So far in 2022, house prices have continued to head upwards. Some reports have even suggested prices could reach new all-time highs this year.
However, a big development on 24 January suggests that a house price crash could now be on the horizon. Here’s what you need to know.
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What is the situation with house prices in the UK?
The latest data from the Office for National Statistics suggests the average UK house now costs £271,000.
In addition, while HMRC recently revealed that the number of homes for sale has technically increased, some analysts predict that this is a temporary blip as a result of the Stamp Duty holiday ending last September.
This seems to suggest that house prices are unlikely to fall any time soon, as a shortage of homes for sale should lead to upward pressure on prices.
In fact, we’ve already seen the highest ever asking prices in 2022, according to Rightmove. The property website suggests the average asking price is now £341,019.
Why might a house price crash be ‘on the cards’?
While the most recent stats suggest there is still room for further house price inflation, on Monday, share prices plummeted for a number of housebuilders and online estate agents.
Let’s take a look at how share prices for property businesses performed on Monday:
- Persimmon plc – down 6.24%
- Barratt Developments plc – down 8.9%
- Redrow plc – down 5.49%
- Bellway plc – down 6.03%
- Foxtons Group plc– down 10.73%
- Purplebricks Group plc – down 6.07%
- OnTheMarket plc – down 7.04%
These drops suggest investors are losing confidence in UK housing market, maybe even fearing a crash. This perhaps shouldn’t be too surprising, considering that markets are increasingly certain the United States Federal Reserve will soon increase its base rate for the first time since the pandemic began.
What happens in the US has an impact on global supply chains, and often has a knock-on effect here in the UK. For example, higher interest rates in the US often encourage the Bank of England to follow suit.
How can a higher base rate impact prices?
A higher base rate makes borrowing more expensive, which limits what budding homeowners can borrow to purchase a new home. In theory, this should lead to lower house prices – harming the profits of housebuilders and estate agents.
This is a big deal, especially as the biggest growth in house price inflation has been seen in new-build properties over the past year.
In 2021, the average price of new-build homes increased by a massive 21.7% compared to 11.6% for older properties.
Some blame the rise in prices on the government’s Help to Buy: Equity Loan scheme, which is considered to fuel housebuilder profits. For example, since the scheme launched in 2013, the share price of Persimmon, one of the UK’s largest housebuilders, has more than doubled.
See our article that explores whether Help to Buy should be avoided for more on this.
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Will a house price crash definitely happen?
Predicting the UK property market is very difficult, if not impossible. However, recent slumps in the share prices of big-name builders and estate agents show us that investors are losing confidence in the UK property market.
While markets aren’t always right, this may help to push general sentiment towards falling property prices.
That said, it’s worth knowing that 24 January was a pretty bad day for stock markets in general. In other words, big-name developers weren’t the only companies to see their share prices plummet at the start of the week. For example, the FTSE 100 ended the day 2.63% lower. On a similar note, the FTSE 250 ended 3.64% lower.
As a result, property bulls may form the opinion that 24 January was nothing more than a bad day at the office. However, whether this proves to be the case or not remains to be seen.
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