The British property market is becoming desperate once again

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In 2008, if you wanted a new car, you could get one for free, as long as you were willing to buy a house.

The global credit crunch was well underway and nobody really wanted to buy a house from the nearly bankrupt UK homebuilders. That didn’t sit well with nearly bankrupt home builders. So they started offering incentives — cash back, free kitchens, taking over the buyer’s mortgage payments for a year or two — that sort of thing. In Scotland, one developer has even offered buyers crazy enough to buy a ‘free’ car for an obvious estate accident: a £15,000 Mercedes ($17,810 for today’s conversion). Cala Homes went further: their incentive package offered £30,000 in cash, carpeting and landscaping.

It didn’t make much difference—nothing screams the end of a craze more than a Merc thrown in as a lead. House prices across the UK fell by 15% between January 2008 and May 2009.

So I’m sorry to report that homebuilders are at it again: whether you want your mortgage paid off for a couple years, a few bucks to cover your legal fees, or even just a free fridge or furniture package, give it a go. one of them a call. I’m pretty sure they are waiting by the phone. How come? Because, again, they have to be.

Persimmon recently noted, for example, that buyer cancellations are up and weekly sales per site are down. Nationwide and Halifax both reported small month-over-month nominal price falls (hence quite large inflation-adjusted price falls) and the latest numbers from the RICS Residential Market Survey fully show the market’s woes.

The net balance of surveyors reporting house price increases over the past three months fell to -2 in October from +30 in September, according to RICS data. That’s the biggest decline on record since the survey began in 1978. As Pantheon Macro Economics put it, this is “pretty clear evidence” that home prices are falling.

Volumes are also down. The balance of new applications fell to -55, not far from the bad numbers seen during the global financial crisis, when it reached -67.

In addition to homebuilders, sellers are also starting to get the message: Zoopla reports that about 7% of homes currently on the market have seen their prices dropped by 5% or more. No wonder kickbacks are back. All of this, Pantheon says, is consistent with monthly mortgage approvals falling below 40,000 by the end of the year, a level we haven’t seen since the dark days of free cars last time around. Falling mortgage approvals almost always mean falling prices.

This shouldn’t surprise anyone. When interest rates go up, the monthly payments on a given amount of borrowed money go up, the maximum amount you can borrow goes down, and so does the most you can pay for a home. And, contrary to popular belief, it’s not the supply of homes but the fully funded demand for homes—what people can afford to pay for them—that actually drives prices. Mortgage rates go up, volumes plummet as the market adjusts, and then prices start to fall. The dynamics are always the same.

And mortgage rates have risen sharply. The average rate on a three-year fixed-rate mortgage went from a mere 1.64% in January (practically free money) to just over 4% in September and then 6.01% in October. A £250,000 25-year mortgage with a rate of 1.64% costs £1016 a month. One at 5.5% (rates have dropped slightly since October) costs £1535 a month. You understood. Rates rising, home prices falling.

There are complications here, of course. A wealth tax, council tax overhaul or a change to the capital gains tax regime on UK primary homes are all possibilities in the near future. This is at the top of a long list of disadvantageous tax changes imposed on rental property owners. This all adds up to more of a negative hedge on the housing market, as does the cost-of-living crisis, since spending more on energy bills leaves less for mortgage payments.

A drop in mortgage rates (quite possible with the weakening economy) would cheer things up a bit. But we can also take heart from the fact that the majority of UK mortgage debt is held by those with the deepest pockets. As Berenberg’s analysts point out, the top 50% of households have about 86% of mortgage debt and the bottom 30% only 5%. One might hope that a few savings buffers at the top don’t mean a nasty 1989-1992-style cycle of defaults (house prices fell 20% in that slump).

Property bulls will also point to the fact that most house price swings in the UK resolve quite quickly. March 2020 barely counts as a slump: Prices had actually risen 8.5% by the end of the year. None of the horrific Brexit-related crash predictions have come true. And even 2008 turned out to be little more than a blip for most people: Prices returned to their all-time highs pretty much everywhere by 2012 and then exploded positively. Buy the dip, they’ll say. You can’t go wrong with UK property.

Yet there is a problem with this argument. Mortgage rates did not rise in 2008 and 2020; they went down. In 2007 the base rate was 5.5%. In 2008 it was 2%. In 2019 it was 0.75%. At the end of 2020, it was 0.1%. It won’t happen this time.

Sure they can flatten or fall slightly. Consumer spending in the UK is sensitive to changes in house prices. (How can it not be since that’s pretty much all we talk about?) So the Bank of England is more surprised by the weakness in house prices – and what isn’t the BOE surprised at these days? – the more likely they are to withdraw from the current tightening cycle.

Mortgage rates can drop to 4.5% or similar. But falling 50% higher again? I do not believe. This isn’t 2007 and it isn’t even 2020. You may soon find yourself wishing it were. Meanwhile, if someone offers you a free car, just say no.

More from Bloomberg’s opinion:

• Will Sunak test the love of Britain’s top 1%?: Therese Raphael

• British households already hit by stealthy taxes: Stuart Trow

• BOE approaching rate pivot sends signal to ECB: Marcus Ashworth

This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

Merryn Somerset Webb is a senior columnist for Bloomberg Opinion covering personal finance and investments. Previously, she was editor-in-chief of MoneyWeek and contributing editor of the Financial Times.

More stories like this can be found at bloomberg.com/opinion

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