The Daily Telegraph
Britain’s dysfunctional property market inflicts misery on millions
Falling house prices may bring some pain, but the real problem is that we do not build enough homes
The air is thick with gloomy prognostications about the state of the housing market. But are things really so desperate? According to figures released last week by Nationwide, house prices fell by 0.5pc from January to February. That may not sound very much, but this was the sixth successive month of falling prices.
Admittedly, since prices were rising in the earlier months of last year, in the year to February average prices have only dropped by 1.1pc. But this was the first annual drop since June 2020 and the weakest price performance for more than 10 years.
Of course, averages can sometimes disguise as much as they reveal. In this case, however, average house prices have fallen in every region of the country. The South West is the worst off, while London has held up relatively well. Moreover, just about all categories of residential property have been soft, with flats recently doing slightly less badly than houses, after a period when the reverse was true.
So much for the recent past, but the immediate outlook doesn’t seem promising either. Since August, mortgage approvals have plummeted by 46pc to only 39,600 in January. Excluding the lockdown period, this is the lowest level since January 2009. Scarce wonder, then, that Persimmon, one of Britain’s largest house builders, has said that sales could fall by 40pc this year.
Why is this happening? It is fundamentally because of the surge in mortgage rates that has followed the abrupt change in the Bank of England’s monetary policy. Moreover, this has coincided with a weak overall economic environment and a marked squeeze on living standards.
When you go from official interest rates of 0.1pc to 4pc in little more than a year, there are bound to be consequences. Indeed, the behaviour of the housing market has been one of the most important distortions unleashed by a prolonged period of excessively low interest rates.
Moreover, this surge in mortgage rates has happened at a time when, on all historical comparisons, average house prices were much too high. The ratio of average house prices to average earnings (HPE) recently hit a peak of eight, easily an all-time record. This compares with an average of just above five over the last 50 years.
For a long time, the implications of stretched HPE ratios were disguised by extremely low interest rates. Indeed, as recently as 2020, mortgage affordability – as judged by the share of average mortgage payments in average post-tax incomes – looked good. At that point, this share stood at a 20-year low. Over the past year, however, this share has surged.
If average mortgage rates were to rise to 6pc, this share would exceed 60pc, which would be the highest since the late 1980s, when severely stretched affordability proved to be the harbinger of a major fall in house prices in the early 1990s.
This all sounds pretty dire, but we need a proper perspective. If average house prices fall from peak to trough by about 12pc, which is roughly what I expect, then at that trough they would simply be back to where they were about two years ago.
Moreover, in money terms such a drop would be smaller than the fall in prices that occurred in the last two housing downturns. Admittedly, in real terms this fall would be a bit larger than the one that occurred in 2007-9, but it would be a fair bit smaller than the drops that occurred in 1999-02 and 1992-97, when real house prices fell by about 30pc.
One new negative factor this time round is that changes in the law in regard to tenants and a less favourable tax treatment are encouraging some buy-to-let landlords to sell up. This is intensifying the downward pressure on house prices while putting upward pressure on rents.
On the other hand, the comparative strength of the labour market is a major favourable factor. Historically, serious weakness in the housing market has occurred when there has been a large rise in unemployment. That hasn’t happened this time.
Admittedly, unemployment should start to rise again later this year, but even so the increase should be only modest. Mind you, if I am wrong about this and unemployment rises by a large amount, then housing market weakness could be much greater.
Even so, the coming adjustment in the housing market by no means constitutes a disaster. True, some people who bought their properties recently may experience negative equity, and all householders would feel less wealthy. This might reduce the amount of money withdrawn through equity release schemes.
On the other hand, prospective buyers would feel happier as they would think the prospects of getting on the housing “ladder” had improved.
In any case, weakness in house prices would surely prove to be just a short interval. Before long, house prices will surely start to rise again, probably in line with rising incomes. The result will be that for owneroccupiers at least, housing will remain a good investment, not least because of the extremely favourable tax treatment.
The fundamentals of the housing market remain much the same as ever. Given the size of our population and our aspirations for more and better living space, we do not build enough homes.
Despite the widespread belief that Brexit would lead to a large drop in immigration, although there are now fewer immigrants from the former eastern Europe, this has been more than made up for by a rise in immigration from the rest of the world.
The simple, discomforting, truth is that the housing market has probably been the most dysfunctional aspect of post-war Britain. It still is. This has baleful consequences, not just for the economy overall, but also for the quality of life of millions of people. Sadly, this is not about to change. This is the real housing disaster, not a short period of falling house prices.
‘Before long, house prices will surely start to rise again, probably in line with rising incomes’