UK housing is on shaky foundations

Everything is calm in UK housing — except share prices.

House price growth has slowed but remains up about 10 per cent year on year. Housebuilders are pointing to robust demand, with upmarket developer Berkeley on Tuesday saying that strong sales and prices were helping to offset rising costs. Vistry on Monday said sales were going great guns as recently as last weekend.

Crisis? What crisis? Take a look at the market. The listed sector is down more than 40 per cent this year, after slumping in August. That’s pricing in a downturn in real house prices on a par with the financial crisis or the early 1990s, according to Liberum.

The likeliest outcome between these dual poles of untroubled strength and total pandemonium is, as ever, somewhere in between. That shares recovered slightly as speculation mounted about a multi-squillion pound support package freezing energy bills suggests that the period of absentee government over the summer had spooked investors, who were left contemplating the impending implosion of household finances.

The trouble is that, energy Armageddon aside, the housing market is still facing an affordability shock, as the era of rock bottom interest rates, elevated demand and ample government support for the sector grinds to a close.

The post-pandemic boom in house prices, up over a quarter since 2019, was propelled by bigger deposits thanks to lockdown savings and bigger mortgages. Loan to income ratios have risen to record levels, notes Andrew Wishart at Capital Economics, with house prices relative to earnings now above levels seen before the financial crisis.

Much has changed since 2007. Affordability checks, while loosened by the Bank of England this year, should mean that mortgage holders are more resilient to rising interest rates. Back then, much as it beggars belief, 45 per cent of mortgage lending went to borrowers without income verification, compared with 0.5 per cent now. Stronger balance sheets among the housebuilders and — for now — a robust labour market should mean less forced selling.

But still, it is the magic of negligible interest rates that has kept market metrics in check thus far. Even after a sharp rise in mortgage rates this year, monthly mortgage costs compared to income in the second quarter were in line with their long-run average, says Capital Economics.

As the outlook for inflation has deteriorated, expectations for interest and mortgage rates have risen, which quickly translates into a nasty picture for affordability. Stretched household finances, higher rates and risk aversion mean smaller mortgages for those that can get them, putting off would-be movers, and is likely to price many first-time buyers out of the market altogether. Citi sees a risk that volumes drop by a quarter to a third, with a knock-on effect for overall sentiment.

What distinguishes this downturn is also the sense that it is unlikely that the government swoops in to prop up demand. The stamp duty holiday put in place in 2020 is widely thought to have been either actively unhelpful, in pushing up prices, or expensive and unnecessary. In any case, the energy crisis should absorb all fiscal firepower.

The latest iteration of the divisive Help to Buy programme, which at least is usefully trained on first-time buyers, finishes at the end of the year. And such is the state of relations between the housebuilding sector and government, soured in particular over cladding and fire safety after the Grenfell Tower disaster, there are no calls for an extension.

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If anything, industry concerns are focused on the government’s ambivalent attitude to boosting housing supply, since the Amersham by-election last June prompted alarm about discontent in the Tory shires.

The housebuilders’ are also keen to expand their homegrown Help to Buy alternative, an insurance-based private sector scheme called Deposit Unlock that enables new-build purchases with a 5 per cent deposit.

Given that the natural time for the government to implement a more effective scheme to unlock financing for younger, less wealthy people would be after a market correction and not before, the industry is right to think that it may be handling this downturn alone.

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