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  1. The Staggers
24 November 2023

Mortgages are approaching a new cliff edge   

Why Jeremy Hunt can’t stop the housing crash.

By Will Dunn

New research from economists at the Bank of England suggests the housing market, which is already in decline, is approaching a tipping point that could precipitate a real crash.

This week’s forecast from the Office for Budget Responsibility (OBR) contained a stern prediction for the housing market: “From their high in the fourth quarter of 2022 to their low in the final quarter of 2024, nominal house prices are expected to decline by 7.6 per cent.” This is the nominal figure, so the real fall in prices – as measured against everything else in the economy – will be significantly higher, especially now that the OBR expects inflation to remain higher for longer. Last month, analysis by Savills estate agents found house prices had already fallen by 13.4 per cent in real terms since March 2022.

Some people will shrug: house prices have been aggressively over-inflated for many years, there is an affordability crisis, and safe deflation seems the best path. But the question is whether housing can have a soft landing.

On the Bank of England’s excellent Bank Underground blog, Fergus Cumming and Danny Walker suggest this might not be possible. They calculate that a 10 per cent (nominal) fall in prices will change the maths on many people’s mortgages, leading to even steeper rises in mortgage rates for hundreds of thousands of homeowners.

It works like this: say you bought a house in 2022 at £300,000, with a £220,000 mortgage, fixed for two years. Because you borrowed less than 75 per cent of the value of the house, this looked fairly low-risk to the bank, which gave you an affordable rate. But if your house price falls by 10 per cent over two years, to £270,000, when you come to remortgage you’ll be taking out a loan worth 81 per cent of the value of your home. Over the 75 per cent loan-to-value ratio, mortgages get much more expensive.

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Cumming and Walker say this is a situation that affects 350,000 households, based on their analysis of owner-occupier mortgage data, and that these homeowners will pay an extra £2.4bn (averaging £2,000 a year each) per year as a result. “This could have a material impact on the economy,” they note.

Jeremy Hunt’s Autumn Statement contained measures to stimulate supply in the ailing housing market – homeowners will be able to convert houses into flats more easily, planning applications will be put through more quickly, and the government will invest in speeding up environmental assessments. He may be saving the rumoured cut in stamp duty for the spring, to give home-buying voters a dose of sugar before an election in May.

But such tinkering does little or nothing to alter the fundamentals of a market that has been insupportably inflated by monetary policy (the artificially cheap debt created by quantitative easing and low interest rates) and fiscal policies (such as Help to Buy’s £29bn in even cheaper loans). Housebuilders make a product for the market, not for policy: they are not going to be spurred into a flurry of new activity just because they have a greater opportunity to pollute rivers.

And as it becomes ever-more expensive to own a house, the pressure on renters – who are in many cases just financing someone else’s debt – grows greater still.

Hunt has already met with lenders and advocates such as Martin Lewis to discuss forbearance measures on mortgages, but more ideas may be needed. A sell-off of homes or a (bigger) spike in repossessions would only compound the fall in prices, taking the UK closer to a rerun of the crash of the early 1990s: there were 75,500 repossessions in 1991 alone, and by the beginning of 1997 a total of 387,800 people had lost their homes. For one group of voters, the “Tory mortgage penalty” may be about to get much more expensive.

[See also: The housing battle of Hastings]


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