House prices look set to fall sharply in the coming months, with several leading analysts predicting a double-digit drop in average prices as a result of the sharp rise in mortgage rates.
The latest economist to warn that property prices will ‘inevitably’ fall, after average fixed-rate mortgage deals climbed to over 6% last week, is Roger Bootle.
With lenders continuing to push up rates in response to the rapidly rising cost of borrowing, Bootle, one of the City’s leading economists, says that averting a 1990s-style slump in the housing market is now near impossible.
In his latest column for The Telegraph he sheds light on how the UK and world economies are performing and the challenges facing the world’s policymakers.
Bootle said that as mortgages get more expensive, the impact on property prices would become more severe.
He wrote: “The last couple of weeks have seen alarm building in the mortgage market, with gathering consequences for the housing market. The latest RICS survey of surveyors; views of the market, released on Wednesday, will give us an up-to-date snapshot. How dire could things get?
“It is vital to put current developments in context. Many people will blame the government’s botched mini budget for today’s mortgage market travails. It is true that the announcement of large net tax cuts made the likely future level of Bank Rate higher.
“Also, the loss of confidence caused by how the mini-Budget was presented resulted in longer-term rates being higher than they needed to be.
“But the fundamental truth is that higher interest rates were on the way in any case. You only have to look at what other countries, led by the US, have been doing.
“And, at the bottom of it all, is a surge of inflation which has to be overcome and a tight labour market which needs somehow to be loosened up.”
Bootle reflects on the fact that the recent hike in interest rates has “shocked” a number of people because they have got used to an ultra-low level “which is without precedent in the whole of our history”.
He also pointed out that before the recent cycle of rate rises began in December last year, Bank Rate was 0.1%.
He continued: “Until recently variable rate mortgages were available at 1.5% and two-year fixed rate mortgages were at 1.1%. These mortgage rates were also without precedent.
“You didn’t need to be John Maynard Keynes [a renowned economist] to realise that this was an aberration and the medium-term risk was all one way.
“Similarly, house prices have been rising relentlessly now for many years. Since 2012, they have risen by 66%, well in advance of the overall increase in consumer prices.
“In real terms, house prices have increased by over 30%. This dramatic growth has been reflected in a record level of the ratio of average house prices to average earnings. It currently stands at 7.8, above the previous peak of 7.5, registered in 2007. The long-term average is 5.1.
“It is true that so-called affordability – that is to say, the percentage of a typical mortgagee’s income taken up by mortgage payments – has until recently been pretty much average by historical standards.
“But that is because interest rates have been so absurdly low. Once rates return to some sort of normality, affordability will be strained.”
Looking ahead, it is highly likely that the Bank Rate will probably rise considerably from the existing 2.25% as the bank of England seeks to curb inflation.
Bootle predicts that the bank rate is likely to hit 6%, or possibly slightly higher.
He urges housing market commentators to dismiss the supply-demand imbalance in the housing market, and better understand that “willingness” to buy property is empty without “ability” – and that is primarily driven by “incomes and finance”.
He added: “Anyone who thinks that house prices can’t fall needs to look at the history of the market. Average house prices fell by about 20% between 1989 and 1992 and again by only slightly less than this in 2007-9.
“Actually, the picture is starker than that because in earlier housing downturns the market was able to adjust a good deal via higher inflation rather than outright falls in prices. In real terms, average house prices fell by about 30% in 1973-1977 and by more than this in 1989-92.
“I suspect that if I am right about interest rates, average house prices will probably fall by between 10% and 15%. That would probably translate into a fall in real terms of between 20% and 25%, making this the third largest fall in the last 50 years.”
While Bootle accepts that his price projection may seem “apocalyptic”, after the sharp rise in prices on the scale that we have experienced, such a correction is not extraordinary. “Nor is it all bad”.
He explained: “For new borrowers, lower prices will improve affordability. Moreover, once banks pass the majority of interest rate rises through to their depositors, many savers who have been extremely hard done by because of the nugatory interest rates that they have received on their savings, will at long last get more.
