Investment Markets » Construction and Property
Has The Housing Crash Begun?
The mortgage market has frozen and house prices have fallen precipitously. Is there worse to come?
The money crisis that has been afflicting banks for months now has turned into a mortgage squeeze. As lenders scrambled to withdraw products and tighten terms (effectively pricing out first-time buyers altogether), the market has ground to a virtual standstill.
Survival is currently a higher priority for banks than winning new business. The big worry is that a sharp contradiction in lending will cause not an orderly correction in prices, but a confidence-destroying crash. Bang on cue, the Halifax reported a 2.5% fall in UK house prices in March: some five times larger than expected and the steepest monthly fall since the dark days of 1992.
With the IMF suggesting that UK house prices are over-valued by some 30%, the spectre of negative equity is again stalking the land. The credit reference agency, Experian, suggests that more than 75,000 households could be vulnerable. But will the market really crash?
The current situation is very different from the Nineties when the UK was in recession (it isn't now – yet) and interest rates were sky-high. However, some things are worse. Overall debt levels per household are much higher, as are house prices relative to incomes – and there's also the threat of a rout in a much-expanded buy-to-let sector.
Even so, today's homeowners are a good deal better cushioned with equity than their predecessors. Back in 1990, over a third of first-time buyers had 100% mortgages, creating an immediate pool of buyers at risk from negative equity; the equivalent figure last year was just 5%. Still there's no doubt we're in for a correction – and a good thing too.
Recent house-price falls should be set against a 170% rise over the past decade. A return to saner pricing and saner lending was inevitable. It will be painful in the short term, but desirable for all in the long term.
Whether or not house price crash – and most experts predict a 10% fall is the likely scenario – there's no doubt the UK economy is in for a bout of austerity. The shutdown of the discount mortgage market could be the last straw for many households already hit by higher taxes and fuel and food inflation.
And there's little the authorities can do to get us out of this hole. Even if the Bank of England makes a hefty interest-rate cut, it's unlikely that cash-strapped banks will pass it onto consumers. The economy is in too much trouble for rate cuts alone to help.
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