House prices could fall by 35% by 2025 under worst-case scenario, market experts warn

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House prices “could fall by 35 per cent”, warn market commentators. A housing downturn is inevitable. Your move, Rishi Sunak.

A serious housing market downturn is in progress. So what now?

In 2017 I bought a flat with my ex-boyfriend. It’s exactly the sort of home I wanted to live in, so I was over the moon. It has also spared me years of extortionate rents and dodgy landlords, giving me the sort of stability that actually makes it possible to build a life.

But, while I have no regrets, I am currently in negative equity, having to pay the bank to remortgage and buy my former boyfriend out and, when all is said and done, pretty sure that it will turn out to be the worst financial decision I ever made. Worse than using credit cards at university. Worse than that time I took out a personal loan to pay letting fees before they were banned. Worse than the one time I used a Buy Now, Pay Later scheme (to buy a Dyson AirWrap, if you’re interested. Would recommend).

Why? Because house prices are falling, and interest rates are rising.

To know that the housing market is in trouble you don’t need to know that the average house in the UK currently costs around nine times’ average earnings, based on data as of 30 November 2022. Or that the last time house prices were this expensive relative to average earnings was in 1876 (nearly 150 years ago). Or, even, that core inflation is embedded, and lenders are increasing their mortgage rates.

All you need to do is look in an estate agent’s window in the cold light of day in London and ask yourself if a one-bedroom flat like mine could ever be worth nearly half a million pounds. If it ever was?

House prices have been falling for some time according to different records (Zoopla put falls at 1.3 per cent on average in March, Halifax said 1 per cent last week), but the truth is that we won’t know the full scale of this downturn until next year or, perhaps, even the one after when the land registry data catches up with the market.

The International Monetary Fund (IMF) say that house prices will continue to fall if rates continue to rise across the world. But just how bad this will be really depends on who you talk to.

The Office for Budget Responsibility (OBR) reckons there will be falls of an average of 10 per cent this year.

Charlie Lamdin, an estate agent with more than 20 years’ experience, has told me he thinks there could be falls of up to 35 per cent.

“Things are very, very far from OK,” he told me over the phone. “What catches people out is the enormous time lag between conveyancing and land registry completion registration which adds another six months onto the typical time frame [of how price falls are recorded. We won’t see the full data of deals being agreed today – in June 2023 – until late 2024.

“By the middle of 2025, I think we will see 35 per cent nominal house price falls.”

Expert housing market analyst Neal Hudson puts it closer to 20 per cent.

“I think 35 per cent might be over-egging it a bit but what’s clear is that we are far from through this period of financial stress. It’s possible that inflation will ease, and things will improve a little bit, but we’re going to see more pain in the housing market as people struggle with mortgage rates.”

The thing about Britain’s housing market is that it could only inflate when the conditions enabled house prices to rise. In the 80s, that was the widespread introduction of mortgages for the first time – the big banking bang. In the 90s, it was the introduction of the buy-to-let mortgage for the first time. And, even when interest rates spiked back then, wages continued to rise, keeping the market moving. When wages entered a period of stagnation after the 2008 global financial crisis, the introduction of near-zero interest rates kept house prices rising by getting mortgages to investors and movers.

This facilitated the historic house-price inflation that peaked during the pandemic.

The post-2008 era of cheap money has come to an end – perhaps forever – due to pandemic inflation and the war in Ukraine, and, now, the conditions of the housing market have fundamentally changed.

Real wages are not growing enough to prop up high house prices and mortgages are becoming less and less affordable.

Will house prices fall by 10 per cent? By 20 per cent? Or by 35 per cent? The truth is that we don’t and can’t know but what we do know is this: hundreds of thousands of people with large mortgages are going to suffer.

“That’s because borrowers today have much larger mortgages relative to their incomes,” as Hudson puts it. “So, they are much more sensitive to rising mortgage rates than previous generations.

“It takes a much lower mortgage rate to create the same level of stress that a double-digit mortgage rate did back in the 80s,”

Hudson has been “worried for a while now” and, if you want my honest opinion, I think we all should be.

But, instead of calling this a crash, we should regard it as a realignment. A repricing of homes relative to what people can afford without cheap credit.

