Michael Gove savaged over housing pledges

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Nikodem Szumilo, Professor in economics of the built environment at UCL, said the decisive factor in an “abrupt correction” in house prices would be the refinancing of mortgage payments, which are expected to become increasingly unaffordable. As such, prospective buyers looking to get more value for their money through a crash in prices may not want to hold their breath.

At the start of the month, the Bank of England raised its base interest rate to 1.75 percent – the sixth consecutive rise since dropping it to a record low of 0.1 percent during the pandemic. Economists are anticipating this will be raised by a further 0.5 percent in September.

The interest rate rises are an attempt to stem spiralling inflation – which climbed to over 10 percent in July, and could reach above 18 percent by January – putting immense pressure on the cost of living, but are also likely to send mortgage interests higher.

House prices in the UK have grown 60 percent in the past decade, and so as the cost of living crisis puts pressure on family finances, experts are predicting a dramatic downturn may be on the cards soon.

Dr Szumilo explained that the crunch point would be when it came to new buyers refinancing their mortgages on the stark economic backdrop.

He said: “Because the vast majority of mortgages need to be refinanced between two and five years in this country, fifty percent of those mortgages are going to have to be refinanced in the next two years.

“Given the changes in interest rates, the changes in monthly repayments are going to be a lot – and given the cost of living crisis, a lot of people are just not going to be able to afford it.

“A critical part of this is going to be budgets that have already been squeezed in so many directions, are going to face increased mortgage repayments, and people are just not going to be able to afford them.”

Professor Joe Nellis, an economist at the Cranfield School of Management, commented: “If you’re going to remortgage now? It’s probably affordable. A year from now? Less affordable. Two years or three years [from now], then it becomes more critical.”

Without some form of Government intervention akin to what was seen during the pandemic – such as a mortgage holiday or a moratorium on evictions – Dr Szumilo believes it slightly more likely that there will be a sudden drop in the housing market as opposed to a slow decline.

Professor Nellis, said he believed the Government should avoid such measures, as a correction in the market was a long time coming, but believed it unlikely that there would be a sudden drop in prices.

He commented: “In some ways, I don’t think the Government should be propping up the housing market too much. Because if you do, you’re simply delaying what I consider to be the inevitable: there has to be an adjustment of house prices relevant to income at some stage.”

While a drop in house prices will make getting on the housing ladder easier for prospective buyers, but will also spell pain for those who already own a house and may be looking to move. With mortgages on the rise, Dr Szumilo said it was only worth waiting “if you have a lot of equity about that you can invest in a house”.

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However, Professor Nellis, whose research helped create the Nationwide and Halifax house price indexes, argued that a gradual slowdown in the marked would be a “good thing overall because of affordability for first-time buyers” who could access pre-existing Government help.

In the event of a downturn, though, Dr Szumilo said that it was “more likely that there will be empty homes for a very long time”, as “there is a lot of cash in the market at the moment” and so developers who have enjoyed high prices will not want to see a loss on an investment.

He added: “I’ve had developers tells me: ‘it’s a great investment because you can never lose money on real estate’. I didn’t argue because it was pointless. It’s an incredibly stupid point to make.

“You will be out of business as soon as the market turns. This is exactly what is happening at the moment; we have the market turning and people used to thinking that you can never lose money on real estate are now losing money on real estate.”

Last week, Persimmon, the UK’s leading house building company, posted consistent profits despite the economic uncertainty. This was attributed to house prices continuing to outstrip rising costs for constructors.

But Dr Szumilo said that for developers, “when house prices start coming down, and inflation remains high, that will invert”.

He said: “It’s likely that there’s going to be more insolvency – especially among construction companies that were not prepared to see house prices come down and costs go up.”

Additional reporting by Dylan Donnelly

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