“There is, though, a danger of something much worse. What the economy needs is for house prices to drift down gently. It is in no one’s interest that they should crash.
“That would be a nightmare, not only for those caught up in it, but for the monetary authorities. For this would run the risk of causing severe financial instability.
“This is why, although interest rates have to go up a fair bit, starting with a largish rise at next month’s meeting of the MPC, the overall approach needs to be “softly, softly”. This combination is going to be a difficult act for the Bank of England to pull off.”
Roll on up… pick a number, any number…
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For goodness sake can these so called experts give it a break. Let’s just see what happens eh?
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I’d say 30. My daughter has just sold her house and the cash remains on deposit. This fall will be far steeper than the early nineties, as the rise in mortgage rates is proportionately far higher.
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I agree Malcolm, I think the price drop could be even higher than 30%, and this is not fear mongering, this is reality!
The amount of cognitive dissonance in the posts on here by those with vested interest in property prices continuing to rise is astounding.
People cannot afford to buy a house any more due to greed. House prices are massively disproportionate to earnings, the likes of which has never been seen in history. We are heading for double figures inflation and wages remain stagnant. “Bring it on” I say. Let the whole market collapse and re-establish itself with realistic market prices which reflect 3 – 4 times average salary, as it always was, and always should be. Greed had its day. It had a good run, now it is time for common sense to prevail.
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If you want common sense to prevail I suggest you start by analysing your own statement.
I think the price drop could be even higher than 30%, and this is not fear mongering, this is reality! This is speculation not reality. You can imagine any figure you like. As Ric says ‘Roll on up… pick a number, any number…’
People cannot afford to buy a house any more due to greed. The fact is people are still buying property. And who exactly is being greedy?
We are heading for double figures inflation and wages remain stagnant. The fact is wages are increasing. They are not staying stagnant
Let the whole market collapse and re-establish itself with realistic market prices. As long as there are more buyers than properties available the market is highly unlikely to ‘crash’. That is still the current position.
CrashforourChildren Do you really think if the market crashed the beneficiaries would be our children? Not the cash rich investors and landlords? And if it crashed those children relying on the bank of mum and dad to help them out will hardly be in a better position. And there are plenty of parents out there who want to help their children.
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Yes, because all of the ‘experts’ have been so right in the past. Market crash due to the pandemic, didn’t happen, market crash due to Brexit, didn’t happen, market crash in 2008, recovered and some in just a few years. Property should always be purchased as a medium to long term investment with an element of risk always a factor. More often than no though, you will benefit long term.
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Absolutely, unlike other recessions,
1. We have full employment.
2. Some 80% of mortgages are fixed rate – this brings huge stability ( admittedly unless you need to change rate now)
3. You can have a mortgage holiday if you lose your job
4. Regional recessions ( is coal mining, steel ) are far less prevalent, due to home working and the internet.
5. Home owners are far less reliant on commuting which has helped the distribution of wealth.
So, speaking as a front line agent, the market today is proving remarkably resilient and buyers are still buying today. we have just had a great sales weekend! I do appreciate we have a long way to go yet. Also, that the media ‘talking the market down’ does not help and needs re-balancing. Speaking on the BBC evening news last week, the interviewer was really keen for me to be negative – I refused!
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Of course you will have those views, you have to. You are a front line agent, fighting for prices to stay where they are, as you make money from selling houses. House value goes up -> your profit goes up. Naturally, you would not want it any other way. Reality is, house prices will fall, as they are unrealistic and unmanageable as it is. They rose by up to 30-40% in the last year alone in some cities (Edinburgh, Glasgow, etc.), and that is very bad and unmanageable. You know the saying “the higher it flies, the harder it falls.” I do agree though, it will not crash fast (more like slow burn), but I really do believe prices will fall, and fall by 15-20%, and get back to normal and manageable levels. Not even hoping for pre-covid prices, but something that would actually allow normal working folk to get a roof over their heads.
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Actually, no, house prices going up or down does not make any real difference to estate agents. What makes the difference is turnover – meaning the volume of houses we sell each month. The more we sell the more we make – agreed. what we want is a stable Housing market with lots of people moving, so house prices falling often actually increase turnover – ironic really.
