Amid the gloomy economic data released last week, one statistic caught many analysts by surprise. Halifax, the country’s largest mortgage lender, reported that UK house price growth has not only slowed down but turned negative. Just one month ago, the same bank had announced that prices had soared to a record high. Could this dramatic shift mark the beginning of the end for the great British housing boom?
After years of watching homeownership slip further out of reach, it might be tempting for generation rent to greet the news of a house price slowdown with open arms. But it would be premature to reach for the champagne. Even if house prices continue to fall, any potential benefits will almost certainly be offset by other economic forces. There are also good reasons to treat this data with caution. The average price fell by just £365 in July – or 0.1% month on month – and still remains more than £30,000 higher than the same time last year. The figure also only reflects data from one lender, and represents an average of prices across the UK.
Beneath the headline figures there are still growing signs that a deteriorating economic outlook is taking its toll on the UK’s most cherished asset class. For the past decade, a combination of deliberate government policies, rock bottom interest rates and £895bn of quantitative easing has helped propel house prices to record highs. During the Covid-19 pandemic, another unexpected shot of adrenaline was injected into the housing market, as the rise of remote working, newly accumulated savings and stamp duty cuts triggered a “race for space”.
The conditions that fuelled this inexorable rise are starting to unravel. Last week the Bank of England raised the base interest rate to 1.75% – a 13-year high. Many economists expect rates to rise further in the months ahead. Central banks around the world have turned their backs on quantitative easing and are now embracing “quantitative tightening”, shrinking their balance sheets after a decade of dramatic expansion. The result has been a significant and sudden slowdown of housing market activity. The number of mortgage approvals has fallen for the past five months in a row, and residential transactions recently nosedived by 55% compared with the same time last year.
For homeowners, the property market slowdown will probably put additional pressures on household finances at a time when budgets are already squeezed. According to the trade body UK Finance, about 2 million homeowners on variable or tracker mortgages will see an automatic increase to their monthly payments. Another 1.8 million households on fixed-rate mortgage deals that expire next year face paying an extra £2,664 a year on average.
The UK’s economic picture will probably make it harder, not easier, for members of generation rent to buy a home. Britain is poised to enter a recession later this year. Households are facing a real-term pay cut of nearly 8% on average. For low-income households, the squeeze on living standards will be significantly higher. This erosion of household income will make it harder to save for a deposit, which remains the single biggest barrier to homeownership. Banks have already started to tighten lending criteria and withdraw riskier mortgage products from the market, making it harder for first-time buyers to borrow large sums. At the same time, investors with large cash piles may take advantage of any downturn to hoover up properties on the cheap.
A property market slowdown also poses wider challenges for the UK’s economic model. The UK has long relied on a buoyant housing market to fuel growth and consumption in the absence of underlying productivity growth. Homeowners typically spend more when house prices rise and less when house prices fall. Last year £4.4bn of equity was converted into cash using equity release products – the highest figure on record. For part of the population, double-digit house price growth has provided a means of building wealth and economic security in an age of stagnating wages and dwindling pensions.
British political leaders have a habit of throwing money at the housing market when it suits them – from the Help to Buy scheme introduced under David Cameron to the stamp duty holiday under Boris Johnson. It’s conceivable that a profound realignment is now under way, where the era of low consumer price inflation and high asset price inflation is being turned on its head. This could mean a prolonged period of stagnant house prices, where transactions fall and the market grinds to a standstill, or a more severe price shock. Either way, it will pose a huge challenge to Britain’s model of capitalism.
Weaning the UK economy off its addiction to house price inflation is, of course, imperative. Soaring house prices transfer wealth away from those who don’t own property towards those who do. This undermines prosperity by diverting investment into the housing market instead of more productive and socially useful areas. Fixing this requires a strategic, long-term plan for transitioning to a new economic model while minimising collateral damage. Hoping that volatile market forces will come to the rescue is a mistake that will almost certainly leave most people worse off.
Laurie Macfarlane is an economist and writer. He is co-author of Rethinking the Economics of Land and Housing