Can anything hold back the crazy house market?

Prophecies of doom and a crash have failed to materialise and so it is back to the status quo – rampant growth, as Mattie Brignal finds out

Britain’s housing market is defying gravity. Covid, recession and soaring mortgage rates have prompted prophecies of a price doom. But despite anxieties, the predicted crash hasn’t materialised.

The market may have cooled after prices hit an all-time high in 2022, but as the economic outlook improves analysts are adjusting forecasts back to the status quo – rampant growth.

Estate agent Savills expects the average price to rise by £61,500 over the next five years, a 21.6pc boost from £285,000 to £346,500. It predicts a 2.5pc price growth this year, a hefty upgrade from its previous gloomy forecast of a 3pc drop in November when Britain was in recession.

Underpinning the forecast is the expectation that the Bank of England’s Bank Rate will fall from 5.25pc today to 2pc in 2028, making mortgages more affordable and allowing people to borrow more.

Lucian Cook, of Savills, said an improving economic outlook combined with “steady cuts” to the Bank Rate will boost house price growth from 2025. He added: “There are headwinds – the general election, for instance, has the capacity to slow the market. But overall, the trend is for prices to keep rising.”

NO MORE BOOM AND BUST?

If history is anything to go by, the housing market is heading in one direction – in the long run, at least. Inflation-adjusted house prices have risen by a staggering 365pc over the past 70 years. But this sustained growth has been punctuated by several big slumps. The housing boom of the 1980s was brought to an abrupt end by a recession, double-digit interest rates and a wave of repossessions, fuelled by a big rise in unemployment. Prices tumbled 37pc from 1989 to 1995.

An unprecedented and prolonged upswing followed, in which prices rose by 174pc between 1995 and 2007. Then came the subprime mortgage crisis in 2008 which wiped 26pc off the average house price over the next six years.

The history of devastating downturns cancelling out decades of equity gains has made commentators anxious about rising interest rates and a shaky economy in recent months.

But the housing market has proved remarkably resilient. Andrew Wishart, of Capital Economics, a research firm, said it is “surprising” that house prices have remained as high as they have.

He added: “One overlooked reason has been the shift towards longer mortgage terms – 25 years was the norm before the pandemic but now 35 or 40 years is common. It’s meant lower monthly repayments which has prevented people falling behind, and stopped repossessions or forced sales.”

LOW UNEMPLOYMENT

More than 1.5m homeowners are due to reach the end of fixed-rate mortgage deals this year. With the average twoyear fixed-rate deal approaching 6pc, many are being forced to refinance at rates that are double what they are used to. In early 2022, average rates were well below 3pc.

This should mean strong downward pressure on house prices, as hard-up homeowners facing higher monthly repayments are forced to sell.

But banks have also become more cautious about who they lend to, and more willing to give borrowers the benefit of the doubt, Cook said. He added: “Lenders have been very accommodating and been reluctant to force homeowners to sell if they can’t afford a mortgage. The other factor is the regulated mortgage market. Banks have applied draconian stress tests for borrowers. This has played a significant role in insulating the housing market, and stopped forced to sales.”

In August 2022, the Bank of England relaxed these stress tests.

“Ironically, this also increases the capacity to boost house prices,” Cook added, “as more people can now be approved for a mortgage.”

For Simon Rubinsohn, of the Royal Institution of Chartered Surveyors, the crucial difference between historic house price crashes and the situation today is the strength of labour market.

He said: “After the downturn in early 1990s, it took a long time for the market to recover – you saw unemployment rise from 1.5m to 3m [between 1989 and 1992]. Banks hadn’t been through this before where there was massive potential for negative equity.

“You saw a wave of repossessions on an unprecedented scale and a lot of unwanted homes on banks’ books. There was a substantial decline in prices. But this time unemployment has remained low. Now, it’s an interesting mix as you have interest rates going up but banks have adjusted their behaviour. They are less willing to repossess, and there have been escape routes for mortgage owners in difficulty.”

It would take a collapse in employment to prompt a similar housing crunch today, according to Wishart.

“The worst case scenario would be sustained high inflation, meaning interest rates can’t come down, and a large rise in unemployment from a deep recession – which isn’t on the agenda.”

THROTTLED SUPPLY

The cause of buoyant house prices “isn’t difficult to identify”, according to Robert Colvile, director of think tank the Centre for Policy Studies.

He said: “We haven’t built enough houses, in particular in high demand areas like London and the South East.

“In the short term, interest rates drive the markets but beyond that, the lack of supply keeps prices high.”

The Centre for Cities think tank estimates that Britain has built 4.3m fewer homes than the average European country as a result of its broken planning system.

Last year, Britain built 234,000 new homes, more than at any point in the previous four years but well below the Government’s 300,000-a-year target.

And the figures are about to get much worse. Between July and September, the number of housing starts fell by 68pc compared with the previous three months and were down 52pc year-on-year.

LABOUR’S PLANS

Sir Keir Starmer has vowed to turbo- charge housebuilding with a pledge to oversee 1.5m new homes within five years of taking office.

But as Wishart points out, a house price slump driven by a deluge of new homes is unlikely.

He said: “Supply moves more slowly than demand. We can only build 1pc to 2pc of housing stock each year, so supply will be quite slow- moving. Over the long-term it would make a difference. But this will take decades, and in the shorter term demand, influenced by interest rates and unemployment, will be a much bigger factor.”

Cook added: “It will be very difficult for any government to bring house building up to 300,000. It’s going to be like turning a tanker ship.”