Why UK house prices won’t go up

Brexit is blamed for subdued house prices but the UK housing market is in trouble with or without a Brexit deal.

Not long ago, Mark Carney warned UK house prices could fall by as much as 35% if the UK leaves the EU deal-less.

The Bank of England governor was immediately accused of scaremongering. People crying foul had a point.

Carney has effectively become a stooge of the government by expressing his pessimist outlook for UK housing only in relation to a no deal Brexit.

“No deal” will inflict pain; a deal with Brussels will bring pleasure, the government machine keeps telling us.

What Carney should have said is the housing market in the UK is in trouble either way. Deal or no deal.

House prices have peaked. What’s propping up the market for the moment, bottom rate interest, central bank money flooding the system, and Help to Buy schemes can’t prop it up forever.

Even with that artificial stimulus, the UK housing market has been more or less flat for a decade.

Here’s why UK house prices may not rise before 2028 regardless of what happens with Brexit.

Unaffordable houses

Once a month, the Royal Institution of Chartered Surveyors (Rics) publishes its UK Residential Market Survey.

It’s widely regarded as one of the best forward indicators of the UK housing market. Last month’s survey doesn’t promise a lot of good.

Rics reports “the weakest reading since September 2012”. Though there are wide geographical differences, the general picture is that of a market that is souring.

The biggest problem lies with the London market, which has gone from bad to worse this year. It’s dragging down the rest of the UK market.

The impact of London’s slowdown is strongly felt in surrounding regions as house prices dropped in the South East, South West and East Anglia.

Due to price rises in the North West, West Midlands, Scotland and Northern Ireland, which offset the slump in the south a bit, the UK housing market was on average only slightly down.

What’s particularly worrying for the long-term trend in UK house prices is the widening gap between house prices and people’s salaries.

In the mid-1990s, a house in England or Wales cost a little more than three annual wages. At that time the house price to earnings ratio was a bit low.

Houses were a little too affordable. People could pay off their mortgages within a decade and could even decide to buy another house. That way the government would have to build a whole lot of houses if it doesn’t want the market to dry up.

As we all know, the government always promises to buy a lot more houses but never actually builds a lot more houses. And so house prices went up again.

A tad much, in fact. People in the UK these days need to shell out almost eight annual wages to own a property. It takes a lot longer to pay off your mortgage, but, more worryingly, deposits get higher too.

It’s precisely this big gap between income and house prices that’s created “Generation Rent”. They can’t afford to buy a home until they’re in their 30s or 40s. Young people in the London area have virtually no chance of getting on the property ladder.

Something’s gotta give. The market needs to correct (i.e. fall) in order for potential homebuyers to be able to afford a home. Or the market needs to stay flat for earnings to catch up and close the gap that way.

Either way, it sure looks like house prices have no business going up for a while.

House prices will flatline

We’d like to believe house prices can only go one way: up. But the last decade already proved that’s not necessarily the case.

Sure, house prices have increased in nominal terms. In 2007, a house in the UK cost on average £174,000. Today, the average house price is £225,000.

That’s a 30% gain in 11 years. Sounds like a lot, right? But really it’s less than 3% per year. Adjusted for inflation it means the housing market has been more or less flat.

What’s more, we have every reason to believe this lost decade in the housing market will be followed by another one.

UK Value Investor’s John Kingham says there’s a very good chance property prices stay flat for 20 years:

“In 2007 house prices were at record highs relative to earnings and the gap to ‘fair value’ was as large as it had ever been.

“We [could] have the mid-2000s credit boom to thank for two decades of almost zero price growth in the housing market.”

Brexit is often being blamed for the subdued housing market. Once the government has pushed its deal with the EU through parliament, everything will be peachy again.

If only… The UK housing market is in a bind either way.

A no deal Brexit would likely cause people to hold off on buying a house. On the other hand, a deal with Brussels would lead to interest rate hikes, which will similarly put off people planning to buy a home.

Capital Economics expects no fewer than five rate increases between now and mid-2020, bringing interest back to 2%.

“Looking ahead, the near 10% decline in mortgage approvals in the run-up to the June 2016 Brexit referendum suggests that households will increasingly respond to no-deal Brexit risk by delaying housing purchases,” writes Samuel Tombs at Pantheon Macroeconomics.

“But even if a transition period is secured, the housing market will remain sluggish, as the MPC [Monetary Policy Committee] likely will begin a faster tightening cycle.”

Even if the UK manages to avoid a so-called “cliff-edge” exit from the EU, a lack of demand and a supply glut could conspire to suppress house prices.

Though prices have been falling of late, UK houses are still relatively expensive compared to people’s wages.

And with loan-to-income at very high levels, it wouldn’t take interest rates to rise by much for affordability to take a big hit.

As and when mortgage rates return to somewhere near normal levels, affordability and demand are likely to evaporate,” notes Strategic Intelligence investment director David Stevenson.

But there’s a supply side issue as well.

“As existing home owners (incl. baby boomers) reach ages where they increasingly need more cash for long-term care, I expect an ‘automatic’ supply of houses onto the market.

“As demographic changes result in greater ongoing supply of residential property, the market will be facing some strong headwinds. I wouldn’t be surprised if prices made no upward progress for many years.”

UK house prices could flatline for another decade…

Bad luck for homeowners who are banking on their property’s value to go up. Good news for aspiring homeowners who might actually be able to afford a home again.

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