Why the Housing Crash Never Happened

A look at recent events in UK house prices. Why prices fell only a little. What are the prospects for the future.

0:00 Intro
0:55 Real House Prices
2:04 Stress Tests
3:52 BOMAD
5:07 Rented sector
7:02 Future House Prices?
7:50 Interest Rates
8:35 Interest Rates
10:59 Regional Market

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in the past two years a perfect storm has hit the housing market ultra low interest rates saw house prices sore relative to incomes If people could get a big enough Deposit they bought a house because as is often the case UK house prices seemed a one-way bed but then the economy darkened inflation soared and interest rates Rose 500% given the interest rate shock on an already overvalued housing market how could house prices not fall but apart from relatively minor correction nominal house prices are still only 5% lower than their 2022 Peaks now first of all let’s look at seven reasons why house prices did not fall further but also there’s considerable uncertainty about what will happen next especially with regard to interest rates one reason house prices didn’t fall is because of inflation if we adjust for inflation house prices fell 15% since the beginning of 2022 which is quite a significant correction when we talk about wages or GDP we always adjust for inflation noral house prices are really misleading to what is actually happening in the market the second reason that prices didn’t fall by more is that although mortgage costs are going up only a small percentage of households have been forced to sell the Nationwide measure shows mortgage payments for firsttime buyers are rising close to levels last seen in the last two crashes 91 and 2008 there’s still a very good reason to feel that prices are overvalued and it explains why Bier demand has been weak in the past 2 years but if we look at uh 1991 and 2008 we saw significantly higher levels of households forced to sell because of uh repossession and is this dumping of houses onto the market that really pushed prices down there are three differences this time around firstly after the credit crunch new mortgage regulations were brought in which meant that buyers had to pass stress tests this means that A lender has to check you can still pay your mortgage if interest rates go up and this didn’t happen pre credit crunch now interest rates have gone up and stress tests kind of worked although people are paying a higher share of their income and mortgage payments they haven’t been forced to sell secondly after the credit crunch more people started to take out fixed mortgages of 2 5 10 years so in the past two years quite a lot have been insulated from higher rates although some still face that mortgage shock to come in the next uh few months but I think the biggest Factor really is the introduction of stress tests which have meant that uh people have to prove they can pay higher mortgages the third reason is that in many ways we have a kind of strange economy what I mean by that is that at the end of last year we entered recession GDP falling last month growth was flat real GDP per capita is still lower now than in 2019 yet despite this dismal economic performance unemployment is near historic lows now true unemployment has risen last month but in 2009 and 1991 we had unemployment of over 10% now stress tests assume you keep your job a rapid rise in unemployment would make them redundant but so far unemployment is fairly muted now true economic inactivity is quite high but the overall employment picture is not significantly affecting the housing market like it did in 2009 and the early ’90s a fourth reason is that when we model the impact of interest rates on disposable income we can often forget about other sources of Finance that’s important to the housing market a good example the interest rate rise from 2 2021 to 2023 meant that the average householder was paying an extra £600 a month to pay for their mortgage which is a big demand side shock but mortgages are only one source of Finance we have seen gifts from friends and family become a substantial part of a housing market it supported 47% of house purchases in 201 23 and harder to quantify as the institutional purchase of houses by investors the average deposit has really soared in the past 10 15 years especially in London and the southeast but parental support have helped quite a lot of people overcome this barrier and this explains some of the increase in the house price to income ratio also perhaps there’s more dual income families than there was in the 70s and ‘ 80s but a good question to ask is has this growth and parental lending sustainable has it reached a peak uh will it even go into decline in the future now related to this point of people stretching to get onto the housing market is that rents the rental sector seem continued growth in the cost of renting higher than inflation and this means many people face really high monthly payments of rent so this creates an incentive to do everything you can to try and buy and avoid paying this dead money of rent for example this can involve taking out longer mortgage terms it used to be 25 years but now we see 30 40 years as more common and this might increase the overall cost of a mortgage but it doesn’t make it easier to get a mortgage in the first place a