Housing bubble warning as economic uncertainty could cause prices to fall ‘substantially’

Michael Gove savaged over housing pledges

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The strength of the housing market “could be about to change” as homebuilders will not be immune from further interest rate rises make mortgages unaffordable for potential buyers. However, estate agents are hoping the “imbalance” between housing supply and demand is enough to prevent a major drop in house prices this year.

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 – putting immense pressure on the cost of living, but are also likely to send mortgage interests higher, deterring house-hunters.

With household income shrinking in real terms, and costs and mortgage prices rising, the current high number of property buyers will likely decline dramatically.

Average house prices fell 1.3 percent this month – however, online property giant Rightmove cautioned that this was in line with seasonal trends, as people trade summer holidays for house searches.

Due to how long it takes to complete a purchase of a property, there will likely be a delayed impact of the current economic climate on the housing market, which is still enjoying a post-Covid surge.

The UK is also still subject to a housing crisis, with an estimated 340,000 new homes needed a year to keep up with supply. In March, Nikodem Szumilo, a professor of construction economics at UCL, told Express.co.uk this was “not necessarily because we don’t have enough houses in general, but because we don’t have enough houses where people want to live”.

The chronic demand for housing in the UK has meant that prices have increased 60 percent in the last decade. But growth in the London housing market – where prices are usually double the average for the rest of the UK – is slowest, suggesting affordability is a key limit on the housing market.

Charlie Huggins, Head of Equities at Wealth Club, an investment firm, commented: “House prices have proved remarkably robust since the pandemic began, buoyed by pent-up savings and cheap mortgages.”

However, he cautioned that the current success of the market – which had driven house prices higher – may lead to its downfall as the cost of buying a home cannot be matched by the amount Britons can afford to borrow.

Mr Huggins said: “Increasing house prices in recent years mean home buyers are having to borrow more to get on the housing ladder.

“Combine that with rising interest rates, which ultimately mean more expensive mortgages, and the affordability of property could fall substantially.

“If interest rates keep rising, it’s hard to see how the housing market would be immune.”

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He pointed to Persimmon, the UK’s leading house building company and FTSE 100 member, which has so far “gushed cash” while demand for houses remained high. The firm recently posted pre-tax profits for the first half of the year of £440million, constructing 6,652 houses in that time.

The Wealth Club said that the cost of building new homes was rising in line with inflation, but was being mitigated by sales prices.

Mr Huggins warned: “Make no mistake – the biggest reason for Persimmon’s success is high house prices, and the general strength of the housing market.

“That is something over which it has no control, and it could be about to change.”

He added: “For now, Persimmon is a cash machine. But with build costs rising, they need house prices to continue going up, or else margins will come under pressure.”

On Monday, Rightmove said that interest rate rises would “gradually filter through during the rest of the year”, arguing there was “still enough of an imbalance to prevent major price falls this year”.

Tim Bannister, the website’s property expert, said: “We’re still expecting price changes for the rest of the year to continue to follow the usual seasonal pattern, which means we’ll end the year at around 7 percent annual growth, even with the wider economic uncertainty.”

But this may be putting an estate agent’s spin on market growth, and still marks a slow in growth.

The Bank of England has predicted house price growth will slow, and in July, Wesley Davidson, founder of mortgage broker Fox Davidson, predicted the average house price will drop by 10 percent in the next 12 months.

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