If the housing market became unhinged from economic reality post-2008 because of cheap credit, it is not yet reconnecting with the new reality – which is one of stubborn inflation, rising rates and comparatively low wage growth.

This is unprecedented because house prices have never been so high in these exact conditions.

Indeed, Charlie Lamdin points out that even after interest rates have peaked, we will still have to wait to see how bad the housing downturn really is. “The steepest falls in the next 12 months will be reported six months after they happen,” he told me.

Zoom out and a house price fall could be a good thing because cheap credit merely created the synthetic illusion of growth which was, as experts like leading economist Roger Bootle have told me over the years, always going to fall apart if we experienced an external economic shock like a pandemic, a natural disaster or a war. For anyone (like me) who bought near the top of the market, it could be very, very difficult to swallow.

My home is going to be worth less than I paid for it for some time and my mortgage will likely keep getting more expensive. My story is not unique, it will be just one of many.

Rishi Sunak will eventually have to act, whether he wants to or not. And there remains a huge question mark over what that action might look like. Introducing a new homeownership scheme like Help to Buy 2.0 to boost borrowing for first-time buyers and prop up house prices will only prolong an untenable situation where the cost of housing remains too high.

If he were feeling sensible, he could reintroduce the mortgage interest relief (MIRAS) which was abolished by Gordon Brown – but that would be a little bit like the energy bills support scheme: using taxpayer’s money to prop up the banks that are charging higher rates.

Or, if he wanted to be really, really sensible, he could do that and invest in housing as national infrastructure, and build social homes which would both bring returns over a long period of time via rent, and boost the economy.

Your move, Rishi.

Key Housing

On a related note, I’d like to draw your attention to my latest report: nearly 830,000 mortgage holders could be paying their loans into retirement.

As house prices have risen, so has the length of time it takes to repay the ever-larger mortgages that people have taken out to buy them.

In 2005, the average length of a mortgage term for a first-time buyer was 25.8 years. By 2022, it had risen to 30 years. Lengthening the term of a mortgage is one way to make the loan more affordable.

In this report, I speak to people who are taking out 34, 35 and, even 40-year mortgages which they will be repaying into their 70s and 80s.

New data from the mortgage trade association UK Finance, which was shared with me, shows that 826,046 mortgages running for 30 years or longer have been taken out since January 2020 alone.

Does this signal a fundamental shift in how homeownership which, once, meant you would pay off your mortgage, retire and cash in on a house that had gone up in value, functions?

I think so but do have a read and let me know what you think.

Ask me anything 

A reader has been in touch via Instagram to ask me the following:

“I am a first-time buyer and keep being sent targeted ads offering me 100% or 95% mortgages. Do you think this is a good idea?”

I’m a journalist not a personal financial adviser. So, here’s what I will say.

Firstly, beware of anyone who tells you that it’s a good time to buy a home right now. If you’ve made it this far in the newsletter this week, you’ll know why.

Secondly, earlier this year there was much fanfare when building society Skipton announced their 100% “no deposit” mortgage for renters which was aimed at getting first-time buyers out of renting and into home ownership.

Well, on Friday they are set to announce a rate increase for that mortgage. The rate has not been disclosed but, when the product was launched, it was priced at 5.49 per cent for a five-year fixed rate. So, it will be higher than that.

Swap rates – which is how banks price mortgages – have gone up recently and mortgage rates are increasing, inflation remains, and the Bank of England’s rate is expected to rise too.

As expert mortgage brokers John Charcol emailed me this morning: “While this scheme was designed to support first-time buyers, unfortunately it’s been launched at the wrong time.”

Taking out a high loan-to-value mortgage at 95 or even 100 per cent at a time when rates are rising, and house prices might fall is certainly risky at best and potentially ruinous at worst.

Ask your question for next week via Twitter @Victoria_Spratt, Instagram @vicky.spratt or email [email protected]

Vicky’s pick

It’s time for something unrelated to housing. I know I usually share something about my free time with you and suggest some respite from the economic chaos we are all living through. However, if you’ll forgive me, this week I’d really like to draw your attention to the horrific case in which a mother of three has been jailed for taking abortion pills during the first lockdown of 2020.

Please do read my column on why we urgently need full decriminalisation of abortion in England and Wales, if you can spare five minutes.

This is Home Front with Vicky Spratt, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.