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The Housing Market – Slowing Down Or About To Crash?

The Housing Market – Slowing Down Or About To Crash?

Have you ever noticed how people in the UK are obsessed with two things, the weather and the housing market.  On an average week there is, at least, one or two ‘official’ reports in the news concerning the housing market and all seem to contradict each other.  Over the coming months in 2018 it is widely predicted that house prices will continue to slow.  The problem is rarely do house prices just slow, in reality they either rise or fall, unless there this prolonged intervention in the market forces.


The first place to look at what is happening in the housing market is London.  Rarely what happens in London stays in London.  There could not possibly be a long term homeowner complaining in London about house prices, particularly seeing how they have performed over the past decade.  The average cost of a home as a multiple of salaries in much of the UK is four to five times, but in London it has been stratospheric, in 1999 it was five times but now the average is thirteen times.


There are a number of driving factors for this, the rise of buy to let Landlords since the 1990’s who are all ‘search for the yield’ particularly from international buyers who benefitted from a weak currency.  As for the property slowdown, while fewer tax breaks for Landlords has seen some would be investor’s cash in and therefore dampening the prices, the biggest issue for the market may yet still be Brexit.


If the EU does not replicate current arrangements at the end of the transition phase, this could mean a sizeable number of staff from financial service companies based in London will be forced to relocate.  If the governments leaked studies of the impact of Brexit are to be believed, other regions in the UK may be in the frontline to an even greater extent.  The price to earnings relationship tell us how hard it is to get on the property ladder, it is not a true indicator of affordability as it fails to take into account interest rates.


Since the days of Thatcherism, rising house prices have offset a general fall in interest rates such as the repayment-to-earnings ratio, which is close to its long term average.  Although it may be difficult to get a foot on the property ladder these days, once there, the repayments do not look excessive.


The bad news is that nowadays household debt is now significantly higher and therefore interest rates do not need to rise very far before many households start feeling the negative effects.  In this case house prices could start gathering negative momentum in relation to earnings to keep mortgages affordable.  If this is the case, house prices could fall more sharply relative to earnings, to keep mortgages affordable at levels of increased interest rates.  Of course there is more than one way housing markets can adjust to higher rates.  Either household income can rise while house prices stay constant, so that over long period of time prices become less stretched versus wages.  Or the adjustment comes about by rising interest rates followed by an outright crash in prices.


Needless to say the latter outcome is one both the government and central banks are very keen to avoid.  Even though first time buyers who would relish a decline in house prices they should be careful what they wish for.  Housing crashes are typically associated with other economic nasties like slower economic growth, rising unemployment and crucially weaker earnings.


So the outlook for the property market in 2018 must be one of caution, but whatever the market does there is always opportunities for the astute investor.  Whether you are looking to buy, let or sell a property in East Grinstead or Crawley visit the property experts Greenaway Residential at www.greenawayresidential.com for all your property needs.


Phoebe Skinner

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