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House Prices in the UK: Poised to Crash?

Readers of these Nethouseprices columns might have been taken aback by the recent slew of headlines claiming that house prices in the UK are "on the brink of collapse", and that the cost of residential real estate is set to fall by as much as 40 per cent. This prediction contrasts sharply with the expert opinion - consistently cited in these pages - that the market has the potential to slow during the course of this year but that a 90s-type crash is highly unlikely. You will consequently be asking yourself which view is the more reliable. In this piece, we look at the background to the latest media reports and evaluate whether they are credible.

"Brink of Collapse"

The gloomy forecast that house prices are poised to go into freefall was first published in The Mail in early July, but has been subsequently covered by most of the national newspapers. This raises our first point: namely that, while the other organs of the press ran with The Mail's headline, by no means all of them reached the same conclusion in the substance of their articles.

The Mail's story was based largely on the statements of two highly distinguished academics from the London School of Economics (LSE). The first, Paul Cheshire, Professor of Economic Geography, was quoted as being the originator of the forecast that the country is "on the brink of" a house price crash and that the value of property could fall by up to 40 per cent.

His argument, certainly as set out by The Mail, was that the well-documented decline in the London housing sector is a harbinger of a significant price correction across the rest of the UK. In other words, where the capital leads, the rest of Britain traditionally follows. Professor Cheshire felt that the key driver of the market slowdown would be the impact that sluggish wage growth combined with rampant general price inflation would have on consumer finances. These factors underpinned the now notorious crash of the early 1990s, when prices fell by a frankly eye-watering 37 per cent. The issue here, of course, isn't just that some homeowners might see a dramatic fall in the market value of their house or apartment. The more serious concern is that many of them will find themselves in a position where they owe their mortgage lender more than their current house valuation - they will be in the dreaded condition of "negative equity."

Brexit and Stamp Duty

The Mail also reported the contention of Professor Christian Hilber, another academic from the LSE, that the longevity and gravity of the fall would depend on the government's Brexit negotiations. Put simply, if the UK's departure from the EU is navigated quickly and gives the country a favourable settlement, the cooling of the housing market is likely to be brief and not especially serious. If the negotiations drag on for an extended period and the outcome is economically unsatisfactory, the decline will be sharp and lengthy.

Former Chancellor George Osborne's controversial changes to the Stamp Duty regime for additional homes were also discussed in The Mail's article, with the newspaper citing experts who believe that the three per cent Stamp Duty surcharge has discouraged investors and dampened the housing market. Despite representations to the government from landlords, think tanks and even some tenants and Conservative backbenchers that the measure is misguided, there is no real indication that the current Chancellor is minded to modify this policy so its impact is set to continue.

Nethouseprices' View

As we mentioned earlier, the positions apparently taken by Professors Cheshire and Hilber aren't shared by the main body of housing analysts. The market has wobbled in recent months, with the major house price indices like Halifax and Nationwide and the professional bodies like the Council of Mortgage Lenders and the National Association of Estate Agents all suggesting that growth has been stunted during the first half of the year. Despite this, until now, no one of any real gravitas has indicated that prices were certain or even likely to crash. The stance taken by such economists as Robert Gardner of Halifax and Martin Ellis of Nationwide has been that Brexit and a weakening wider economy might weigh down price growth, but that the UK's housing shortage and highly competitive mortgage climate would support modest rises in house prices. Large numbers of affordable new homes aren't an overnight possibility and the Bank of England has signalled no imminent rise in interest rates, so the factors currently buoying the cost of property aren't likely to be eroded in the near-term.

The inevitability of the rest of the UK following London has also been contested by many commentators who argue that there is a concatenation of features distinguishing the housing market in London from that to be found elsewhere. Firstly, real estate in the city is arguably overpriced and is therefore overdue for a correction. This isn't the case in other parts of Britain. Secondly, the effect of the Stamp Duty surcharge is exaggerated in areas of high cost housing, disincentivising investment in London property and encouraging purchasers to look farther afield. And finally, London has greater exposure to the EU than other cities both in terms of industries - like financial services - which are headquartered there, and in terms of the volume of people of European provenance currently living there. There's no certainty, goes the argument, that these problems will spread and dent the housing market outside London.

Our conclusion, then, is that nothing has really changed apart from the tenor of the debate: a crash is no more probable than it was before The Mail's article unless the negativity around that report should start influencing the public's behaviour by deterring them from buying a new house or prompting them to sell up cheaply before prices can fall too far. We will, of course, monitor this story and keep you posted on developments which suggest that a crash is becoming more likely. The opinions of such respected economists as those consulted for The Mail feature cannot, of course, be lightly dismissed. The experts at the Nationwide and Halifax have, however, been correct in their predictions for the year to date, so we remain sceptical about the prospects of a "collapse" as long as they continue to forecast modest growth.

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Source: Nethouseprices

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