Why Britain’s falling house prices will not bounce back
The property market crash is well under way.
Figures published this week by Nationwide confirmed that house prices have now fallen for five months in a row, the longest stretch since 2009.
Values are down by 5.6pc compared to their August peak, meaning the average home is now worth £15,454 less than at the end of the summer.
The data confirm that Britain is facing its worst housing market crash since the financial crisis and leave many homeowners asking: how bad will it get?
Analysts believe the current house price slump will not be as big as the one suffered during the financial crisis – but the downturn will last much longer.
During the credit crunch, house prices fell for 16 consecutive months, according to Nationwide. This time, analysts at Oxford Economics expect the slump to last 24 months.
Britain is set for a more drawn out property crash because of changes in the mortgage market, which mean the pain of higher interest rates will filter slowly through the market rather than hit all at once.
However, while the slump will be prolonged, Oxford Economics forecasts prices will only drop by 12pc peak-to-trough, compared to the 18pc crash recorded from 2008 to 2009.
Andrew Goodwin, of Oxford Economics, says: “We think the much higher share of fixed rate mortgages now will limit the fall in prices and make it less steep, but more prolonged.”
So far, the market has been remarkably protected because unemployment is low and a very high share of homeowners are on fixed rate mortgages.
“The biggest driver of house price falls is the extent to which people are forced to sell. That happens either if they lose their job or if the cost of their mortgage is too big to keep going,” says Mr Goodwin.
Ten years of ultra-low interest rates following the financial crisis brought a sea change in the structure of the British mortgage market that is now limiting the speed of price falls.
Cheap rates brought a huge incentive to lock in. In the 10 years from 2012 to 2022, the share of mortgage borrowers on variable rates – which fluctuate in response to changes in the Bank Rate – plunged from 71pc to 15pc, according to Capital Economics.
More recently, as the Bank of England began raising interest rates from the end of 2021, homeowners rushed to remortgage and lock in cheaper rates for longer.
The shift to fixed rates in the post-2008 years is one of the reasons why house prices in Britain have not been falling as quickly as in other countries such as Sweden, where far more mortgages are on floating rates.
The effective rate on outstanding mortgages, which moves more slowly than the effective rate for new loans, has been climbing from its low of 2.01pc at the end of 2021 thanks to successive rate rises.
By the end of 2024, it will have nearly doubled to 3.92pc, according to Capital Economics’ forecast.
Yet it would have hit 5.17pc by the end of this year if the mortgage market still looked like it did back in 2012, according to Capital Economics.
However, fixed rate deals cannot protect homeowners forever. An estimated 1.8m homeowners will come to the end of their deals in 2023 and will have to refinance at much higher rates.
About 7.4pc of mortgage holders will be looking for new deals in the first three months of the year, with a steady flow for the rest of the year.
The drumbeat of homeowners coming off fixed rate deals means the blow of higher interest rates will be more protracted than if all homeowners had variable rate deals.
People refinancing during 2023 and 2024 will also be stuck on higher rates for longer, even after the Bank of England eventually begins cutting interest rates, Mr Goodwin says.
“Those two factors together mean that we are unlikely to see a big bounce back in the housing market,” Mr Goodwin adds.
Andrew Wishart, of Capital Economics, says that the high prevalence of fixed rate mortgages could push the Bank of England to keep interest rates higher for longer.
“It reduces the potency of monetary policy, raising the risk that interest rates have to be raised further or kept higher for longer to compensate,” Mr Wishart said.
The speed and scale of price declines is just one way to compare the two market slumps. Another is affordability levels.
Mortgage affordability in the years to come will depend on how high interest rates go and how long they stay at those levels.
If the Bank Rate has already peaked at 4pc, the share of income needed to cover payments on a typical mortgage will return to the level recorded in February 2022 by November 2024, according to Pantheon Macroeconomics.
However, if the Bank Rate rises to a higher peak of 4.5pc, housing affordability will still be as bad as in 2008 by the end of 2024.
Then there is the question of recovery. After the initial sharp drop, house prices quickly rebounded thanks to central banks around the world slashing interest rates.
This time, there will be no such stimulus as the Bank of England grapples with inflation.
Simon Rubinsohn, of the Royal Institution of Chartered Surveyors, says interest rates are unlikely to return to the rock bottom levels enjoyed in the post-financial crisis era.
Even after the Bank starts to cut the Bank Rate, it will settle at around 3pc, he believes.
That means no bounce this time.
“I don’t think the housing market will bounce back in the near term in terms of prices or activity,” Mr Rubinsohn says.
Mr Goodwin added: “In terms of the economy, the financial crisis saw a very sudden collapse and then a rebound. Now, everything is very soggy. There will be a weaker upturn if you have a shallower downturn.”