THE SIGNS THAT TELL US THE HOUSE PRICE BUBBLE WONT BURST

Saturday March 12, 2022

People’s ability to afford a home is at a record low but this won’t crush the market

 

Not so long ago, offering the asking price was a sure-fire way to seal a property deal. But now it carries little weight.

In February a record 43% of owners sold their home for more than its asking price, according to Hamptons.

In February 2019, before the pandemic supercharged buyer demand, it was achieved by a modest 16% of sellers.

Even the most stretched of would-be homeowners have accepted over-bidding as the “new normal”. First-time buyers were the most likely to pay above the asking price, with more than half doing so last month. A record number of landlords joined them. Some 38% of investors bought for more than the asking price in February.

The figures are indicative of a property market that has shown no signs of cooling. House prices have defied expectations of a slowdown in the first months of 2022 as the country enters its worst cost of living crisis in a generation.

Instead, they jumped by 10.8% in the year to February, the sharpest growth since before the financial crisis in 2007, according to lender Halifax.

But despite comparisons with the previous crisis, and its subsequent housing market crash, experts have said history is not doomed to repeat itself. Yet.

Cheap debt

Wage growth has consistently failed to keep pace with soaring house prices in recent years, sending affordability to a record low.

Buyers now need 7.7 times their income to afford the average home, according to analysts Capital Economics. This has surpassed the previous peak of 7.5 needed before the financial crisis.

The affordability problem has so far been masked by record-low mortgage rates and savings bolstered throughout the pandemic, although rampant inflation and a higher cost of living threaten to pull these safety nets from beneath borrowers.

Aneisha Beveridge of Hamptons said: “The increase in the cost of living has been harsher and more persistent than expected, which may result in faster and higher interest rate rises than first anticipated.

“This could slow the market and is particularly likely to weigh on first-time buyers, whose incomes are being squeezed by soaring inflation.”

Mortgage rates have steadily climbed since October last year and borrowers are already paying hundreds of pounds more in interest each year as a result.

However, interest rates are still low by historical standards and are expected to cushion house prices from a sharp fall.

Andrew Burrell of Capital Economics said: “Even if the Bank of England increases interest rates to 2% next year, as we forecast, mortgage payments would still be much more affordable than in 1989 or 2007 [the previous property market crashes].

“We do not anticipate house prices collapsing under their own weight.”

Capital Economics has predicted strong house price growth to continue until the summer. But by the second half of this year, higher mortgage rates and inflationary drag will have dampened buyer demand and slowed house price growth “to a crawl”.

“Only if house prices continue to rise sharply despite higher mortgage costs, or if Bank Rate rises further than we anticipate, would they be due a fall,” Mr Burrell said.

Replenished supply

The recent house price boom has been underpinned by a chronic shortage of homes for sale. As long as buyer demand is so poorly matched by supply, there is little chance of house prices cooling.

But there are early signs the imbalance is about to ease. New listings of homes for sale were 5% above the five-year average in February, according to property website Zoopla.

Simon Brown of Landmark Information Group, a property data company, said: “Supply is definitely starting to increase, but this takes time before it has any impact on the market, so we could be looking at a delay of a couple of months.

“We will hopefully see buyer demand ease off while supply increases, and this would bring the market slowly back in line with normal levels, rather than the bubble bursting.

“It would take a huge shock of some sort to cause demand to vanish abruptly and trigger any sort of crash.”