With falling house prices, can a crash be avoided?

DESPITE all the problems afflicting the UK in the last troubled year, the housing market has doggedly refused to crash as many expected. At least, so far.there have been repeated warnings of a meltdown, with Capital Economics predicting a 12 per cent drop this year and Japanese Bank Nomura forecasting a 20 per cent fall.

That would hit the wider economy by making millions of homeowners feel poorer, but latest data astonished everybody as UK house prices rose by 1.1 per cent in February.

This left them 2.1 per cent higher than this time last year at £285,476 – although the average price has slipped £8,500 since peaking in August, according to the latest Halifax house price index.

Halifax’s director of mortgages, Kim Kinnaird, said underlying activity indicates a downward trend but recent cuts in mortgage rates, improving consumer confidence and labour market resilience have kept prices stable.

Yet Kinnaird cautioned: “With average house prices remaining high, housing affordability will continue to feel challenging for many buyers.”

House prices are likely to fall, the question is whether we are going to get a hard or soft landing.

HARD

Activity is set to fall as the cost-ofliving crisis means buyers have less money in their pockets, said Quilter’s mortgage expert, Charlotte Nixon: “Many are hesitant to make such a significant investment when they are struggling with basics such as food and energy bills.”

The era of the sub-one per cent mortgage is now gone for good, with today’s best-buy mortgages starting at 4 per cent.

However, that is down from 6.5 per cent in the wake of former Chancellor Kwasi Kwarteng’s mini-budget disaster in September. “Although we have hopefully passed the peak of inflation, it’s likely interest rates will still rise further,” Nixon said.

That will up the pressure on the market and Jonathan Hopper, chief executive of Garrington Property Finders, said sellers are “rattled” and vendors “anxious”. “Buyer enquiries and new seller instructions are down, with mortgage approvals falling 46 per cent in January, according to the Bank of England,” he said.

Buy-to-let investors have been driven off by the Treasury’s tax crackdown and new regulations that could make it harder to evict tenants.

The cracks are starting to show, with prices in Southampton falling 17 per cent, analyst Twentyci says, with Falkirk, Dorchester,telford, Plymouth and Llandudno suffering similar drops. House prices in other countries have already succumbed, with Sweden suffering a drop of 20 per cent and Australia, New Zealand and parts of the US also wobbling.

That is a real worry as just a few days ago Fitch Ratings warned that the UK faces a bigger mortgage payment crunch than any of them.

SOFT

Yet the UK could still escape meltdown as mortgage rates remain relatively competitive as lenders jockey for position, said mortgage broker SPF Private Clients’ chief executive, Mark Harris: “Even if the BOE does increase base rates from today’s 4 per cent on March 23, there is a growing expectation that rates are close to their peak. If inflation does continue to fall, the outlook will appear brighter.”

Buyers have not given up yet, said London estate agent Jeremy Leaf: “They are waiting to see if prices soften further and mortgage repayments stabilise before committing.” Yet they may soon be tempted to take the plunge as a fresh crop of properties come on to the market, he added.

Another factor holding up prices is that the UK still has a shortage of properties and cannot build houses fast enough. Major house builders like Barratt and Persimmon are likely to build even fewer homes this year, as building costs rise but prices and demand dips.the lack of decent property could prevent a crash.

‘Buyer enquiries and new seller instructions have declined, with mortgage approvals down 46 per cent’

FLAT

The froth has come off the housing market, and many will welcome that after years of ever-spiralling prices, particularly first-time buyers.

The nightmare scenario is that inflation stays high, the economy worsens, job losses mount, mortgages prove unaffordable and this triggers a rush of forced sellers.

City regulator the Financial Conduct Authority reckons 570,000 borrowers will hit financial problems by next summer, said AJ Bell’s head of personal finance, Laura Suter:

“The mortgage market is a terrifying place for the 1.4million homeowners coming off a cheap fixed-rate deal on to far higher rates this year.while average mortgage rates have dropped, they are still significantly higher than existing deals.”

Older homeowners will be cushioned by years of property market gains, but young buyers are on the front line. Suter said: “They often have a toxic combination of having borrowed up to the max and lacking savings to bail them out.”

There is plenty to worry about but people have been predicting a property meltdown for years, and it still has not happened yet.

The UK appears to have avoided a recession by the skin of its teeth, and it might avoid a house price crash, too. But it will be a close call.