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Where does one apply to become an expert/analyst?
Looks like a cushy number to me, sitting at home thinking of a number then writing a short fictional article to “support” your guess!
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Ask Russell Q, they seem to think he’s an expert these days.
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@ wiltsagent – so does Russell Q.
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Not a high bar to clear.
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Regrettably, the media are far more interested in ‘boom and bust’ than presenting a balanced argument (as far as property is concerned) and whilst economists invariably get it wrong it is their figures that are quoted rather than an experienced estate agent.
If the general media wants a crash we shall have a crash unless all estate agents pre-empt the ‘circus’ and advise their customers about what is going on, on a regular basis
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I can’t help but wonder why PIE insists on publishing scaremongering stories? The top 2 news items today are basically the same. More tomorrow perhaps? Then maybe another from one of their resident ‘experts?’ Hmmm…….
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City analysts, who are currently shorting stock on any form of housing, ‘predict’ huge property market crash. This isn’t insider trading- it’s market manipulation. We are talking ourselves into a recession and market crash simply for the benefit of those hedging bets on the market (especially now banking bonus cap has been removed). This is so dangerous- meddling with people lives and greatest assets so a tiny wealthy majority and become more so. Utter lunacy.
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I do agree with some of your points.. But how to put this delicately, housing crash(or slow burn) will also benefit a lot of families that are yet to climb on that housing ladder, prices are crazy just now, they were bloated to unmanageable level, and something must give. It makes sense when you think of it, people want to own homes so they will pay more then they should, they also want bigger and better, so they will stretch their budget to accommodate that. Instead of buying something they can actually pay off, even if interest rates go up to 6-7% (they could have guessed that looking historically they will not stay at 2%), they would weather it through. But if they wanted that 4 bedroom detached in a nice area, but it hit their upper mortgage limit, they still went for it. HOPING market stays strong. Well..newsflash..Their fixed rate will expire in the next 12 months and they will face a SHARP monthly mortgage payment, that they wont be able to afford and will have to sell and downsize or get repossessed..That and lack of will/ability for people to go into 6-9% fixed mortgage rates, will bring those bloated prices down.
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10 out of the last 3 house price falls were correctly predicted by city bods and so called experts.
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10 out of the last 3????
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Keep talking the market down and it will panic enough people. You would think the Chancellor had ordered the killing of the first born when he reduced the tax rate to 40p. The panic that ensued reminded me of elderly maiden aunts swooning when they caught sight of a young couple kissing in public. Get a grip.
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Key sentence in this article:
“Also, the loss of confidence caused by how the mini-Budget was presented resulted in longer-term rates being higher than they needed to be.”
Market fuelled largely by how confident people feel. I was talking to an agent the other day who said he had not noticed any downturn, and yet was talking to me about his 4 fall throughs……You see what you want to see. The market will certainly drop away, its simple economics, you only have to look at correlation between interest rates and house prices to see, its not witchcraft, just facts, rates rise, prices drop. The extraordinary exception was global crash of 2008, with unprecedented rates drops in 2009 & QE. Took a good 2 yrs to start to pick up again.
In the latest price surge, In some UK locations, prices have risen 40% over the last 18 months, so ‘crashes’ of 20% will still be in overall plus territory, which is why the 2008 ‘crash’ was not significant, it was a drop from the (then new) peak.
So really, what constitutes a ‘crash’?
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We need this crash. Every first time buyer needs this crash to happen, and it is 10 years overdue.
Get house prices back to affordable levels. Mortgages at 3 to 4 x (single person) annual earnings as they should be.
Interest rates have been held low to boost a market that is the only thing holding up the economy. The sad thing is, that whoever made these rules is fully aware that they cannot keep flogging this dead horse forever. It just took one energy crisis and an inept government to be the straw that broke the camel’s back.
Yea its going to be pretty bad for a few years while our shattered economy finds its footing, but once we get back to affordable house prices, everyone will be better off.
fingers crossed for a huge crash
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