A housing crash is now inevitable – why aren’t we talking about it?

There’s more misery to come – possibly more than most people who don’t remember the extreme economic conditions of the 1970s, 1980s and 1990s can envisage

Sean O'Grady
Wednesday 06 April 2022 15:24 BST
<p>The key indicator here is consumer confidence, and this has been hitting some dangerous lows lately</p>

The key indicator here is consumer confidence, and this has been hitting some dangerous lows lately

May I be the first to predict a housing slump? Though I know I’m one of life’s pessimists, I’m still a bit surprised that Britain’s imminent house price crash hasn’t received much attention in the media.

I suspect that’s because it’s one of those things people always assume “can’t” happen, because the consequences would be so gruesome. That attitude, of course, only tends to sustain an unsustainable bubble, and make the subsequent bursting of the bubble that much more messy – with debt, defaults and repossessions all over the place.

The other factor is that it’s been a while since we had a proper housing recession – the last slippage in the inexorable trend towards unaffordable housing was after the banking crisis in 2008, though London was hardly affected.

You have to go back three decades, to the early 1990s, to find the terrifying phenomenon of negative equity on any scale. That’s the uncomfortable position of owning a property that’s worth less than the mortgage secured on it; and the ruinous feeling when you’ve got no job and no income to keep up the mortgage repayments.

The key indicator here is consumer confidence, and this has been hitting some dangerous lows lately. One of the main indices, produced by GfK, had a reading in March that was as bad as the most depressing points in the pandemic, and approaching the levels seen in the last financial crisis.

Joe Staton, client strategy director at GfK, sums it up: “A wall of worry is confronting consumers this month and there is an unmistakable sense of crisis in our numbers. Consumers across the UK are experiencing the impact of soaring living costs with 30-year-high levels of inflation, record-high fuel and food prices, a recent interest rate hike and the prospect of more increases to come, and higher taxation too – all against a background of stagnant pay rises that cannot compensate for the financial duress.

“Confidence in our personal financial situation and in the wider economy are severely depressed while the daily news of unimaginable suffering from a horrifying war in Europe and rising COVID numbers at home is adding to the bleak mood. The outlook for consumer confidence is not good; it’s certain there’s more bad news to come.”

You don’t need to be a latter-day John Maynard Keynes to understand that consumer confidence is closely associated with movements in house prices, and on that basis, and the basis of the trends in wages and interest rates we’re likely to experience in the coming months – a housing crash is pretty much an inevitability.

Why, then, is the market so apparently buoyant? Part of it is the depressurising of pent-up demand during lockdown, which will sort itself out in due course, and indeed has been doing since viewing started up again a few months ago. The other is the usual leads and lags – it takes time for big, macro-economic trends to feed through, and for consumers to see and experience for themselves what their personal financial situation holds for them in the next year or so. Seeing is believing.

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The effects of higher gas and electricity prices, higher council tax, the national insurance hike, higher inflation in the shops, modestly higher mortgage repayments and below inflation pay rises are all making themselves known – and will continue to do so in the coming difficult months.

Then it will dawn on people that this might not be the best time to make such a financial commitment. Often, though by no means always, buying a bigger home entails higher council tax liability, bigger heating bills (especially in Britain’s aged housing stock) and, of course, higher mortgage payments. It’s interesting that the GfK index’s measure of how households see their personal financial position faring over the next year is even worse than it was during the worst of the pandemic and the banking crisis. And there’s more misery to come.

Possibly more misery, indeed, than most people who don’t remember the extreme economic conditions of the 1970s, 1980s and 1990s can envisage – double figures inflation and double digit interest rates, for example, and redundancies and business closures. Brexit will make it all worse, but there would be hard times for some in any case.

It’s probably a bit like those old Looney Tunes cartoons, where Wile E Coyote  gets tricked by Road Runner and runs off a cliff. For a few seconds, he’s suspended in mid-air, legs spinning but he ain’t moving – then he looks down and drops like a stone.

The momentum in a decades-long housing boom (give or take a few hiccups) is such that the belief that house prices can never go down will sustain it a little longer. Just don’t look down. Especially if you’re a government looking to win the next election.

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