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Are we heading for a housing market downturn?

A lack of supply has seen the housing market triumph for nearly a decade. That could be about to change
Are we heading for a housing market downturn?
  • House prices forecast to fall for first time since 2012
  • Buyer demand down due to cost of living crisis

Since the housing bubble burst in 2007, the market has recovered and boomed anew. House prices continued to rise even as Brexit and the pandemic walloped most other markets. Consequently, the shares of the big residential developers have generally been trending upwards since the great financial crash even in the face of strong headwinds.

Savills is predicting that house prices will drop by 1 per cent in 2023 with several slow years of growth to follow. The signs that this period of unbroken growth may finally come to an end are a combination of a fall in demand, rising mortgage costs, difficulties in the construction industry, while the end of the Help-to-Buy scheme next year could also have a negative impact. 

House price growth has been a national phenomenon for the last decade, but different regions also have their own stories to tell. For years, house price growth in many parts of London far outpaced the regions. That trend has since reversed with the regions now providing the main source of house price growth while, in London, some areas are already seeing a decline. 

The chief reason that house price growth has generally been so consistent for so long is simple: a supply and demand imbalance. For years, the number of homes available to buy has fallen far short of the number of homes people want to buy. The government has attempted to address this with a target to build 300,000 homes a year, but it has never achieved this. In 2019, then housing minister Kit Malthouse branded the target “mythical”.

Then the pandemic hit and, rather than slowing down, the housing market entered overdrive thanks to a combination of factors. First, as Savills’ head of residential research Lucian Cook explained during a speech to the finance industry last week, the lockdown and work from home mandates fuelled a desire for larger houses as people were forced to spend more time inside than perhaps they ever had before. Second, the government’s stamp duty holiday – which was intended to support the housing market – instead acted like rocket fuel.

As Cook wryly observed, “people were very happy to pay £30,000 more to buy a house in order to save £15,000 in stamp duty”.

All of this helped house prices leap an eye-watering 20 per cent between May 2020 and March 2022, according to the Office for National Statistics. For context, the house price growth from September 2014 to May 2020 was also 20 per cent. 


Buyers backing away

There are signs that this recent surge in prices cannot be sustained for much longer. The first of which is a sharp drop in demand.

Last week, the Royal Institution of Chartered Surveyors (RICS) revealed that the net balance of new buyer inquiries was negative 7 per cent in May compared with 8 per cent the previous month. The figures show that more high street estate agencies saw a fall in enquiries than saw a rise in enquiries and brings to an end eight consecutive months of positive results.

RICS put the plunge in buyer interest down to “the rising cost of living and higher interest rates” as inflation rages on. Rising mortgage costs might also explain the dwindling interest: Savills forecasts that mortgage payments as a percentage of income on a 25-year repayment mortgage will have risen to 24 per cent at the end of 2022 from 17.5 per cent three years earlier. This is the most expensive mortgages have been since 2010, though Savills adds this figure still remains some way below levels seen in the run-up to the credit crunch of 2007/08 and a long way short of the late 1980s and early 1990s.

Cook added the caveat that these predictions could change if the government allowed for higher loan-to-value (LTV) ratios, which it has implied it might, but he said such a solution could have unintended consequences – observing that the last time banks were allowed to dish out higher LTV mortgages was in 2007, prime crunch time. 

This decline in demand would not be such bad news for housebuilders were it not also combined with a surge in construction costs and land prices. A House Builders’ Federation (HBF) survey for the March quarter found that 89 per cent of respondents considered the availability of materials a major constraint on development – the highest figure since the HBF started asking that question over 10 years ago. As a consequence of this, for the month of May, the S&P Global/CIPS UK Construction Purchasing Managers’ Index recorded the slowest growth in residential construction since May 2020.

The downturn looks like it has already begun. But this is a long way from a collapse in prices, given the paucity of new supply.