Will there be a housing market crash?

Lenders are pulling their products left, right and centre because they have no idea what is going to happen with interest rates. In the Bank of England vs Truss administration war, there are no winners. Borrowers are caught in the crossfire. I am hopeful that in a week or two we will have a clearer idea of what is going on. Hopefully the Bank of England will make a proper statement and then we will all know where we stand. Lenders included. But the property market will be tested in the weeks and months ahead.

There could come a point at which increasing mortgage payments due to interest rate rises massively reduces demand for houses, which will clearly be bad news for property prices. We might not be there yet but what if rates go up another 1%, 2%, 3%? Higher interest rates on mortgages have the potential to significantly reduce demand among people up-sizing or moving, as well as property investors. Then, of course, a lot of people may not pass banks' affordability checks, which means they can't buy the homes they want. Higher rates could also increase supply, as more people sell up if they cannot afford their mortgage and we may possibly see an increase in repossessions. All of these factors mean we may well see a property crash.

The UK housing market is vastly undersupplied and so a fall in prices can really only be triggered by a couple of things: someone building and then releasing a million homes onto the market all in one go, or lenders withdrawing mortgages meaning that only cash buyers, or those with really big deposits, can purchase. I'm not aware of anyone secretly building a million houses, but the second one is scarily looking like becoming a reality. Our hope is that markets settle quickly and lenders return with their full (albeit no doubt higher priced) product ranges soon. If not, the housing market is looking extremely vulnerable.

Unless we are very lucky and inflation falls much more quickly than predicted, I don't see any other outcome than a sizeable fall in house prices. Possibly 20-40% over the next two to three years. I'll be accused of being a doom-monger, but if you use simple maths and common sense, how can house prices not fall? A lack of housing supply won't help one iota when mortgage rates are somewhere between 5% and 7%, as is likely over the coming months. First-time buyers won't be able to borrow as much, therefore they won't be able to offer as much. It's as simple as that. This is why the Bank of England are putting up rates so slowly compared to other central banks. They know what will happen if they increase them too far. Those coming to the end of fixed rate deals could end up paying hundreds of pounds more each month. Unable to afford a new deal, many will have to sell up to prevent being repossessed, forcing prices lower. The truth is, housing is vastly overpriced, and decoupled from average wages thanks to extended terms, higher income multiples and above all, dirt cheap rates. With rates on the rise, the decade-long property bubble is about to burst.

Up until recently, I have been optimistic we will not see a housing crash but given what is happening and what is expected to happen going forward it is now a much more realistic possibility. I never thought we would witness such significant rate rises in such a short period of time and the impact this is going to have on monthly payments is going to be unaffordable for many borrowers, if they rise to expected levels. Up until August this year lenders were required to ask for evidence that the mortgage payments would still be affordable if there were a rate rise of 3% but we are already experiencing rate rises higher than this so those that borrowed to their maximum capacity and just about squeezed into the affordable bracket will see their payments become unaffordable even by the conservative rules of regulation, let alone the reality that people's mortgage payments were already breaking the bank when they were much cheaper.

Transactions will reduce dramatically due to a lack of liquidity and tightening of affordability and lending criteria in the mortgage markets. Of the transactions that take place, the majority will be below market value desperation sales which will make it look there is a catastrophic drop in the housing market. However, on a macro level as soon as the liquidity comes back and banks start lending again the transactions will increase and average house purchase prices will increase. On a micro level some areas will crash hard, some will continue to grow and some will go every which way but sideways. Looking at a year by year analysis or short term trend may look scary but looking back over a 1 - 3 year period in 18 months time will show an overall upward trend in housing prices as the bottom line is we are woefully short of housing, even more short of good quality housing and the demand is insatiable. If the PM and Chancellor want to stimulate the economy and housing market whilst also making inroads into the housing and climate crisis they should galvanise new build development, smooth the passage and process of planning and incentivise new build purchasers. One stone 798 birds.

Death by a thousand rate rises! House prices look set to remain static nationally for a time due primarily to long term shortages of supply - ie there are still not enough houses to match demand. Most home owners are also on fixed rates and therefore are currently protected from the rises. Those whose rates are expiring now benefitted from the mortgage stress test before taking out their mortgage which means they should be able to afford their new rates. However even the housing market is not immune to the current economic situation. The primary impact will be a reduction in real values due to inflation but regionally we may see some hefty falls from the current levels. The biggest risk is unemployment. Whilst employment remains high the markets are likely to stagnate as no-one moves and no-one can afford to buy. However, if people start to lose their jobs, then we will see a spike in re-possessions which will lead to house price falls. If interest rates continue to climb, as is likely, though next year then we will almost certainly see a significant rise in homeowners unable to pay. Whilst the banks have some tools to help, such as moving people onto interest only payments for a time, this will be equivalent to putting a sandbag in your door when a river floods.

The big unknown is how much and how fast will mortgage rates increase as a result of the current turmoil? Mortgage rates have increased by between 2%-3% since last year and the mortgage and property markets have both coped well with this pace of change. In the current crisis however, we could see the same rise again within a few days. That could cause a 'buyers strike' in the property market, which could in turn cause property prices to crash.

There are very good arguments on both sides as to whether there will or will not be a crash. In some ways I can see why a crash seems inevitable, people are skint as it is just scraping by every month after paying extortionate energy and ever rising food bills which is now being further compounded by increasing mortgage interest rates people don’t have the money anymore to buy new houses, maybe downsizing will keep the market partially afloat but if everyone is downsizing part of the market will still crash. And if this is the case I see the crash coming soon i think we are already at the top of the slippery slope and will just see this crash harder as the interest rate continues to rise. I think the saving grace keeping the market aflot if it is kept afloat will be the property landlords and big investors, as a recession is not always a bad time for everyone, for investors It can provide great opportunities to buy properties at a lower value.