Are house prices falling?

The idea that house prices could fall seems farfetched for many of us, who have only ever seen the prices of our property rising.

But as those who remember the financial crisis can confirm, it can and does happen. Back then there were stories of negative equity, people who bought at the peak, and thanks to falling prices owed more than their property was worth. Could it happen again?

The Bank of England’s governor Mark Carney seemed to believe it could. There were recent headlines about his worst-case Brexit scenario where they might fall as much as 35% over three years. In fact, house prices have already fallen in central London. Kensington & Chelsea was down 12.9% over the last year. Will the rest of the market will now start to follow the lead set by the capital?

There are many house price indices in the UK, no two of which ever seem to agree. According to Nationwide, house prices in August were up 2% compared to the same time last year. That’s compared to year-on-year growth of 3.2% seen in January.

According to the Halifax, the picture is rather different. In the three months to August, prices climbed by 3.7% from a year ago, up from 3.3% annual growth in July.

The picture is muddied by the fact that regions across the UK are behaving differently. The truth may be that prices are falling in Central London, static in the south east, and rising elsewhere.

So overpriced London is deflating, while elsewhere, there may still be moderate growth, roughly in line with inflation. It looks as though Mr Carney’s fears are not shared by the market.

In fact, the main impact on house prices seem to be the decline in buy-to-let, thanks to the government’s policy of making residential property far less attractive for investors. Extra stamp duty, and the favourable tax treatment of buy-to-let landlords coming to an end mean that buying a small property and letting it out is no longer the sure-fire moneymaker it once was. Many investors seem to be getting out of property. The price of flats and small houses in and around the capital may be falling as a result.

Taking the inflationary pressure out at the bottom of the market may feed through to higher priced homes. This may be behind the falls in London, where buy to let speculation was particularly popular.

So, should we be worried about the Governor’s warning? Probably not – his doomsday scenario was part of his program of bank ‘stress tests’, rather than a prediction.

Brexit could mean problems if things go badly, but although no deal seems to be on the table now, the chances are that something will be hammered out. If there is a Brexit effect on the housing market, it could again be mainly focussed on London. It might mean reduced demand from foreign investors who were artificially inflating London house prices and reducing the numbers of European professionals working in the City.

For those who simply want a home to live in a fall could be positive news, although in the longer term, the direction for house prices will probably be up. Britain is a small and crowded island, and there may always be a shortage of good homes. For those who have considered property as an investment, it simply may be time to start looking at other ways to build wealth.

At Continuum we would be pleased to help with both investment and homebuying plans.

The value of investments can fall as well as rise and you may get back less than you invested.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Sources:

bbc.co.uk – Annual house price growth at nine-month high, Halifax says – 7th September 2018

moneyweek.com – Don’t panic! Stagnant house prices are great news for us all – 4th September 2018