Are House Prices Headed For A Crash?
The four most dangerous words in financial markets are supposed to be “it’s different this time”, but another four – “it won’t happen here” – come a close second. The US may be in the throes of a boom-and-bust housing crisis, but British pundits still insist that a gentle slowdown is on the cards here, despite a trebling of prices in the past decade.
The UK market is a “special case”, they argue, but let’s be clear: if the British property market looks like a bubble, feels like a bubble, then it is a bubble… and it is dangerously close to bursting.
It took the headline writers at the Express to state the danger in its starkest terms: “100 days to halt the housing crash” – the argument being that the Bank of England needs to start cutting interest rates by February to prevent any small early-year blip exploding into something worse.
It did the trick in 2005, but the situation now is very different. We’re in the midst of a prolonged credit squeeze and the key source of mortgage funding – wholesale markets – has dried up. Even radical action from the Bank is unlikely to make a difference.
Under normal conditions, the Bank’s interest rate determines all other short-term rates. But hard cash is such a prized commodity that the one-month money-market rate, at 6.75%, is a full percentage point above the base rate. The Bank must send a signal and cut rates, but it won’t solve the basic problem, which isn’t just the price of credit but it’s sheer availability.
How bad could it get? If you’re one of the 1.5 million people who have to remortgage next year, the answer could be very nasty indeed. The Financial Services Authority warns that many homeowners may find it difficult, if not impossible, to find an affordable deal: some face a 60% hike in monthly payments. Even so, the economy is in radically different shape than during the dark days of the last crash in the early Nineties so the degree of pain should be less.
The market is arguably more over-valued now than it was then and the buy-to-let market is highly vulnerable. No one knows whether we’re in for a 2% slide or a 30% crash, but sharp falls could become widespread if buyers and sellers expect a sustained fall: the self-fulfilling dynamic that can turn a correction into a rout.
Confidence will keep house prices stable. Unfortunately, it’s thin on the ground at the moment.