As the saying goes, all good things must come to an end. Is that the case then for UK house price growth, which, as of February 2022, has reached a record 17 year high and was 11% higher than the previous year?
The property market has certainly seen a significant boom in the last 10 years, with the average UK house price jumping to £277,000 (and around £535,000 in London). Despite concerns of a significant house price crash in March 2020 in the wake of the Covid-19 outbreak – with predictions of a 10% drop in value – the opposite has happened in reality. In fact, we have seen an impressive 20% growth in the last two years alone. This has been thanks to the pent-up demand (and accompanying savings) of lockdown, the incentive of stamp duty relief from July 2020 – September 2021, a continued dearth of supply versus buyer demand and accessible mortgages with very favourable rates.
Whilst house prices are continuing to rise in 2022, albeit at a slower rate of growth, the impact of rapidly rising inflation – currently at 7% and set to hit 10% or more later this year – and the cost-of-living crisis we are currently experiencing is starting to have an impact. As prices for everyday items, services and utility bills are rising at their fastest rate in 30 years this has put a significant squeeze on household budgets and left many homeowners struggling to keep their heads above water let alone consider taking a step up the property ladder.
Indeed, the Bank of England has already raised interest rates to 1% as of May 2022, with further increases set to follow. These rising interest rates and soaring living costs mean affordability is a real issue for existing and future homeowners and a housing slump is on the cards eventually, even if industry experts are still quibbling about when exactly that may be. Mortgage rates are now starting to follow interest hikes, with lenders becoming more stringent in their affordability checks and down valuations on the rise too, leading us to believe that the house price bubble might be about to burst any day.
This situation is not new though, and throughout history we have seen the ebb and flow of house prices, which is generally based on the wider economic and political situation of the time.
However, we would do well to learn from the mistakes of the past when it comes to the property market to avoid a significant house market crash and the resultant economic fallout. A case in point being the crash of the early 1990s, when mortgage rates hit an unthinkable 15% and many homeowners were either forced to sell or become trapped in a cycle of negative equity with homes that were worth significantly less than they were paying for them. Immediately prior to the global financial crash of 2008, which also saw a fall in house prices, the gap between average wages and house prices was the equivalent of today’s disparity. The average UK property price rose from £100,000 to £225,000 between 2000 and 2007 thanks to financial deregulation, particularly in mortgage broking. When that bubble burst, the world faced a huge recession and properties lost around 15% of their value, not returning to pre-crash prices until at least 2012.
In the present day, predictions of a drop in house prices are not nearly so severe, thankfully. Many experts agree that prices will continue to rise at a slower rate of about 3% by the end of 2022 and into 2023, with an actual decrease in property value not hitting until 2024 at the earliest. Even then, it is anticipated that this will be at a more modest rate of between two and five per cent. Economic commentator, author and proponent of the 14-year housing cycle, Fred Harrison has a more long-term view though. Having predicted the 2008 house price crash, Harrison feels that prices will continue to rise in the next few years, before a big crash in 2026.
For first-time buyers, or anyone wanting to purchase a home without the need to sell one, the idea of a significant house price crash may seem like good news. However, regardless of whether or not house prices do drop and by how much, buyers should be focused more on the longer-term affordability of any property purchases. If both interest and mortgage rates continue to increase, it is important not overstretch yourself at the thought of a ‘bargain’ purchase now which you could be paying over the odds for later.
