The next fall in UK house prices has a silver lining

You may be losing money in your investment portfolio – the FTSE 100 is down 5% year-to-date and the S&P 500 is down almost 20%.

But I bring you the kind of news that will surely more than make up for those disappointments: your house is still making you money – and lots of it.

Nationwide’s latest house price index came out this week and showed prices up 10% in August last year – and £50,000 on average over the past two years. Other indices show something similar: Zoopla has prices up 8.3% on last year and the latest batch of figures from HM Revenue & Customs also show strong volumes: property sales have rose 7.2% month-on-month in July and 32% cent year-on-year.

There is some distortion due to the incomprehensible stamp duty holiday policy, but even so sales volumes are still higher than before the pandemic – up 6% from July 2019, notes Hargreaves Lansdown .

Look at these numbers and I know you will feel reassured that if all else fails, your property will be your pension.

On to the bad news. You shouldn’t feel remotely reassured. The truth is that this happy state of affairs cannot last.

You can argue – and the house price bulls keep arguing – that there is a limited supply of UK homes and the strong labor market conditions – record vacancies and unemployment very low – will maintain demand. Tight supply. Firm request. What could go wrong?

The answer to this question is demand. It can disappear in a flash of expensive gas. Let’s start with the cost of living crisis. You’ve heard a lot about rising energy costs, but one of the best ways to think about it is in terms of the tax equivalent: the coming rise, said Greg Jackson, CEO of Octopus Energy on the BBC. Today programme, is equivalent to adding 9 pence to the basic rate of income tax.

Can you imagine a constant demand for homes at current prices under these circumstances? Enough. And that’s before you start adding in the rising costs of absolutely everything else – the British Retail Consortium has driven food prices up 9.3% over the past year. Next, note that the labor market may look strong, but it’s not getting stronger: the UK unemployment rate is no longer falling – it was stable at 3.8% in June – and the number of job vacancies is not increases more.

Labor supply usually picks up in a cost of living crisis (for obvious reasons) and this could work against the push in wage increases. At last count, real wages were falling at the fastest rate in 20 years – down 3% from April to July according to official data from the Office for National Statistics.

If salary rewards continue to be around 4%, as they have been, and inflation stays above 10%, employees will end the year with their purchasing power adjusted for inflation down by more than 6%.

Worse still, it will come in the face of rapidly rising mortgage rates. The rate on a two-year mortgage with a loan-to-value ratio of 75% rose to 3.51% in July, from 2.88% in June and 1.64% at the start of the year. If things continue as they are, this rate will rise to around 4.3% by the end of the year, or almost triple, according to Pantheon Macroeconomics.

Zoopla made the numbers on mortgage rates at 4%. If they do, they estimate the average first-time buyer outside London will need £12,250 more in income to be able to finish than last year. In London it’s £35,000. This is starting to change the incentives for first-time buyers. Until recently, assuming you could get your hands on a deposit, in almost all parts of the UK it was cheaper to buy than to rent.

This is no longer the case: rents are rising rapidly – ​​up 11.8% year-on-year in the second quarter of this year, according to Rightmove. Zoopla adds that at a 4% mortgage rate, the costs are “at or above the average rent”, assuming an 80% mortgage over 30 years.

Add it all up, Citi says, and prices could drop 15%. This seems prudent to me given that the combination of rising rates and recession tends to create forced sellers, which we did not have in 2008 for example, when mortgage rates fell sharply.

Those who doubt that any of this matters should note that the signs of weakness are already with us. It takes a little longer to sell a house now than in April – 22 days compared to 19 days, says Zoopla.

New buyer inquiries fell for the third consecutive month in July and a growing number of failed sales, according to the Royal Institution of Chartered Surveyors. And new mortgage approvals are also falling: data from last month showed them down 21% year-on-year in June. Finally, the Building Societies Association’s Property Tracker survey showed that in the second quarter of 2022, the net balance of households thinking the time was right to buy a home was just 16%, the lowest since the third quarter of 2008. This boom is definitely fading.

There are some silver linings here (thank goodness). The first is small but useful. If you have paid inheritance tax on an asset and then sell it for less than its IHT assessed price within four years – for property or 12 months – for shares – you may be able to recalculate your liabilities and recover the difference.

You may think it’s a small compensation for capital losses, but nowadays we have to take what we can get. The second is more about your children: if markets and property prices crash from here, your retirement will be impoverished, but theirs will be much richer.

Standard Life published research this week suggesting that a 22-year-old who starts saving for retirement now on an annual salary of £23,000 will end up with a nice pot of £424,000 – assuming an annual pay rise of 3% and investment growth of 6.25 percent. hundred a year.

That’s fine, but imagine if the first two years of these savings were to see the markets go down 40% and the next 20 see them go up again. Imagine the same with houses. A drop of 25% perhaps, followed by a real buying opportunity for those not yet on the scale. Buy cheap and sell expensive — in 30 years. The dream! One of the great joys of capitalism is its tendency to self-correct extremes. We could be about to see a classic of the genre.

Merryn Somerset Webb is editor of Money Week. The opinions expressed are personal. [email protected]

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