UK property market could see ‘biggest threat’ by winter – preview of last 5 months of 2022

Talk to any real estate agent or property surveyor right now and there’s a question on everyone’s lips when it comes to the housing market. And it is this: “Will this be a downturn or are we now on the edge of the cliff in terms of collapsing property prices?” Anyone who claims to be able to give you a definitive answer on this is bluffing.

The real estate market is notoriously difficult to predict. In recent years, Brexit uncertainty and the pandemic should have halted price growth. But that was not the case.

In fact, not only have prices not fallen, but the past two years have seen increases at rates rarely seen before. Almost all regions saw double-digit price inflation, with many places seeing unprecedented growth of 15-18%.

We have now started to see those stunning increases recede and the market is slowly returning to something like normal.

So what does the last five months of 2022 have in store for us?

To answer this question, we need to look at what factors got us to where we are and what has changed.

For years, real estate prices have fluctuated, reflecting world events.

There seemed to be a fairly predictable cycle of price increases for about a decade, followed by a readjustment – ​​sometimes severe that would last several years before prices resumed their upward run.

But that changed with the financial crash of 2008.

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For a long time it was impossible for most to get a mortgage, and prices fell, the UK economy was in turmoil and people just stopped spending money or going into debt and, where they could, they economized.

The Bank of England, fearing stagflation, cut interest rates from over 5% at the start of 2008 to just 0.5% a year later.

Brexit worries saw rates fall even further to just 0.25% and again to 0.1% to counter the economic shock of Covid.

With such low rates, borrowing money was cheap and easy and there was almost no reason to leave money in the bank – at these rates £100,000 is worth £100 a year!

It gave us a double whammy. A rush of rental landlords looking for better bang for their buck than the bank and buyers rushing to take advantage of mortgage payments that cost far less than rent.

Add the post-lockdown effect of the ‘space race’ and the ill-advised stamp duty holiday and its astonishingly low prices have exploded.

Governments and banks should not be surprised when people borrow as much as anyone is reasonably willing to lend to them. It’s human nature. Real estate agents know this well.

When a candidate signs up to search up to £250,000, they will be sent properties up to £290,000.

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It’s so common for agency software to automatically add a percentage when running a match.

Prices went up and up and up again. So what has changed? Well, interest rates to start with.

Last Christmas the base rate was one percent lower than today – that’s a huge jump from 0.25 percent and lenders are pricing in the hikes and predicting further hikes, which means that fixed rate loans are more expensive.

This took money out of the pockets of owners and buyers, dampening ambitions to move or increase debt.

But there are also other factors at play that make small rate hikes seem insignificant.

I am of course talking about the cost of living crisis that affects us all. Food, heat, taxes and fuel all increased by double digit percentages.

Taking even more money out of pockets will be, between now and winter, the greatest threat to the now quite fragile real estate market.

There could be other negative effects due to the disruption caused by the strikes which should once again be a part of our lives.

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Everyone will start to feel less financially secure as they look for ways to pay the difference in price.

Could this be the catalyst that starts a free fall in prices? It could.

But there are also many things that will help balance the market. As inflation rises, savings will lose value in real terms.

Returns of more than five percent from the property will seem more attractive to owners.

Rents will rise, pushing many first-time buyers currently on the fence to move.

Additionally, the government will likely step in again to prop things up, perhaps with stamp duty adjustments to encourage greater supply to entice buyers.

Interest rates are rising, but they are still very low and soon people will want to fix them at a cheap rate – this will also create demand.

There is no doubt that the multiple interest rate hikes over the past few months and the very real possibility of even more hikes will cause much concern, if not fear, to all homeowners and buyers.

But the appalling inflation rates both inside and outside the housing sector could be much worse in the long run.

Unfortunately, interest rates are a blunt tool used to control rising prices.

The rising cost of borrowing also penalizes frugal and extravagant homeowners.

Interest rates have stayed too low for too long and created this imbalanced and inequitable real estate market.

And as nasty as the effects are, it’s interest rates that could get things back on track and manage the deceleration, averting the very real specter of a full-scale housing crash.

For now though, prices should remain stable, the edge of the cliff is far away at the moment.

But make no mistake, we are headed in its direction and the question now is whether the market will slow down just enough to stop sooner.

Penny D. Jackson