the market was going to fall. Right decision for 12 months and then very wrong decision as Gordon Brown sent interest rates to nothing
  • With everyone preaching doom and gloom, I gave a talk in April 2020 to a lender and their clients saying the government would bring in incentives for the housing market and prices would go up. Right decision /advice.

So, what about now?

It is easy for anyone to say that at 6% mortgage rate levels this will correlate with average house prices of around £170,000 (against the current average of £290,000) which is what Oxford Economics and many others are basing their deduction figures on.

But I believe there are other factors to consider. The 1990’s crash saw interest rates go as high 15% (even going over 20% in one day as we wrestled with the ERM). Interest rates were generally over 10% for 4 years. That is a serious affordability issue when house prices are high.

According to the Bank of England over 80% of homeowners are currently on fixed mortgage deals. During the 1990’s crash everyone was on variable deals.

Many investors are already paying mortgage rates at 5% on their mortgages.

Most people were stress tested to 5% interest rates before taking out their residential mortgage at the historic lower rates.

The 2007 crash was caused by suicidal bank lending with some lenders offering buyers 120% loans. That has not happened again as banks have been much more cautious.

This current spike in affordability issues is being caused (Brexit aside) by short term worldwide problems, by the pandemic and Putin, (I’m not sure which one is the bigger virus!). This is not a long term economic cyclical issue. Therefore, I believe the interest rates will decline again fairly quickly – probably before any significant damage is done to house prices.

I believe some residential investors (22% of the resi market) will probably panic sell, as some did in the early weeks of the 2020 pandemic.
But according to all the London agents I am speaking to at the moment, there are buyers both UK and overseas that are still happy to buy. In contrast, at the beginning of the pandemic no-one was buying. After the 2008 banking crisis no-one was buying. After we left the ERM no-one was buying. After the change in stamp duty in 2014 no-one was buying at the top end of the London market. That inactivity is what causes house prices to fall.

To conclude, do expect a difficult few months ahead and that prices achieved over this time may not be as strong as they were in Q1 and Q2 2022. I will certainly not deny that difficulties in the property may occur at some stage, but I don’t believe we are at that time yet.

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