As we approached 2023, fears of house price falls were plentiful – with some commentators forecasting a drop as deep as 20% this year.
So far, such predictions have proven to be off the mark. We have seen some small drops, but on the whole, the market appears to be holding steady.
While this is welcome news in some ways, in others, it’s not, and fears are starting to grow that we could be facing a situation possibly worse than a house price crash – a house price freeze.
A recent report, entitled ‘Reboot: building a housing market that works for all’, from the Joseph Rowntree Foundation, suggests the housing market could be facing a ‘worst of all worlds’ scenario where prices don’t change at all. While house price falls are unwelcome – especially for homeowners – they can at times be a necessity in order to reset prices to more affordable levels – something the report highlights.
Its authors put forward a scenario where a number of factors intertwine to create a standstill in house prices. The first of which would be a stalling in the rate of house building. It suggests housebuilders may ‘mothball’ sites to avoid selling in a falling market.
In a similar guise, we could also see transactions fall as homeowners avoid selling, while also waiting for prices to rise. The final contributing factor the report says would be that cash-rich investors swoop in to buy up homes for holiday or short-term lets, leaving those first-time buyers relying on mortgage finance frozen out of the market.
All of this would see the housing situation exacerbated further for vulnerable groups such as private renters, low-income mortgage holders, shared owners and those who have recently bought through Help to Buy.
Given the current housing market, this prognosis is entirely plausible. In order for house prices to fall by any significant level, we need an influx of properties into the market, something which normally happens through forced sales, such as repossessions.
Today’s mortgage market is very different to that of 2008 when we saw repossessions at a 16-year high. The stringent mortgage affordability tests over the last decade and heightened lender forbearance mean many borrowers are well placed to withstand the current storm.
Unemployment is low and we are starting to see mortgage rates steadying, albeit that swaps have started to move up again in recent days. Mortgage arrears are also low. UK Finance figures show arrears of 2.5% or more grew by just 1% in Q4 compared to Q3, while those balances in more significant arrears actually fell by 2% against the previous quarter.
The report outlines a five-point plan to remedy the situation and calls for its implementation in the forthcoming Spring Budget.
Short-term measures include giving councils and housing associations the power and funding to buy stalled sites from developers and redesign them to include more affordable housing. It also calls for council tax to be imposed on homes in new developments 18 months after planning permission has been granted – built or not.
The report also suggests at least a doubling of the Stamp Duty surcharge on investor purchases and a removal of tax breaks on short-term lets, in a bid to discourage a switch to this type of tenure.
Lastly, in order to support households with higher costs, it would like to see the unfreezing of Local Housing Allowance (LHA) as well as a new version of the Mortgage Rescue Scheme launched, which would fund social landlords to buy the homes of borrowers who are struggling to meet their mortgage payments.
Other long-term measures are also proposed in the report, such as an annual property tax in place of council tax and stamp duty, more mixed tenure housing developments and for councils to be able to have a say in who buys in certain areas.
Combined, the authors argue such measures would lay the foundation for a better and also fairer housing market. Whether their wishes will be granted in the Budget however is a completely different story. Governments are often reactionary rather than proactive, so I fear even if we are about to enter a house price freeze, we are unlikely to see a Government pre-empt this
If the predictions in the report come turn into reality, we are likely to see the economic gap between homeowners and renters widen further, which is not just bad news for the housing market but the economy also.
Let’s hope the housing and the mortgage markets are prioritised in the forthcoming budget and we start to see a gradual thawing of the market soon.
Simon Jackson is managing director of SDL Surveying
References:
https://www.jrf.org.uk/report/reboot-building-housing-market-works-all
https://www.ukfinance.org.uk/data-and-research/data/arrears-and-possessions