The recession has already started. Then again, no it hasn’t. But it’s definitely coming. Actually, maybe it’s not. But whether it does or it doesn’t, house prices have definitely dropped. Or they will anyway. Maybe. Some of them.
As the above might have tipped you off, I don’t claim to be an economist. But I’m pretty sure Michael Gove said everyone had had enough of experts anyway, so I’m positive that might not matter. What I am sure about is you can pick an expert to suit your point of view and be sure you were right. Confirmation bias is a wonderful thing, especially if your vested interests are the financial kind.
Over the past six months we’ve had a lot of predictions about the economy and house prices are intractably linked to it. The housing market is a supply and demand industry. The very fact that we have such wild differences in prices for similar houses across different regions – and then within regions – tells you that. More people in work, more consumer confidence, higher prices. On top of that, inflation, interest rate rises and the cost of building all have enormous cumulative effects.
The predictions of all the major residential agents and advisers at the end of last year was that houses prices would fall in 2023, somewhere around 10 per cent across the country. As interest rates rose, numbers of sales decreased and the prices achieved for houses and flats as a percentage of asking prices decreased too. We seemed set for a decline, if we weren’t already in it.
For those of us who clearly remember the financial crisis of 2007-08, there was certainly a point when the money evaporated and house prices dropped off a cliff. Your bank might not even let you have your savings money back, let alone lend you money for a mortgage. Cue that supply and demand problem and house prices could only go one way.
This time around no one had predicted that bursting of a bubble and so far, that has proven correct, thankfully. Banks are far better capitalised, none of them have gone bust and you can still get a mortgage if you have the right deposit.
However, lending has tightened up in terms of proof of income and mortgage-to-earnings ratios. So you would be right in thinking that demand for buying a house will decrease for those who were stretching themselves to get on the housing ladder or to make that next move. For those people, the “cost of living crisis”, interest rate rises and even job security mean that will have to be put off, again.
Given that people in that bracket make up such a large percentage of the market, presumably house prices are already decreasing, despite interest rates for mortgages having seemingly levelled out. Various banks are now offering five-year fixed at under 4 per cent, despite the bank of England rate being just that. Can we see evidence of such a price drop yet? Yes, and no.
In fact, what we have seen so far is increased disparity in the market, by which I mean that some house prices have decreased but others have continued to increase. That appears to be because of a few important factors.
First, in purely financial terms, not everyone suffered through covid. In fact, some did rather well. If nothing else, the amount of savings paid into to UK banks has never been higher than in 2020. While 34 per cent of all UK adults have little to no savings, many others have more than ever.
Second, at the present time, while interest rates have risen, they are still historically quite low. Many people’s mortgages have risen £100 or more a month – a lot if you don’t have it but to those with otherwise disposable incomes, still affordable.
Third, and here is the supply and demand issue again, we aren’t building enough new houses in this country and crucially, have not been doing so for many years. In particular, we don’t build them in areas where demand is strongest (ie, the south east) and the forthcoming changes in planning law will make that even worse.
Last, there has been no drop off in employment. In construction, materials prices have dropped a little but labour rates are at an all-time high. Improving your house instead of moving does not necessarily present itself as a cheaper option.
So where does all this leave us?
Poor-quality housing in lower-priced areas has dropped. Buyers at that level have reduced in numbers as the cost of living, interest rate rises and the tightening of mortgage lending criteria all take effect. This then causes rents to rise as more people are in the market, further increasing the problem.
At the other end, prime property is on the increase. Prime London prices (£1 million or more) are nearly 8 per cent higher than a year ago and still seen as cheap to foreign buyers with the current exchange rate and prices still 7 per cent lower than they were at the peak in 2014. Outside London, house sales at over £2 million have never been higher in Brighton and Hove. The £3 million-plus market, non-existent in 2019, is buoyant. Seafront facing property remains at an all-time high.
New-build property, in good areas in particular, is also in high demand, due to changes in planning rules restricting supply, labour and materials rates remaining high and a demand for newer, more sustainably built housing.
The middle ground of housing is much more difficult to ascertain. If you own a good, well-maintained house in a good area, it’s probably worth the same or more than it was this time last year. If it needs work and your neighbourhood does too, it probably isn’t.
I’m not sure what that says about our society or the intricacies of our economic system but, as I said, I’m not an economist. And I’m just as beholden to confirmation bias as everyone else. Probably. Maybe. Ask me again this time next year.
Ed Deedman is a director of Cayuga Homes.
