Property Crash Prediction by Experts

25/07/2017

The overall UK property market has had an eventful time since the 2008 financial crash, with an initial loss of confidence and market slowdown followed by a slow recovery as an austerity led economy and stagnant wages restricted opportunities for ownership for many. However, at the same time, some areas of the country, notably London and parts of the South East, saw a vibrant, rising market throughout, driven by foreign investment and high demand.

While different areas have seen different effects, what has been common to all is steadily rising house prices, in fact, you have to go as far back as the 1990’s for the last time there was a real drop in house prices across the country of the kind being predicted now (Lea 2012). However, now we are entering a new economic world, with Brexit causing uncertainty in almost all financial and economic activities, it is perhaps not surprising that experts are beginning to take a more in-depth look at the housing market and what the effects of Brexit could be in the short and medium term.

Brexit, and just how it will affect things is perhaps the biggest potential shakeup of the housing market in 50 years or more, and as pointed out in the press, experts are now beginning to predict a major house price crash in the near future. While we are still unclear on what form Brexit will actually take, the level of disruption, various economics experts are beginning to take a serious look at what may happen to house prices post Brexit. Former government housing adviser and Professor of Economic Geography at the London School of Economics, Professor Paul Cheshire, is one such well-regarded expert who suggests that the crash could be as bad as that experienced in the 90’s, where housing fell by as much as 37% (Hawkes 2017).

Examining the market, he notes that “‘Historically, trends seem always to start in London and then move out across the rest of the country. In the capital, you are already seeing house prices rising less rapidly than in other parts of Britain.” He then suggests that this could quickly turn into a retracement, with house prices falling initially as a result of the ongoing collapse of wages in real terms (Rasiah 2017). With wages today on average 14% lower than in 2008 and rising inflation due to the devaluation of the pound making it worse, and a likely extended downturn due to Brexit exacerbating both, the pressure on the housing market will be at least equal to that experienced in the early 1990’s.

In May 2017, The National Association of Estate Agents figures show that the number of homes that sold for less than the asking price rose to 77 percent (Hawkes 2017), highlighting the precarious nature of the housing market as we approach Brexit and the economic turmoil that will follow. But what would a 90’s style house price crash actually mean for the housing market?

With a near 40% drop in prices, we would see a return to negative equity, where a homeowner owes more on their mortgage than the property is worth, a situation that effected over one million people in the 90’s crash. House prices would fall across the country, but homeowners in the more expensive areas would be hit the hardest. With average prices in the South East currently £315,807, a 40% fall would see them lose £62,480, falling to £253,327 (Hodgkin 2017). For homeowners who live in the property, this is a problem, for buy to let landlords, a reduction towards negative equity can cause real problems, potentially forcing a flood of sales that would further drive prices down.

The immediate issue of falling prices is not all, as with 2008, the medium-term story is how does the market recover, and what are the lasting effects on the future housing market. According to national agency eMoov, who used data from the Land Registry and historical comparisons with previous severe price crashes, to look at what the crash could do. Using all the available data, eMoov determined that in some areas, such as Wales and Yorkshire, housing prices could take over nine years to recover to pre-crash levels (Hodgkin 2017), leaving hundreds of thousands of people in negative equity for an extended period of time.

The shadow of a housing crash is looming ever larger as the Brexit process moves forward, but the main issue with making these kinds of predictions about the aftermath is a simple one, we still do not know what Brexit will actually be. Until we are much further along the negotiation process, what Brexit will actually look like, and therefor just what economic impact it will have, remain unknown. The housing market will be effected by whatever happens, that much is certain, but what that something is will decide just how it is affected.