There won’t be a house price crash, but beware a buy-to-let downturn

Property markets only take a dive when you have very high unemployment and interest rates

On top of everything else, warns Andrew Bailey, Governor of the Bank of England, we need to start worrying about “apocalyptic” food shortages. What with already squeezed real incomes, a slowing economy and the near certainty of further interest rate rises to come, there’s suddenly an awful lot of negative news for people to get their heads around. Should we therefore not also be calling time on the house price boom?

Many pundits say we should. The chill beginning to settle on a previously red hot market is already unmistakable. But an outright housing crash, in the sense of a 20pc-plus collapse in nominal prices of the sort we saw during the economic contractions of the early 1990s and the financial crisis?

Barring a particularly nasty recession, with crushing unemployment – which nobody is predicting at this stage – this continues to look somewhat unlikely. Here’s why.

House prices went through a distinctly soggy patch in the immediate aftermath of the vote for Brexit, but once the deal was done, and the fog began to lift, they gathered pace anew. Then came the pandemic, and the enforced closure of the entire market. The lull didn’t last long; as soon as it could, the market came roaring back, turbo-charged by pent up demand and a stamp duty holiday.

Fed by ultra loose monetary policy, the dash for out-of-town properties with gardens soon spread even to inner city flats.

Flush with the enforced savings of the pandemic, banks and building societies were falling over themselves to lend. For the housing market, at least, boom times had returned.

It couldn’t last, and indeed it hasn’t. The turning point was last December, when even the Bank of England could no longer ignore a manifestly overheating economy and finally got around to lifting its official rate of interest from the absurdity of 0.1pc that ruled during the pandemic.

Potential house buyers have been getting increasingly nervous ever since. Forty years of rising property prices is not just about squeezed supply. Above all it is about abundant and ever cheaper credit. If that dynamic is now in danger, so are house prices.

A year ago, it was still possible to get a 10-year fixed mortgage on an interest rate of less than 1pc. Today, the charge is more than 2pc. This still looks incredibly low to those of us who can remember double-digit mortgage rates, but everything is relative.

Capital Economics has crunched the numbers. Based on a median income household with an 80pc loan-to-value mortgage buying a property at the UK average, the cost of servicing the loan rises from £881 a month with Bank rate at 0.5pc to £1,094 if the rate is increased to say 3pc – or from about 40pc of disposable income to 50pc. With everything else inflating away like there is no tomorrow, that’s quite a squeeze.

‘Forty years of rising property prices is not just about squeezed supply’

But here’s the point. Is it really enough to cause a wave of forced sales, which is essentially what is required to induce a crash? Yes, of course there will be households who cannot cope, and fall into arrears. There may even be a marked rise in foreclosures. But as Mark Carney, a former governor of the Bank of England, once observed, however hard things get, British households will do almost everything to keep paying their mortgages. That’s why banks are so keen on mortgage lending. Despite very high levels of household indebtedness, there were in fact relatively few UK mortgage defaults at the time of the financial crisis.

This didn’t stop regulators confusing a banking meltdown caused by subprime lending in the US with perceived excess in the UK housing market, and clamping down on UK mortgage lending accordingly. As everyone knows, it has been difficult to get a mortgage ever since. Rigid rules on job security, minimum deposits, loan-to-value and loan-to-income rules are routinely applied, making the market much more resilient to upsets. Don’t expect a flood of cheap properties coming on to the market as a result of higher borrowing costs. Much more likely is that people sit it out.

The other precursor to an outright crash is rapidly rising unemployment. This is possible; it’s amazing how quickly circumstances can change. But with the labour market as tight as it is today, it seems unlikely.

Also tight as tight can be is supply. With the Government having again ducked meaningful planning reform, this doesn’t look like getting any easier. The ranks of property seekers is, moreover, about to be swelled by the arrival of an estimated 100,000 Hongkongers. Even with higher rates and unemployment, it is hard to see much of a let-up in demand.

The Achilles heel in this is the buy-to-let market, which may experience selling pressure as interest rates rise. Many of the attractions of buy-to-let have been torn away by ministers determined to tilt the balance back in favour of owner occupation.

The further strengthening of tenants’ rights in the Queen’s speech, together with the cost of environmental improvement, will have been the final straw for many smaller landlords. Yet even here, there seems to be no shortage of corporate investors, able to absorb these costs, willing to step in.

As it happens, a steep rise in interest rates might not be such a bad idea. Never mind resurgent inflation, there are almost as many net cash savers in the UK as borrowers. They would be big beneficiaries. First-time buyers might also benefit if this induced a crash, making home ownership more accessible. But corrective action of this sort is not at all what either the Bank of England or No 10has got in mind. They want neither a recession nor a house price crash. My bet is that they will avoid both.