six reason for stable house prices is that despite a drop in mortgage lending there’s been a relative shortage of houses coming onto the market meaning prices have been kept High because of short of Supply property Developers have even admitted that they’ve slowed down the sales of new houses because they don’t want to see prices go down despite promises to build more houses government targets have not been met and last year was a real low for house building with the growth in population the UK does suffer from a shortage of housing and this is a factor in propping up house prices though it is interesting to note that in 2024 Sula are reporting a big increase in the supply of houses coming onto the market supply is increasing faster than a demand and this could be quite important in the coming months the seventh reason is that in recent months we have started to see real incomes grow now it’s fairly weak and it’s still mainly undoing some of the falls in real income of 2022 but it is encouraging more firsttime buyers to dip their toes into the housing market so these are some reasons to explain why we had only a gradual slide in real prices in the past 2 years but what about the prospects of house prices in the coming 12 24 months and also with labor likely to win the election and promising to build 1 and a half million new houses in the next 5 years which such a big increase in Supply push down prices well evidence suggests that if you increase supply of houses it reduces prices less than you might expect there might be some uh lower growth some fall in prices but it’s not a huge factor and secondly forgive me for being a little cynical but government promises to build houses are rarely if ever met and even if the will and the money is there in practice it can be difficult to build so many houses because of shortage of skilled labor shortage of land Etc now the really big determinant of house prices in the past 15 years and will be going forward is interest rates the bank of England’s own study said that it was low interest rates which was really behind the big increase in house prices of the 2010s and early 2020s one study by the bank of England suggested that every 1% rise in interest rates could in theory reduce house prices by between 2 and 20% depending on the country and uh uh the situation of the economy but this effective interest rates is often subject to quite a long time delay if you go back to the ’90s interest rates Rose but prices fell for the next four or five years so in theory with base rates going 4% in the past 2 years there may still be some Falls to come because of a time delay effect but the big question is what will happen to interest rates and it’s fair to say this has proved fairly difficult to forecast the Outlook is still uncertain I expect them to fall but then I expected them to fall last year and I think that core inflation proved a little more stubborn than expected now the logic for interest rates to come down is a few fold firstly inflation has fallen quite sharply cost push pressures have gone into reverse secondly economic growth is very weak at best real GDP per capita is effectively stagnant now thirdly although Services inflation is still elevated there is generally a time delay in responding to headline inflation going down when inflation shut up to 10% pay was well behind and workers only negotiate their contracts once a year so it’s understandable there’s a time delay but now headline inflation is falling the same delay is happening in Reverse but I think that going forward workers still have weak bargaining power in the UK and when they come next to negotiate their pay contract the wage will reflect the fact that headline inflation is lower so given economic weakness and falling inflation it’s going to be very hard for the bank of England to justify keeping interest rates at over 5% real interest rates already at a 15-year high and arguably damaging the weak economic recovery if interest rates were to fall to four or even 3% then it would definitely uh boost demand in the housing market yet even if interest rates do fall by a small amount it’s still hard to see a return to the ultra low rates of the 2010s and also all the other factors which have helped prop up house prices are in a way kind of exhausted uh house prices are still fundamentally over valued and even though we throw everything into buying a house a majority of households will struggle to find more Finance to keep paying higher prices so the net effect is that it’s very hard to see uh a return to booming house prices that we saw in previous decades and unless there’s a big economic shock the most likely scenario is um fairly stagnant or gradual decline in real prices for the foreseeable future the final point is that don’t forget housing market is highly Regional because it’s London and the southeast most affected by higher house prices and cities have have seen the biggest falls in the north less affected by higher interest rates CU prices are more affordable and there you’ve seen prices rise by the way although it’s hard to see a big drop in house prices I would actually like to see them gradually fall because High house prices have caused a lot of economic and social problems this video goes into all the detail about why High prices have created distortions in the UK economy