Is property market now on the brink of collapse?

HOUSE prices continue to rocket to new highs every month – but as the cost-of-living crisis intensifies, there are growing fears that we are now finally heading for a fullblown property market crash.

There is nothing new about this, as the doom-mongers have been shouting about the dangers of a property crash for years.

It hasn’t happened yet but there are now good reasons to be concerned, with inflation rocketing, the economy slowing and the Bank of England ramping up borrowing costs.

With base rate now at 1 per cent, the average homeowner with a £224,000 mortgage is paying £1,000 a year more interest than before the BOE started hiking rates in December.

If base rates hit 3 per cent next year, as many expect, that figure could rise to £3,000 extra.

So are we finally facing the long-awaited meltdown?

MARKING DOWN VALUATIONS

There are good reasons to be worried. Banks and building societies certainly are. They don’t want borrowers overpaying for homes in today’s red-hot market, only to plunge into negative equity soon afterwards.

Some are now marking down properties during mortgage surveys, knocking £20,000 or £30,000 off the valuation to protect themselves.

That makes it harder for borrowers to raise the money they need, forcing some to pull out of their purchase and disrupt property chains.

Yet the most recent figures show that house prices continue to fly, up an incredible 10.8 per cent in the year toapril.that includes a rise of 1.1 per cent last month, adding £3,078 to the average home.

This has lifted the average property price to another new record high of £286,079 – and Halifax managing director Russell Galley said activity shows “little sign of abating” amid strong buyer competition.

He said the housing shortage is the main driver due to “insufficient numbers of new properties coming on to the market”, as demand continues to outpace supply.

Galley anticipates the rate of house price growth will slow by the end of this year. He does not foresee a crash.

CHAINS FALL APART

Yet there is growing caution among buyers, sellers and lenders, according to the Royal Institute of Chartered Surveyors.

Estate agents report having to do a lot more legwork for sales, as prospective buyers take their time over their decision, admitted Hargreaves Lansdown’s senior personal finance analyst Sarah Coles.

Other agents said buyers are finding it harder to get mortgages, as lenders tighten affordability criteria.

“This is causing some chains to fall apart, as many banks don’t think properties are worth their asking price,” Coles explained – but she did say housing shortages are coming to the rescue, adding: “Almost every agent complained they didn’t have enough homes on their books.”

By every rational measure, today’s dizzying house prices should crash back to Earth.the average property now costs around 9.1 times the average salary in England, way above the long-term figure of four or five times a salary.

First-time buyers are struggling to build the deposits to help them keep up. By the time they have saved what they thought was enough, they find they need to save even more.

Seven in 10 first-timers have now put their plans on hold for at least two years due to the cost-of-living crisis, Nationwide reports.

LONG-TERM FIXED RATES

However, there are strong arguments that a crash is unlikely.

Most older homeowners have built up plenty of equity in their property, and can sit tight if prices fall. Others are taking action to protect themselves from mortgage increases, said Joshua Elash, director of property lender MT Finance: “They are increasingly locking into longerterm fixed rates, in expectation of further rate rises in the months ahead.”

Meanwhile, it is still possible to get a five-year fixed rate mortgage charging around 2.5 per cent.

When property prices crashed by 20 per cent between 1989 and 1993, mortgage rates hit a staggering 15 per cent.

That would trigger the mother of all meltdowns today, but that isn’t going to happen.

‘By every rational measure, today’s dizzying house prices should crash back to Earth’

SLOWING INTEREST RISES

The BOE does not want to hike rates aggressively, because it knows that this would tip the country into a full-blown recession.

The economy contracted by 0.1 per cent in March and may fall into outright recession later this year, said Rupert Thompson, investment Strategist at Kingswood.

He predicts the BOE will respond by slowing the rate of increases, so base rates may only climb another

0.5 per cent or 1 per cent from here.

This would keep mortgage finance affordable and head off any crash.

Despite fears, the property market may actually be on much firmer foundations than many people think.

Even if prices were to dip, this would be likely to bring out a new wave of buyers, looking to snap up a bargain.

The doom-mongers may have to wait a little longer for the crash to happen. Until we build more homes, it may never come.