The Speaker
Saturday, 25 May 2024 – 00:53

House prices are starting to fall: How did we get here and what will happen next?

House prices are starting to fall, but to understand why this is happening we need to understand how they got so high in the first place.

Adjusted for inflation in 1977, the average house price was just over £93,000. In 2021 that had risen to £270,000. Just to reiterate these figures are adjusted for inflation, meaning there has been a rise in house prices of just under 200% in 44 years. This coupled with about 40 years of wage growth stagnation that, according to the Trade Union Congress (TUC), has led the UK to the worst ever modern wage squeeze in history among the G7 between 2008 and 2021.

To explain how house prices have risen so much, it’s time for a quick history lesson. It’s the 1980s and Britain’s first ever female Prime Minister, Margret Thatcher, is in power and she wants to completely change the way the UK works. Among many reforms across all different sectors, she overhauled the UKs housing status quo. Thatcher introduced the right to buy scheme which allowed tenants of social housing to buy their homes from the state after 3 years at a 31% discount of the value, rising to a 50% discount after 20 years living in the property. Many of the people able to take advantage of this scheme were the better off monetary wise. 

Now, over 40 years later fewer than 5% of the sold homes have been replaced, available social housing stock has dropped by just over a million and majority of these sold council homes are in the possession of private landlords that has led to tenants paying almost double the rent to private landlords than charged by local authorities. This coupled with Thatcher’s scrapping of rent controls, the weakening of housing benefits and increasing buy-to-let mortgages, meant that all house prices could do was rise.

Adding further fuel to the rate that house prices were rising was that Thatcher introduced deregulation of the banking sector, specifically rules around how much banks can lend people to buy houses. This move was mirrored all over the western world and continued by successive governments, which led to a rise in mortgage rates, rising house prices and the 2008 financial crisis.

After the financial crisis mortgage rates still increased and the advent of Quantitative Easing led to further rises. QE was the Bank of England’s strategy to combat the aftermath of the financial crisis; the Bank of England buys government or corporate bonds from financial companies and pension funds, increasing the price of these bonds and lowering their interest rate; in turn, lowering interest rates across everything else. The effect of this on housing prices and other assets is for them to rise. Subsequently, QE encourages investors to purchase higher risk, higher-yielding financial assets, which would make those who owned these assets wealthier leading to a boom in the financial market while also raising house prices.

The trend of rising house prices can’t possibly continue. This statement isn’t politically motivated; it’s just that nothing lasts forever; things change: so how is it changing now? House prices starting to drop is by no means isolated to just the UK. For example, in Canada and Sweden prices are down 8% since February, and in New Zealand they’re down 12% since their 2021 high.

Reports from both Halifax and Nationwide state monthly house price rises have begun to turn negative, dropping by 0.9% in October. Natwest is forecasting that prices would drop by 7% by next year. Other experts are predicting similar trends: Right Move -7%; Credit Suisse -15% and Capital Economics -15% among many others forecasting similar trends. Low deposit mortgages are also being withdrawn from the market as well.

This is happening for one main reason according to experts. Robert Gardner, the Nationwide chief economist, said that “The market has undoubtedly been impacted by the turmoil after the mini-budget, which led to a sharp rise in market interest rates. Higher borrowing costs have added to stretched housing affordability at a time when household finances are already under pressure from high inflation.” Increasing mortgage rates mean that a typical first time buyer with a 20% deposit would see mortgage repayments jump from 34% to 45% similar to the rise before the 2008 financial crisis, according to Gardner. With interest rates expected to rise further, the situation is only going to get worse.

The rise in interest rates means a rise in mortgage rates; this coupled with the cost of living crisis, means many won’t be able to afford a new home driving prices down. Expected tax rises and government spending cuts by Sunak and Hunt are likely to further push house prices down, said Halifax.

So if house prices drop, what will the wider effects be? Due to the nature of the housing price drop, which is due to the rise in interest rates on rents, according to a spokesperson from London Renters Union, rents are likely to rise by 30%-40%, maybe as much as 70% in some cases. Landlords increase rents to protect their profit margin, which is under threat due to rising inflation.

Even a drop in house prices can make buying more expensive as inflation rises. Speaking on Novara housing expert Danny Dorling explained that falls in housing prices are offset by massive rises in mortgage rates. 

Large drops in house prices could provide the opportunity for councils to buy back houses and bring them under council control. This is already being done by Wandsworth Council.

What would the effects be to those who already own their homes? Well 65% of the British public own their own homes, meaning a majority of their wealth is tied up in housing, so falling prices could lead to home owners panicking, reducing their spending and triggering an economic downturn.

I hate to end this article on a negative note, but if house prices continue to fall and inflation continues to rise, we are likely to see an economic downturn. It’s not definitive, but unfortunately very likely.

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