The recent upheaval in the mortgage market has led to the inevitable prophesying as to what will happen to property prices.
Such is the UK’s fascination with house prices, that in the past we have seen bookmakers take bets on which way the house price pendulum would swing. The odds at present would appear to be firmly in favour of them falling, with Capital Economics offering one of the gloomier forecasts of a 15% drop.
By its calculations, if mortgage rates are 6% this year it says this will reduce the size of loans that lenders can offer, which in turn will see a drop in buying power and falls of between 10-15%. While none of us has the power to foresee which way the market will go, if I were a betting man, I would not be putting my money on 15%.
One of the main triggers for falling house prices is when the market is flooded with properties, which pushes up supply and eases demand. One of the ways in which this happens is when the market sees large scale repossessions.
While it is plausible we might see an uptick in arrears and repossessions as a result of the recent market turmoil, we are unlikely to see them to the scale that would be needed to dramatically lower house prices, as repossession is always a last resort for lenders.
Given the robust regulatory framework and stress tests that have been in place over the last few years, for the most part, lenders’ books should be in relatively good shape. This should mean there are options for borrowers who might be struggling, such as extending the term of their mortgage in order to lower repayments.
There will also be those who will have seen the equity in their property increase since they last remortgaged potentially placing them in a lower LTV bracket.
We’ve, understandably, seen something of a panic regarding the pace at which the market has moved but the rate increases we are seeing are to some extent the way the market was always heading – we are just getting there a little quicker.
There was already a market expectation that interest rates would reach around 4- 4.25% by this time next year due to inflationary pressures. Now it is looking likely we will reach 5% or even 5.5% by this time next year – meaning the market isn’t off trajectory completely.
While interest rate rises will make finding a foot on the property ladder more expensive for first-time buyers (FTB)s, it is unlikely to dampen demand altogether. For first-timers, it may instead mean putting their ‘dream’ property purchase on hold and opting for a smaller, more affordable first home.
For those thinking about delaying, unless they are fortunate to live with their parents it’s a Hobson’s choice, as the alternative to buying is renting, which isn’t cheap either, and will undoubtedly become even more expensive as landlords look to pass on any rate increases.
Another significant reason we are unlikely to see substantial house price falls is down to the simple reason that homeowners will be unwilling to sell their homes for less than they can get today.
If a seller knows they could have got £400,000 for their property last month, they are not easily going to be swayed into letting it go for £340,000. A more likely scenario is they will wait for the market to recover, instead of selling at what they will perceive to be a loss.
So, if I were to put my money anywhere, it would be on stagnant house prices for the foreseeable future, with around 3% annual increases thereafter.
While we are likely to see growth in house prices stall quite rapidly that isn’t necessarily a bad thing. The annual increases of around 10-12% we have experienced over the last two years were unsustainable. If we move to stagnant prices for a year, followed by 3% growth, that will equate to around 13-15% growth over a four-year period, which is around 3.5% a year – not a bad place to be at all.Â
Simon Jackson is chief executive Officer of MSSÂ
