UK Housing Market Is Getting Desperate Once Again

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

The global credit crunch is well underway and no one wants to buy a house from the near-bankrupt UK house builders. That doesn’t sit well with nearly bankrupt home builders. So they started offering incentives – cash back, free kitchen, taking the buyer’s mortgage payment for a year or two – that kind of thing. In Scotland, a developer even offered buyers who were crazy enough to buy an apparently crashed house a “free” car – a £15,000 Mercedes ($17,810 at today’s conversion). Cala Homes continues: Their incentive package offers £30,000 worth of cash, carpet and landscaping.

Nothing makes much difference: Nothing screams end-of-a-mania more than a Merc chucked in as a perk. House prices across the UK fell 15% between January 2008 and May 2009.

I’m sorry to report that the home builders are at it again: If you want to pay off your mortgage in a few years, a few grand to cover your legal costs or even a complimentary fridge or furniture pack, give one of them called. I’m sure they’re waiting by phone. Why? Because, again, they have to.

Persimmon recently noted, for example, that buyer cancellations are up and weekly sales per site are down. Nationwide and Halifax both reported small month-over-month declines in nominal prices (so big falls in inflation-adjusted prices), and the latest figures from The RICS Residential Market Survey shows the market’s woes in full.

The net balance of surveyors reporting house price increases in the last three months fell to -2 in October from +30 in September, according to RICS data. That’s the biggest drop on record since the survey began in 1978. As Pantheon Macro Economics says, that’s pretty “clear evidence” that home prices are bottoming out.

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Volumes are also falling. The new balance of questions fell to -55 – not far from the bad numbers seen in the global financial crisis, when it reached -67.

Beyond home builders, sellers are also starting to get the message: Zoopla reports that nearly 7% of homes currently on the market have seen their prices cut by 5% or more. No wonder the bribes are back. All this, says Pantheon, is consistent with monthly mortgage approvals falling below 40,000 at the end of the year – a level we have not seen since the dark days of free cars last season. Falling mortgage approvals often mean falling rates.

This should not surprise anyone. When interest rates increase, the monthly payment on any given amount of borrowed money increases, the maximum amount you can borrow decreases and so does the maximum you can pay for a home. And, contrary to popular belief, it’s not the supply of homes but the fully funded demand for homes — what people can afford to pay for them — that actually determines prices. Mortgage rates rise, volumes collapse as the market adjusts and then prices begin to slide. The dynamic is always the same.

And mortgage rates are definitely up. The average rate for a three-year fixed-rate mortgage rose from just 1.64% in January (practically free money) to over 4% in September and then to 6.01% in October. A 25-year £250,000 loan at a rate of 1.64% costs £1016 a month. One at 5.5% (rates have rebounded slightly since October) costs £1535 a month. You get the idea. Prices are up, house prices are down.

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There are complications here, of course. A wealth tax, a rejigging of council tax or a change in the capital gains tax regime on the UK’s main houses are all possibilities in the near future. That’s on top of a long list of bad tax changes imposed on buy-to-let landlords. All this adds to the additional negative overlay on the housing market, such as the cost-of-living crisis, because spending more on energy bills leaves less for debt repayment.

Lower mortgage rates (quite possible as the economy weakens) are a little cheerier. But we can also take heart from the fact that the majority of UK mortgage debt is held by those with the deepest pockets. As Berenberg analysts point out, the top 50% of households have almost 86% of the mortgage debt and the bottom 30% only a 5%. One might hope that some savings buffer at the top means there won’t be a bad round of 1989-1992-style defaults (house prices fell 20% in that crash).

Property bulls will also point to the fact that most UK house price swings have quickly resolved themselves. March 2020 can hardly be considered a crash: Prices actually increased by 8.5% by the end of the year. None of the dire Brexit-related predictions of the crash came to pass. And even 2008 turned out to be nothing more than a blip for most people: Prices returned to their highest levels anywhere in 2012 and rose positively after that. Buy the dip, they say. You can’t go wrong with UK property.

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However there is a problem with this argument. In 2008 and in 2020, mortgage rates did not increase; they went down. In 2007, the base rate was 5.5%. In 2008, it was 2%. In 2019, it is 0.75%. By the end of 2020, it will be 0.1%. That’s not going to happen this time.

Sure they may be flat or fall a little. UK consumer spending is sensitive to house price movements. (How could it not be given that this is all we are talking about?) So the Bank of England is more surprised by the weakness of house prices – and what is the BOE not surprised these days? — they are more likely to pull back from the current tightening cycle.

Mortgage rates may fall back to 4.5% or similar. But fell to 50% plus again? I don’t think so. It’s not 2007, and it’s not 2020 either. Soon you’ll find yourself wishing it was. In the meantime, if someone offers you a free car, just say no.

More From Bloomberg Opinion:

• Will Sunak Try Love With Britain’s Top 1%?: Therese Raphael

• British Families Already Hit by Stealth Taxes: Stuart Trow

• BOE Edging Into Rate Pivot Sends Signal to ECB: Marcus Ashworth

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Merryn Somerset Webb is a senior columnist for Bloomberg Opinion covering personal finance and investing. Previously, he was editor-in-chief of MoneyWeek and a contributing editor to the Financial Times.

More stories like this are available at bloomberg.com/opinion

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