Is a Frozen Market Worse Than a Home Price Crash?

What’s worse than home prices plummeting 20 percent? How about them not 20 percent crash? With higher borrowing costs and inflation – and decades of tight mortgage lending – the UK housing market is threatening not to fall but to freeze.

And that could be the “worst of all worlds,” according to a new report from the Joseph Rowntree Foundation. In this scenario, low unemployment leads to relatively few forced sales, meaning prices are little moved but transactions stall, housing construction halts, and well-funded investors swoop in to outbid those on lower incomes.

The result is like what we have today, but worse: home ownership remains inaccessible to all but the wealthiest and rents continue to rise – it could be years and no one benefits from reduced prices when the cycle resets.

But is that worse than a full crash? I remember talking to a woman who worked for Citizens Advice 30 years ago. She still choked on people caught in the downturn in the early 1990s, when home prices fell 36 percent in the Southeast — 20 percent nationally.

“We have a kind of folk memory of the early ’90s home price crash,” says Toby Lloyd, co-author of the report. “But we didn’t realize how much things have changed since then.”

Compared to the early 1990s or even 2008, homeowners today face far less price erosion. According to the English House Survey, most homeowners in England have not had a mortgage in the last decade.

Line chart of annual change in house prices, nominal and real (%) We are now entering the fifth housing crisis in the last 50 years

The report proposes policy ideas to prevent large homebuilders from mothballing sites until market conditions improve; and to prevent investors and business owners from siphoning off property – most notably, giving councils special powers to restrict who can buy in their area.

Should house prices in the UK fall 20 per cent from their peak last year, it would only bring the average price back to where it was at the start of the pandemic. “There will be people who will suffer [from negative equity] but fortunately they will be relatively small and help can be provided,” said Neal Hudson, another co-author of the report. “Stagnation is the big concern.”

So how likely is such a market slump? It’s looking chilly at the moment. January sales were down 11 percent year-on-year, according to HM Revenue & Customs data released this week – and many of those deals were completed before mortgage rates soared. According to Rics’ monthly market survey, buyer inquiries, agreed sales and new orders are declining.

So far, home prices are down about 3.2 percent from their peak, according to Nationwide — but there may still be a long way to go. When we advertised our north London flat last spring, it was offered within a week. After the deal was wiped out by rising interest rates, we went public again last month with a 5 percent price cut. The feedback from the viewings is unequivocal: Not at this price.

Maybe we’re avoiding the “worst of all worlds” scenario of not crashing the JRF after all. gulp.

Nathan Brooker is publisher of House & Home

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