Benefitting from a housing price crash

The obvious camp that benefits if house prices crash is first-time buyers, who have been priced out of buying a property in recent years in many parts of the UK. People who already own a house are typically hesitant to move during periods like this. However, providing they have the available equity in the house still, it presents a fantastic chance to move up the ladder at a discounted price as the more expensive property is likely to have taken a larger hit than they would have. If the housing market was to crash significantly, it could also bring in intervention from the Bank of England and the government on ways to prop up the housing market as it plays such an important role in our economy.

There are typically two groups of people who will be best placed to benefit from a housing price crash. The one group is those people sat on cash that they wish to move into property in the form of buy to let assets, and the other group is first-time buyers. The buy to let market is under significant pressure currently, with cashflow margins tight if financing is needed. This is especially the case once you factor in the current taxation model of personally owned rental income. A reduction in asset acquisition costs could see investors encouraged back to the market. First-time buyers have been under increased pressure to save large deposits, in monetary terms if not percentage terms, for many years. Any downwards price pressure could help those already underway with saving to get on the property ladder sooner. However, supply and demand still need to be factored in, and of course due to the current imbalance of supply against demand there is no indication prices at this stage will collapse. However, a modest readjustment would be a sensible prediction.

Few people will benefit from a housing crash. There might be an opportunity for people who have the means to take advantage of a "bargain". However, there will be many faced with negative equity and it will have a much wider impact on the economy because property value is the UK's financial barometer. It is probable that we will see some downward pressure on property values, which is likely to be regionalised and will have greater impact on mid-high value properties. Any period of property deflation will be short-lived. Stagnation is more likely and that is probably what we need for a period anyway. If you are buying to live in a property, then you buy when you need to. If you are an investor then you buy because you can see a return. In both scenarios, you are not master of the environment, you simply adapt to it. If you are an investor you are probably holding off to see if the elusive "crash" is coming or you are taking a longer term view on your investment. If you are looking to buy to live in, then your focus should be on your ongoing ability to service the mortgage. Waiting could simply cost you more.

There are very few who can benefit from a genuine house price crash. Since any large and sharp collapse in prices is probably brought about by a lack of mortgage availability, only cash buyers are in any real position to benefit. If we see a gentle downward trend in prices, over a few months, with no reduction in mortgage funding then anyone looking to move onto, or up the housing ladder will benefit from lower prices. The middle ground is where there is a reduction in house prices and a marginal reduction in mortgage availability, which generally tends to be around the higher risk areas for lenders; so those with smaller deposits, too much credit, complex incomes (such as contract workers, or those with large amounts of variable pay, like commission). Whilst changing your job to look better to mortgage lenders is a little extreme, it would certainly be prudent to work on repaying credit card and loan debts and saving a little more deposit. Remember that lenders work in 5% increments; if you have a 5% deposit, can you get it to 10%, or if you have 10%, can you get it to 15%? Each extra 5% will see you have more chance of getting a mortgage and potentially at a lower rate.

A house price crash will benefit everyone looking to buy a home, but especially first-time buyers, many of whom have been priced out for far too long. Property prices have become decoupled from economic reality and are completely unsustainable. The government really needs to control house price inflation, in much the same way we have a 2% consumer inflation target. That would allow real wages to catch up and reduce the average earnings to house price ratio, which is currently almost double the historical average. In a couple of years, prices could easily be 20-25% cheaper than they are now. And if inflation is back under control, mortgage rates might be lower too, though I don't see any return to ultra cheap credit. That could be a really good time to buy.

We have been telling clients for the last year of the impending rate rises and effects the cost of living crisis will have on house prices. We called a 20% downward correction over the next three years, in Sept 2021 alongside steep rate rises. Alongside this we recommended clients focus on flipping properties, or selling lower value properties with lower quality tenants at the peak in prices as those would be the properties that would struggle to cover their mortgages if tenants start struggling (as those with less disposable income tend to first). The whole point of this was to focus on building a 'war chest' of excess funds on their balance sheet to take advantage of both fire-sale properties where owners have to move and thus need to reduce prices to 'get out' and to tap what will soon become a very busy foreclosure auction market. Clients that have taken the above steps will clean up in our view over the next few years, selling high and buying low as with stocks. Using bridging finance for the properties they are buying will allow them to scale their buying with the savings they have built up. We suggest that they continue flipping where the value of the property and grade of the tenant is low and eventually as the economy starts to stabilise look to buy higher value properties with professional tenants who are more likely to be shielded from inflation with contracts containing annual pay rises etc. That ever growing balance sheet will enable them to reduce LTVs on these properties (and/or invest in upgrading energy efficiency) to lower mortgage rates and improve yield.

Honestly, unless you're cashing in your chips and selling your deceased grans house, your equity as actual cash you can use is all a bit airy fairy. If house prices come down it's not the end of the world because the house you're buying will probably be cheaper too. You may even need a smaller mortgage meaning less money in the banks pocket rather than yours over the next 25 plus years. There will be victims, such as people trapped in negative equity but one fact is inescapable. We do not build enough houses in the UK meaning that in the long term they can only go up. My advice? Hang on in there and home-ownership is still a heck of a lot more appealing than the wild west world of renting.