This is why house prices are unlikely to crash...

Personally I don't put much (if any faith) in economic or house price forecasts at all. I have been attending, as a guest, the MPC briefings at the Bank of England since 2007. It has always struck me how the expectations for rates and inflation fluctuate so much from quarter to quarter. It has been such a rapidly changing world economically, and global events have much greater impact now that we have a truly global economy....it comes as no surprise that its ever more difficult to predict the future.

As a mortgage broker I am always keeping a particular eye on house price expectations and also interest rates. I have to say that house price forecasters rarely get it right - certainly not on a regular basis - even when they produce expensively funded and glossy research it is usually not particularly accurate when looked at in the rear view mirror!

So why am I making a rather bold statement that 'house prices are unlikely to crash'. Well I tend to look at the fundamentals that underpin the market and the factors that are almost always at play in booms & bust cycles with property. Here is why I do not think - despite rampant inflation and rising rates - that house prices are likely to fall by much (or at all).

MORTGAGE PAYMENTS AS A PERCENTAGE OF INCOME

The first and I think most important indicator is mortgage payments as a percentage of income that people take home. Put simply - when mortgage payments are too much of your pay - and become unaffordable - then the price of property tends to drop. The graphic below shows very clearly spikes in costs followed by the crashes of the late 80s and then 2008.

Interestingly the graphic below breaks this down by region and it is staggering to see how London mortgage payments reached up to 80% of average take home pay in the 1980's.

So the key thing to look at here is just how low the current % of take home pay is spent on mortgages - nationally just above 30%. If we compare that to periods when house prices have crashed it has been nearer 50% of take home pay.

So actually - the cost of mortgage payments is about average over the long term - suggesting there wont need to be a correction in the near term.

INTEREST RATES AND THE COST OF BORROWING

Pop into any pub at the moment and you will no doubt hear moans and groans about the cost of living - foods going up - energy is going up etc etc. Of course to combat inflation interest rates are also rising.

Lets remember folks that they are rising from absolute rock bottom! It is still incredibly cheap to borrow money on a mortgage. It is about 65% cheaper to borrow now than it was at the turn of the millennium

With borrowing costs so low it is hard to see why they would be a cause for a market crash - in fact I see the opposite daily in my job with clients buying and buying and buying with the low cost of funding giving them far more capacity to borrow more, and more cheaply, than in previous years.

SUPPLY AND DEMAND

We do not build anywhere near enough houses for the number of households we create each year. It has been this way for what feels like forever and each year we don't build enough the deficit grows and grows and grows.

Never have I seen this in such sharp contrast. Out in the market there really is, for the first time since I can remember a real problem for people looking to rent and buy in finding the right property and in some cases anything suitable. There is a real shortage of property available to buy and rent with multiple buyers/renters fighting over available stock and very little coming to market.

What does this do? what happens when more people want something than there is physically available? THE PRICE RISES not crashes!

**The figures in the graph below are from a study from the NHF and Crisis and there is some debate around the number of homes built vs needed

Look at 2020 on the graphic above for how big a problem this is. Although building has increased in volume we are still nowhere near building what we need....and what about the 100,000 + backlog that has been mounting up year after year after year?

Over time this has become a mountain it will be difficult to climb in terms of making any headway in catching up with the amount of builds required. More worryingly the government don't seem to have a plan to solve the situation.

SUMMARY

I can see the housing market slowing. I feel that pressure on households from soaring energy, food and fuel costs is, and will bite hard. However I also see that surge in costs subsiding over time and the housing market will be well placed to pick up speed again once things settle down.

Any mortgage questions or assistance as always give me a shout!

07740 284270 [email protected]