Who Would a Housing Crash Hurt?
Probably not the people it should.
by Matteo Tiratelli
31 October 2022
Nothing says “crisis” to our political elite like a house price crash. Margaret Thatcher’s right to buy scheme, introduced in 1980, promised private property and asset ownership to millions. And since then, rising prices have been the motor for economic growth and personal enrichment in Britain. But the storm clouds are gathering.
Around the world, housing markets are starting to creak. In Canada and Sweden, prices are down 8% since February. In New Zealand, they’ve fallen by 12% since their peak in 2021. In the US, transactions have started to slow and the pressure on prices in big cities is growing.
Britain’s not at that stage just yet. But Halifax and Nationwide are reporting that monthly house price growth has started to turn negative, and low-deposit mortgages are being rapidly withdrawn from the market. Spooked by these global headwinds, many experts are now predicting steep falls over the next year.
Experts are predicting large falls in house prices over the next 12 months: Knight Frank -5%; Rightmove -7%; HSBC -7.5%; Bloomberg -10%; John Charcol Ltd -10%; Fox Davidson -10%; Panmure Gordon -14%; Credit Suisse -15%; Capital Economics -15%.
The story behind this downturn is simple. Coronavirus-related supply chain issues and the spike in energy prices have driven double-digit inflation, provoking a cost of living crisis for millions. Central banks then responded by raising interest rates, which had sat at rock bottom since the 2007 financial crisis. And, as interest rates have gone up, so too have mortgages. This huge jump in monthly mortgage payments will mean even people who have managed to save up for a deposit won’t be able to afford a home, driving demand and prices down.
So who wins and who loses?
For renters, it’s tempting to celebrate a fall in prices. But perversely, rents are likely to keep on rising. Speaking to Novara Media, a spokesperson for the London Renters Union (LRU) said that their members were reporting that “landlords and agents are using the cost of living crisis, and now interest rate rises, as excuses to inflate rents by as much as 30%, 40% or even 70%”.
Landlords will protest that they are simply passing on increased mortgage costs, but the truth is more complicated. More than a third of landlords have no debt whatsoever– and there’s evidence that even those who do have mortgages are using the current crisis to squeeze even more profit out of the houses they own.
Anny Cullum is the research and policy officer at the renters’ union Acorn. She told Novara: “Rent rises have been outstripping interest rates for some time. With many landlords already charging much more than they pay out in their mortgage and overheads, rent rises will generally be them deciding to pass on costs to protect their profit margin. Yet again, it is tenants who will pay the price.”
Falling prices also won’t necessarily make it any easier for people to buy. As Oxford geographer and housing expert Danny Dorling once explained on Novara FM, what matters for buyers is the total cost: the price tag plus the mortgage rates. Over the last 15 years, while prices were increasing at an incredible rate, the monthly cost of owning your own home has held steady at just over 16% of an average salary. That’s because central banks around the world kept interest rates at close to zero, pumping cheap money into the housing market and keeping mortgages at historic lows.
But this time round, any falls in house prices will be more than offset by higher mortgage rates, meaning that the total cost of buying a home goes up.
So, who does benefit from falling prices? The only group who are unaffected by changing mortgage rates are cash buyers, including already-wealthy landlords. And while we shouldn’t celebrate the rich getting richer, the current chaos in urban rental markets has been partly driven by a shortage of rental properties, which this could ease. A simpler solution would be rent controls – but I won’t hold my breath for Rishi Sunak to announce those this winter.
Another group that could benefit are hedge funds like Blackstone, which is gradually building a global property empire and is already Britain’s largest single provider of affordable homes. While there have been significant protests against this financialisation of housing in some places, it has not yet registered as a political issue over here.
A more progressive possibility is that local councils could take advantage of low prices to bring houses back under local authority control. These projects of re-municipalisation are already underway in Labour-led Wandsworth, but they have yet to be championed at the national level.
But the real worry if house prices fall will be the ripple effects. 65% of British people live in a house they own, down from a peak of 71% in 2003, but still much higher than at any time in the 20th or 21st centuries. That means that for most people, the vast majority of their wealth is tied up in the house they live in. So when prices start falling, that knocks consumer confidence, reducing spending and triggering a slowdown in economic activity.
A crisis in the housing market can affect the economy in other ways, too. It will make buying and selling homes much more difficult, making it harder for people to move for work. Small business owners, who often use their homes as collateral for loans, will also be hit as banks refuse to lend. Finally, the construction industry – which accounts for about 7% of Britain’s gross domestic product (GDP) – will also start to slow.
All of this will drag on an economy that already looks like it’s heading for a recession, affecting all of us, regardless of our housing situation.
Where do we go from here?
The house price boom in England is a relatively recent phenomenon. For most of the 20th century, house prices fluctuated between four- and six-times average incomes. But in the mid-1990s they started to climb. And today, prices in London are 13 times average incomes, a multiple not seen since the mid-1800s.
This three-decade bubble didn’t happen by accident. Unlike most goods, supply and demand don’t seem to matter that much to house prices. Since 1996, housing stock has in fact risen by more than the number of new households, an excess of supply that should have brought down prices. But instead, they grew exponentially, fuelled by a combination of unquestioning government support and super-low interest rates.
How this new crisis plays out will also be determined by politics. In the short term, we need to continue fighting for eviction bans and other immediate relief measures. Mikey, a member of the Tower Hamlets branch of the LRU, urged the government to “follow Scotland’s lead”, where campaigning by the tenant union Living Rent has resulted in a rent freeze and an eviction ban. “To do anything less,” Mikey added, “is to prioritise landlords’ profits over our rights to a secure home.”
But in the long run, we need to find more sustainable ways of deflating house prices. Although there is already widespread support for this, it can be done in different ways. Interest rate hikes will hit younger mortgage holders and families hardest while risking the economic effects described above. Instead, the solution to house prices lies in the rental sector. As Danny Dorling told me last week, “None of this helps people with housing very much until we have a government that introduces decent rent regulation.” Proper regulation and a programme of sustained council house building, would help to stabilise lower prices and, as Mikey from the LRU put it, “to de-financialise and de-commodify our housing system, so homes can once again be places to live and not investments.”
Whether a parliament of landlords can deliver on that promise remains to be seen.
Matteo Tiratelli teaches sociology at University College London.