It’s a fact, The UK’s property boom is spluttering and stuttering and we should all be very worried about what happens next!
Is this the reason developers in the borough of Waverley are slow to build and are sitting on their planning permissions and keeping them warm?
House prices fell nationally in the last three months. The Royal Institution of Chartered Surveyors (RICS) house price index hit zero in February. It was a bigger drop than forecast and the lowest since March 2013.
Crest Nicholson is now offering buyers of its new homes in Cranleigh six months mortgage-free. But buyers are put off by viewing new developments where the gardens of homes, built on clay, are or have been, underwater and management fees have to be paid for the upkeep of community facilities e.g. children’s’ play areas, etc.
Demand for homes in the UK fell for the 11th month in a row. Sellers are putting up a record lack of properties and buyers are not registering with real estate agents.
If you’re a glass half full type, you’ll be delighted. The figures suggest that Brexit is having the intended effect.
Property demand and prices outside London are beginning to feel the ripple effect, with buyers seeking big reductions. Property demand and prices in London are languishing. The great rebalancing of our nation is taking effect. No longer is prosperity tied to one city. The rest of the nation has some catching up to do.
But the problem is that house prices are dangerous by nature. A drop in London values could trigger a crash nationally.
Thanks to the vast amount of leverage you need to buy a home, falling house prices represent a huge amount of risk for the banking sector too.
But the real risk is in house price expectations. Because if expectations change, the entire equation for buying and investing in property could trigger a serious economic crisis.
Rising house prices suck in everyone
If everyone expects house prices to rise, that changes the calculations for affordability. For the buyer and the lender.
When house prices rise, the borrower who can’t afford their mortgage can simply sell their home. The profit makes them wealthier. It feels risk-free to own property. You just need to get on that ladder somehow. It’s more of an escalator to wealth.
It’s not just the borrower who is misled by rising house prices. The bank is protected more than anyone else when house prices rise.
The value of their collateral is going up so even the worst possible borrower can repay their loan by selling out. The worst-case scenario is that the bank recovers their money by repossessing the house. In this world, lending is a risk-free deal. They’re willing to lend to anyone. It doesn’t matter who they are.
The danger of risk-free
What happens when people stop believing house prices inherently go up? They don’t even have to go down, just stop going up. Suddenly, the entire premise of borrowing, owning property, and lending falls apart.
Borrowers no longer demand unaffordable debt because it no longer enriches them. And lenders’ collateral values no longer inherently safeguard a loan. Suddenly, the lending decision is about default risk instead of collateral risk. Far fewer people can borrow in that environment.
Under those circumstances, the lending business becomes a matter of risk management instead of simple lending volume. Banks stop fighting for market share and start panicking over their default rates.
Without the presumption of rising house prices, the demand and supply of mortgages are not artificially influenced in a way that justifies widespread lending and buying. The incentives to buy property and lend against it disappear.