Are House Prices Due For A Fall?

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House price rises don’t have to be followed by falls. In fact, they don’t necessarily have to be interspersed with plateaux. They cannot, however, simply keep storming ahead in defiance of both logic and affordability criteria.

This means the UK housing market is arguably long overdue for a cooling-off period. This raises the question of whether it will come in the form of a plateau or price drops. It also raises the question of whether a contraction would be painful or would actually be a benefit overall.

Why the UK housing market is due for a cooling-off period

When COVID-19 hit the UK, Rishi Sunak, then chancellor, ordered an SDLT (Stamp Duty) holiday. This was originally due to run between the 8th of July 2020 and the 31st of March 2021. It was, however, ultimately extended to the 30th of September 2021 (albeit with a reduction in the discount).

This tax break was great news for onward movers and investors. Unfortunately, it meant that the existing SDLT discount for first-time buyers essentially became meaningless. The end of the SDLT holiday saw first-time buyers regain their advantage over onward movers and investors. It also saw the economy get back into gear after COVID-19.

Both of these changes helped give fresh strength to the housing market. Realistically, however, neither could be expected to last forever. Firstly, there is a limit on the number of people who need or want to buy or sell (or both) at any point in time.

Secondly, the UK is now recognised as being in a cost-of-living crisis. This means that, overall, even people who might want to buy are likely to find it more challenging to do so. Furthermore, lenders are likely to be well aware of this. They will hence take this into account when making lending decisions.

Will the cool-off take the form of a plateau or price drops?

Currently, this is very hard to assess. Realistically, much is likely to depend on how the economy performs over the next few years. Part of this will depend on actions taken by people in the UK, particularly the government. Part of it, however, will almost certainly depend on global factors. This will include how well the rest of the world recovers after COVID.

If the UK’s economy performs at least reasonably well, then there is a good chance the housing market will simply stand its ground until inflation does its work. As long as sellers can afford to pay their mortgages, they will only be forced to move if their personal circumstances change.

This could result in a standoff between sellers and buyers with the former mostly holding out for buyers able and willing to meet their price. The exception would be sellers who are forced to move and who therefore are under more pressure to be flexible on price.

On the other hand, if the economy does not do well, sellers may be forced to sell. They might also be forced to price their home as attractively as they can to sell it quickly. Even if they’re not, they might be prepared to be flexible in return for a serious offer from a serious buyer. These distressed (or semi-distressed) sales would act to lower overall sales prices. They might therefore put other sellers (and estate agents) under pressure to lower their prices.

Would house price drops be entirely bad news?

Every change hurts some people and benefits others. House price drops could definitely be bad news for sellers with little to no equity. They could result in homeowners being forced to sell at a loss and still have to pay off their mortgage (or go bankrupt).

On the other hand, sellers with plenty of equity might be quite happy to see house prices drop. They will get less for their current property but should pay less for their next one. First-time buyers would probably be delighted to see house prices come down for any reason.


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