The property market feels like it has been having a Wile E Coyote moment for months now, as it shot off a cliff, and now hangs in mid-air waiting for gravity to finally apply. However in reality, there are all kinds of hidden forces at work within the market that could send house prices up or down.
The question is which of these forces will become most overwhelming first, and which direction it will send house prices in. The answer isn’t quite what it first appears.
At first glance, it looks like gravity will prevail. Part of the problem is that price rises in recent years have pushed property up to unaffordable levels.
In 2021, in England, property cost an average of 9.1 times earnings — up from 7.9 a year earlier. Since then, we’ve had almost a year of double-digit price rises, accompanied by pay rises in low single figures, so housing is even less affordable.
Rising prices feed into the cost of new mortgages, which are already getting more expensive as rates rise. The average rate on a new two-year fixed rate mortgage has risen to 3.03%, according to Moneyfacts, and if the Bank of England continues raising rates along with market expectations, we could see the average top 4% this year.
This is hardly the only price that’s rising either. While the government has announced more help with energy bills, for the vast majority of people it won’t be enough to cover this year’s extra expenses.
Meanwhile, the cost of everything from food to petrol is making a bigger dent in our budgets. It makes it harder to stretch to the bigger mortgages we need to buy more expensive homes.
Even if we decide we can afford a bigger mortgage, lenders may not agree. They’re increasing the assumed costs in their affordability calculations, which will make it harder to borrow. At some point, we may get to the stage where either buyers or lenders decide enough is enough.
All these things mean that eventually house price growth and transactions will start to slow. There are some signs this is happening already. All the indices are showing lower annual rises as the months pass, and there’s a reasonable chance they’ll be in low single figures by the end of the year.
Mortgage brokers have said the big change they’ve seen very recently is among mortgage valuations. Previously valuers were happy to agree to lend the sum that had been agreed for a property, but increasingly they’re starting to question whether a property is worth it.
This tends to happen when an estate agent, buyer and seller think that house prices are rising at the same pace as before, and the lender disagrees. It’s the lender who has to carry the can if they’re wrong about the value, so they’re the one who is most likely to be presenting a realistic picture of how much the house is objectively worth.
It all looks pretty bleak, but there are still good reasons why prices may not actually fall. First and foremost, buyers are still keen. Earlier in May, Zoopla figures showed that the demand for property was still 58% above the five-year average.
Meanwhile, property for sale is still thin on the ground. With so many buyers chasing so few homes, it puts a floor under prices.
Meanwhile, although mortgage rates are rising, they’re hardly sky high. Around 95% of people who are taking out mortgages right now are opting for a fixed rate too, and more of them than usual are fixing for five years — at around 45%.
It means millions of people are relatively confident they can lock in an affordable rate to protect their outgoings while the worst of the inflation passes.
You also have to consider the alternative to buying. If you’re still renting, then your costs are climbing.
According to Zoopla, there has been an 11% hike in rents over the past 12 months, so that anyone planning to move from an unpredictable and rising rent to a fixed rate mortgage won’t just have a chance that their overall costs will fall, they can also gain far more certainty over their future expenses too.
Taken together, all these things make falling house prices less likely. Instead, we’re likely to see price growth slow substantially but stay positive, while house sales start to drop away.
However, there’s always the wild card of what happens in the wider world. Nobody can completely rule out house price drops if things get even worse than we’re expecting.
If high inflation and higher interest rates tipped us into a recession, there’s a risk people would start to lose work. This could make some people less confident about buying and could force some to sell up. This might flip the balance of supply and demand, and depress prices.
But before anyone starts to get too stressed about a theoretical crash, it’s worth bearing in mind that we’re not seeing any widespread conviction that all of this will happen.
There is risk on the downside, but it’s not a Wile E Coyote-style foregone conclusion. Instead, everyone’s favourite cartoon anti-hero is likely to be trundling along a straight, flat road for the next few months.
It doesn’t make for much of a cartoon, but in reality it’s far easier to live with than his trademark cliff dive.