‘The risks are pretty big’: how long can UK house prices defy gravity?

It is two years since concern last swirled around the health of the housing market. Then, estate agents were tentatively setting up socially distanced viewings after the market was allowed to reopen part-way through the first Covd lockdown. At the time, the property firm Savills reviewed its forecast and decided it still expected house prices would “fall by around 5% to 10% in the short term”.

This did not happen. The pent-up demand that had grown through lockdown was quickly stoked by stamp duty holidays across the UK. Far from falling, house prices started rising – and have not stopped since.

On Friday, the UK’s biggest lender, Halifax, said prices had risen by 1.1% in April, bringing the average to a new high of £286,079. “Housing transactions and mortgage approvals remain above pre-pandemic levels and the continued growth in new buyer inquiries suggests activity will remain heightened in the short term,” said the bank’s managing director, Russell Galley.

“For now, at least, despite the current economic uncertainty, the strong increases we’ve seen in house prices show little sign of abating.”

Halifax’s numbers are the latest evidence that despite a pandemic, consecutive Bank of England meetings resulting in interest rate rises and a developing cost of living crisis, house prices – and activity – have remained strong. But how long can it last?

Two years after it predicted a fall, this week Savills said it remained “difficult to see the trigger for a meaningful house price correction”. Other commentators appear to agree, although with caveats.

“I’m not expecting there to be a crash but I’m more negative about the prospects for the market than at any time since the start of the pandemic,” said Neal Hudson, a housing market analyst at the consultancy BuiltPlace. “The risks are pretty big at the moment.”

Halifax house price index

House prices have been supported by low borrowing costs, so rising mortgage rates, combined with other increases in living expenses, could tip the balance. This week’s interest rate rise came with warnings that inflation could hit 10% before the year was out and that the UK was in danger of falling into a recession. With interest rate rises the Bank’s key tool for reducing inflation, further increases in the cost of borrowing seem inevitable.

“We might suddenly go from a point when house prices look perfectly reasonable to where all of a sudden they’re not,” Hudson said. “You don’t have to go up to the 15% interest rates we saw in the 80s for people to feel the same pain. We’ll see the equivalent amount of pain if we see rates go to half that.”

The mosaic floor in the Bank of England
The mosaic floor in the Bank of England. Further interest rate rises are inevitable given it is the Bank’s key tool for reducing inflation. Photograph: Luke MacGregor/Reuters

Robert Gardner, the chief economist at Nationwide building society, said he had been surprised by the strength of the market reflected in his organisation’s recent monthly reports, given some of these factors were already in play.

“The squeeze has already started,” he said. “We’ve seen that filter through in sentiment surveys earlier in the year. We know the market lags that, but it hasn’t really shown significant signs of slowing, which has been a surprise.”

Nationwide’s index recorded lower growth for April than Halifax, at 0.3%, but showed the average price was up by 12.1% year on year. Gardner is expecting the market to slow, rather than crash. But a key factor will be employment.

“The thing that is really important is the labour market – that’s probably the most important thing overall,” he said. “Recently the unemployment rate has fallen back to where it was before the pandemic and the number of vacancies is high so that suggests that strength [in the labour market] is going to last in the near term.”

There are other factors underpinning the growth of recent months that could support the market for the rest of the year, at least. The end of the first lockdown and the government’s stamp duty holiday seemed to prompt a flood of demand from borrowers, particularly those looking to change their lifestyle. But while some thought demand was being brought forward, the early signs are that there is still appetite from would-be movers.

Gardner points to recent mortgage approval figures, which, although falling to 70,700 in March, remained above the immediate pre-pandemic average of 66,700 a month. A survey of 3,000 people by Nationwide also found 38% were either considering or in the process of moving. “There’s still a strong motivation to move,” Gardner said.

In fact, some workers may only now feel comfortable enough with their new working patterns to commit to a move. Gráinne Gilmore, the head of research at the property website Zoopla, said: “Some buyers will have already taken the leap, but some buyers will have been waiting to see what the final finding is for their work.”

Housing demand is currently outstripping supply, with estate agents in some parts of the country reporting bidding wars among buyers. Anthony Codling, the chief executive of the property consultancy Twindig, said if prices did start to turn down there would be “a step back of supply and a step back of demand” rather than a crash. Homeowners will sit tight if they think their property will fetch less than they want, which will support prices.

Commentators say there is no reason to suspect that there will be a flurry of homeowners forced to sell any time soon. While the early 1990s saw repossessions and distressed sales, the banking crisis did not result in a massive sell-off of homes. Instead, falling interest rate rises allowed people to keep paying their mortgages, and banks were encouraged to offer forbearance. Codling said the mortgage repayment holidays brought in during the pandemic suggested lenders would react in a similar way in any future downturn.

For the three-quarters of borrowers who are on fixed-rate mortgages, the interest rate rises so far have not made an impact on their monthly costs. It is renters who are more stressed, and this is where the danger of a sell-off lies for Hudson. Tenants on low incomes are struggling and landlords may be hit by missed rents. “In the rental sector where demand is weak we could see landlords selling up,” he said.

Outside the buy-to-let sector, if the UK goes into recession it does so at a time when mortgage holders are protected like never before. The mortgage market review that followed the banking crash brought in strict rules on lending, and put an end to 100%-plus mortgages for borrowers who did not have to show any evidence of their income. Instead, borrowers have undergone strict affordability checks and had their finances “stress-tested” to make sure they can pay a rate far in excess of the ones widely being offered by banks and building societies.

Despite years of rising prices, households have not been allow to take on the excessive mortgage debts that characterised the early-2000s. “They’ve not stretched themselves, they’re not on high loan-to-income ratios,” said Hudson. “These are some of the safest borrowers there have ever been.”