Two reasons the UK housing market ‘could’ crash…
Google data shows lots of people are always searching to find out when house prices will drop. People often talk of ‘a correction in the market’ or ‘the bubble’. So let’s have a look at what we at Avocado Property believe are the two most likely factors to create a crash…
1) Huge Mortgage Rate Increases
You may have seen us talk about the importance of mortgage rates. We always say that house prices are not actually as relevant in a buyers search criteria compared to monthly mortgage cost. How much someone can afford monthly is always key to the price they can pay for a property.
For the last few years banks have been super competitive! Rates have been historically low and the Bank of England base rate until a few months ago was down at 0.1%. So… if mortgage costs are like the birdy (cheap), then demand is high, and it is high right now.
What would it take to cause a crash though? We think the BoE base rate would need to rise to circa 5% and mortgage rates for a standard mortgage (85/80% LTV) would need to go from circa 1.8/2% up to 6,7,8%. This would put a huge increase on the monthly cost of a mortgage, alongside the cost of living increases, would create a huge amount of pressure in the housing market. In truth it would create a lot of ‘fire sales’ for people that have brought in the last 4-5 years with less equity in their homes. It would also shun buyer demand and potentially push renting a property back to cheaper than buying. People will always need to sell, but this would see buyer demand decrease to tip the scales of ‘supply and demand’ in the opposite direction to now. Prices as a result would fall.
If this type of correction was ever to happen (unlikely the government would let it) it would only likely last 6-18 months before action would be taken and the ten year cycle of price growth would continue.
Chances of it happening? 2/10
2) A Global Financial Crisis
2007/8 was the last significant crash in the UK housing market and it was led by US financial issues. Could this happen again? It could, mainly because we don’t really know what happens behind the scenes in the money market.
One thing that might change the way the world moves money is the way we live. Green tech, green living and global pressure to reduce our generations carbon foot print could turn things upside down. Over coming years several green tech companies will no doubt be unicorns of investors money. Pick the right one to invest a few quid in shares and it could change your life. So can Vegas though… What we don’t know is how expensive a drastic environmentally friendly change to the planet could be on the global economy.
Last time a global financial crisis happened it was down to the way banks loaned money at ease; which back fired in a catastrophic way. This time could we see a strategic global war, that filters worldwide resources in favour of one group of countries, causing a crash? Could we see the stock market, crypto and other trading markets flattened? All scary and possible. Some maybe more likely than others…
Chances of happening? 0.25/10
Summary
If’s, but’s and maybe’s. Yes the property market could crash. If you buy a property the year of the crash and at the peak then you are super, super unlucky. If you buy a property and live there for 5-10 years history tells us you will make money – big money! The market pricing is set by simple demand and supply. At the moment demand is out stripping supply drastically; hence huge price growth.
We talk to a lot of people that are waiting it out to buy at the next ‘crash’. They have spent a lot of money renting for many years and chances are they will spend a lot more on rent in the coming years too.
If you have any questions around this topic it would be great if you could join us on our Thursday night live chat across Facebook and YouTube at 6pm every week. Get your questions in live to the panel and we will discuss them live too.