Only one key ingredient isn’t in place for a property crash

Larry Elliot is the Economics Editor of The Guardian and his assessment of the likelihood of a property crash doesn’t make happy reading for anyone who’s already on the ‘property ladder’.

Essentially what he’s saying is that the economy is only recovering very slowly and unemployment is rapidly rising – although at the present time this is still partially hidden by the furlough ‘job retention’ scheme. This alone is likely to significantly dampen housing demand.

At the same time, household incomes are being squeezed and consumer confidence is low.   Combine all this with the fact that house prices are historically very high (particularly in terms of affordability – the multiple of people’s incomes to house prices) and you’ve got a perfect storm. Except for one thing….

Interest rates have never been lower –  and are likely to stay low for a good while yet. High interest rates played a major role in past property market crashes. So as long as mortgage payments remain affordable at existing super-low levels there’s a good chance that collectively we should survive the coming storm.

The danger is that governments will soon start ‘printing money’ (known as ‘QE’ or ‘quantitative easing’) in a bid to inject funding into comatose economies. Historically the response to economic downturns was for Central Banks to dramatically slash interest rates, making mortgages cheaper – but since rates are today virtually zero, this is no longer an option.

The risk with ‘printing money’ (albeit electronic variety) is that historically this has violently stoked inflation (as it did in the 1920s and 1970s) – causing prices in shops to start rapidly escalating – which then requires interest rates to be raised to try and stabilise prices.

A far more likely scenario is that the pound will be hit by currency speculation post-Brexit and significantly drop in value (compared to the $ and Euro etc). This makes imports dearer, stoking inflation. And in countries where currency devaluation is intense (like Argentina and Zimbabwe) governments usually have to raise interest rates to quell speculation. 

But rising interest rates would be the final straw for over-indebted home owners with large mortgages, leading to mass repossessions causing house prices to fall through the floor. During the 1989-93 property crash base rates reached as high as 15% – compared to almost zero today.

Historically, owning property has been one of the best ways of ‘hedging’ against inflation. If you bought a house in the 1970s it rocketed in value, while in real terms (adjusted for inflation) your mortgage debt shrank over the years. Trouble is, property prices today are very high in relation to incomes, and interest rates are already on the floor, so it’s unlikely that property will be able to perform the same trick over the next decade –  particularly if mortgage rates rise significantly.

Of course sky high mortgages would be the worst case scenario which hopefully won’t arise.  But if you’re currently buying a property it makes sense to negotiate very hard.  And one of the best ways to do this is by  getting a survey .  A survey can provide excellent ammunition by highlighting defects which you can then get costed and present to the selling agent to reasonably demand a sizeable price reduction.

Remember that when the selling agents first valued the property they would have assumed that everything was in satisfactory condition (unless something was very obviously defective like misted up windows or decrepit kitchen units). So it’s perfectly valid to request a discount to cover the cost of rectifying defects that weren’t factored into the original valuation.

Our next blog – coming soon …….

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