Unless you’ve been living under a rock, you’ll have noticed that UK house prices are booming again.
Residential property prices in the UK were up by around 11% in the year to January 2022 – the fastest growth rate recorded since 2004 (the rate was even higher at 13% in the year to June 2021).
Meanwhile, average earnings have struggled to keep pace — at the time of writing, the average UK house price (£255,556) was more than 10 times the UK median salary (£24,120), the highest level on record!
The number of net additional UK dwellings (the most comprehensive measure of housing supply in the UK) was also down 11% year on year as home builders struggle with a materials shortage, while at the other end of the spectrum buyer demand increased rapidly during the pandemic.
How did we end up here?
The UK’s housing crisis has stemmed from successive short-sighted government’s policies — namely, Maggie Thatcher’s ‘right to buy’ followed by Tony Blair’s buy-to-let initiative and lack of house building. Adding to that, in the years that followed the 2008 crash £445 billion of quantitative easing was released into the economy, which we now know disproportionately found its way into the property market.
Fast forward to now, and we’re at it again. But this time the flames have been fanned by policies deemed necessary to soften the blow of a pandemic.
In 2020 alone £440 billion of new money was invented, and this is already seeping its way into the property market. At the same time, government support schemes — such as furlough and the Self Employment Income Support Scheme — were rolled out and (coupled with a lack of spending opportunities afforded to people while restrictions were in place) helped to significantly boost household cash balances.
Interest rates hit an all-time low and lending criteria was softened, which meant that it also became easier to borrow more.
With large household deposits and cheap borrowing came the ‘race for space’ – a mass exodus of people moving from cities to suburbs in search of larger homes.
But it was the introduction of the (entirely unnecessary, in my opinion) Stamp Duty Holiday in July 2020 that proved to be the icing on the cake, as it provided relief to private landlords looking to expand their portfolios and exacerbated prices at a point when property transactions were at their highest.
Where does that leave us?
Property inflation isn’t the only economic indicator running rampant – it’s been frequently reported now that the Consumer Price Index (a measure of current inflation on consumer goods and services) is expected to reach 6% by March 2022, some way off the 2% target set by the government.
Increasing interest rates is the only effective tool in the Bank of England’s armoury to curb inflation. Any steep or sudden changes, though, would erode confidence in the wider market so they’ll most likely take a ‘little and often’ approach by making small increases incrementally.
Most homeowners are not going to be affected, at least initially, by a Bank Rate hike. This is because 94% of residential mortgages taken out in 2020 and 2021 were locked in at fixed rates. In fact, data from the FCA shows that 5-year fixed rate mortgages were the most popular product in 2021. CPI inflation woes have been on the horizon for some time now, so it makes sense to see more people locking in a fixed rate for a longer term while interest rates are at all-time lows. But there may be more to it…
In 2014, the Financial Policy Committee (FPC) introduced new rules, including a requirement for mortgage lenders to stress-test mortgage affordability. Interestingly, 5-year fixed rate products aren’t covered by these rules, meaning that there is a greater incentive for lenders to offer these products.
Additionally, it’s a requirement that the government-backed ‘Mortgage Guarantee Scheme’ (introduced in April 2021 to incentivise banks to offer riskier 95% loans to homebuyers where they would otherwise not) can only be offered out on 5-year fixed rate terms.
It’s perhaps no surprise then that the ‘5-year fixed’ has now become the most popular product on the market.
Why UK house prices will fall in 2026
If CPI inflation isn’t brought under control in 2022 then interest rates won’t come down as soon as the BoE would hope, and there’s a large proportion of homeowners out there who may find that their repayments have doubled (or tripled or more) when the time comes to remortgage.
As the cost of living outpaces wage growth, the knock-on effects are lower household cash reserves, tighter lending criteria, and fewer property sales.
With more 5-year fixed products obtained during the pandemic — a period of soft lending criteria, nonsensical government intervention to my mind, and low interest rates — than ever, I believe the cracks will show in 2026.
