Will house prices crash?
House prices worldwide have been pushed up by low interest rates. With rates rising, the market could cool
It’s easy to get parochial when thinking about house prices. Despite appearances, the British are not uniquely obsessed. Indeed, when it comes to high-risk overvalued housing, we’re not even near the top of the pile right now. A recent survey of the most vulnerable markets by The Economist had Britain ranked only 13th of 20 nations. Sweden, the Netherlands and New Zealand make up the top three, while Australia, Canada and the US are at five, seven and eight respectively.
The Economist looks at four key measures: price growth, the share of homes with a mortgage, the proportion of mortgages that are variable rate, and the overall indebtedness of households. Taking the average from the end of 2019 to the end of 2021, UK house prices have “only” risen by around 18%. Prices in New Zealand by contrast, are up by 46%. Almost two-thirds of British homeowners own their properties outright; just a third of New Zealand owners do. The vast majority of UK homeowners now have fixed-rate mortgages (albeit many are only for two years), whereas almost all Norwegian mortgages are variable rate. And homeowners in the most vulnerable nations are far more overextended than in the UK.
Why does this matter now, given that house prices in most of these markets have been expensive for years? Because the key factor behind the boom – low and falling interest rates, which make mortgages cheaper and thus pump ever more money into housing – is now reversing.
So if we want to get an idea of just how vulnerable the UK market might be, it’s worth watching our more fragile counterparts.
The answer already looks pretty clear. The Bank of Canada began raising interest rates from 0.25% in March to 1% now. Last month, house prices fell for the first time since April 2020, while sales volumes are down by more than 25% on the year. In New Zealand, the central bank first raised rates in October, from 0.25% to 0.5%. Now they are at 1.5%. House prices peaked in November and have fallen by 5% nationwide since then. Transactions fell by 30% in April. Bank analysts in both countries are starting to mutter about 20% falls.
Will the UK follow suit? The latest data on asking prices from property website Rightmove shows that sellers remain optimistic – prices are up by more than 10% on this time last year. But it’s hard to believe that rising rates (and the cost of living squeeze) won’t cool the market, and if we do end up in recession, much steeper falls could be on the cards. If you are looking to buy a home to live in (rather than as an investment), then timing the market is a fool’s errand. But you should certainly be sure not to overstretch yourself, and that you plan to live there for a prolonged period.
“The British are not uniquely property obsessed”