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  • Writer's pictureInvestment Synergy Team

Global crash: how far will house prices fall in the UK?

Prices are plummeting around the world, in Canada, New Zealand and Sweden - and still have a way to go.

Hugh Graham - Feb 10th 2023, The Times


House prices are cooling across the world, but what does this mean for the UK?

There is much debate about what constitutes a housing crash, but the consensus seems to be a fall in property prices of about 15 to 20 per cent. A research briefing by the consultancy Oxford Economics defines it as a 10 per cent peak-to-trough fall in prices. By that metric, much of the world’s property markets have already crashed — and still have a way to go. “I think we have been in a bubble, and I think we are now in the process of that bubble correcting significantly in some economies,” says Adam Slater, the lead economist at Oxford Economics.


In January, Jeremy Grantham, a co-founder of GMO, an asset manager based in Boston, who correctly warned of the 2007 US housing bubble, wrote, “The bursting of the global housing bubble... is only just beginning,” noting that the average US home sells for six times the average family income.


However, unlike in the 2008 financial crisis, when America’s subprime mortgage scandal became synonymous with a global downturn, this time it’s the countries with a reputation for stability that are falling the fastest. We looked at what’s happening in housing bubbles around the world and what it means for the UK.


Canada

The average house price in Canada was $626,318 in December 2022, down 21.2 per cent from the peak in March 2022, according to the Canadian Real Estate Association.

Oxford Economics has forecast a 30 per cent peak-to-trough fall. It’s easy to see why: in Vancouver, a buyer has to pay 95.8 per cent of their pre-tax income toward their mortgage on an average home, according to the Royal Bank of Canada. “Canada didn’t have a proper correction after the big housing bubble 15 years ago,” Slater says. “It just kept on expanding.”


So surely the mother of all crashes is coming? Don Kottick, the president and chief executive of Sotheby’s International Realty Canada, doesn’t think so, even though the Bank of Canada has raised interest rates eight consecutive times in the past year to a base rate of 4.5 per cent. “We don’t have enough homes for the population. The government stated they were going to bring in 250,000 people per year [through immigration]. But last year we had close to one million. If the inventory doesn’t come on the market, then we could see some price increases.”


A new two-year ban on foreign buyers is not likely to bring prices down much, according to Ann Green, an estate agent for Royal LePage Sussex in Vancouver. “Sixty per cent of the new immigrants coming in will be professionals. These kinds of numbers keep the market buoyant.”


Nonetheless, she anticipates an end to the manic bidding wars of late. The federal government has brought in a new “anti-flipping tax” that penalises people who buy and sell a property within a year.


Slater warns that Canadian buyers are overleveraged and have high levels of household debt — loans with a debt-to-income ratio of 4.5 comprise 20 to 25 per cent of mortgages. And he doesn’t buy into the low supply argument. “They always say that. The problem with that is if demand is even weaker than that low supply. And we’re probably only in the foothills of any increase in supply resulting from [forced sales]. So the fact that we’ve had such a big correction already, without any of that [distressed selling] could be considered a risk rather than a benefit.”


New Zealand

The median New Zealand house price rose 43.3 per cent from $628,000 at the start of the pandemic to $900,000 in October 2021, and has fallen 12.2 per cent since then to $790,000, according to Knight Frank estate agency. Oxford Economics predicts a peak to trough fall in house prices of 25 per cent by the end of 2023. In Auckland, there has been an 18 per cent fall in prices in a year.


The key in all this is interest rates: 12 per cent of mortgages are on a variable rate, while 40 per cent of fixed-rate deals are set to mature in a year. Many people’s mortgage rates will jump from 3 per cent to 6.5 per cent.


In some areas “you’re starting to see bargains”, says Graham Wall, a founder at the estate agency Wall Real Estate. “So a house that was worth $3 million 18 months ago is now $2.5 million. [That’s because] a young couple whose mortgage was costing them $1,000 a week is now $2,000 a week. And they simply can’t afford it.


“Some people tell me that investors have stopped buying. They’ve almost disappeared from the market. And the big chain agencies that run weekly auctions, they were packed in the past, but now no one is turning up.”


Wall thinks it’s a “pause” in the market, not a crash. “There’s a real lack of supply in New Zealand, so this will never be a collapse.”

Slater counters this by pointing out that there have already been significant price falls at a time when there is a lack of supply. Unemployment is only at 3 per cent, but high employment does not prevent crashes either. Slater says: “Once you get into a recession and asset prices start to drop, you get this potential complex of feedback effects. The weakening of asset prices is bad for the real economy. So you get higher unemployment from that, which can then feed back into further drops in asset prices — a snowball gathering pace.”


Tony Alexander, a New Zealand economist, has warned against excessive pessimism. “Stronger than expected net migration inflows will help, as will rapidly improving affordability in terms of house prices versus income.” Private sector hourly earnings have risen by about 16 per cent in three years. He is confident that interest-rate rises have peaked. “The endgame for the housing market decline [is] underway.”

Slater is not so sure. Analysis by the Reserve Bank of New Zealand showed that as of August 2022, an estimated 2 per cent of loans in that country were in negative equity (and may be now as high as 3.5 per cent). A 10 per cent further fall in price would raise the negative equity share to 7 per cent. “Once you start to get price falls, negative equity will rise very, very quickly,” Slater says.


“The very extreme, risky borrowing practices that we saw before the last house price crash have largely disappeared from the scene. But there is evidence that more mainstream borrowers, Mr and Mrs Average, are more leveraged than they were 15 years ago. So if you do get mortgage rates doubling, that’s potentially quite a big problem. Because of house price rises, you’ve had to take out larger mortgages.”8


Sweden

In Sweden average house prices rose 27.7 per cent from the end of 2019 to the end of 2021, according to Knight Frank, but prices are down 17 per cent since the peak in Q1 2022. Oxford Economics predicts a peak-to-trough fall of 19 per cent.


One reason for the Swedish bubble is that interest rates have been set at 0 per cent or less since 2014. In the five years leading up to the pandemic, they were negative. “That’s probably one of the reasons Sweden’s gone down so fast,” Slater says.


Another cause for concern is that the Swedish have one of the world’s highest levels of household debt — 203 per cent of net disposable income, according to the OECD, compared with 148 per cent in Britain (2021 figures).

“It’s worth noting that the big price falls in Sweden have come with unemployment dropping,” says Slater, who adds that in the lead-up to the previous crash in the UK and US, mortgage arrears rose before unemployment did.


“Sweden is one you need to keep a close eye on because if it is in any way a harbinger of what’s to come elsewhere, we’re in for a rough ride because the drop we’ve had in Sweden so far has retraced about three quarters of the previous peak,” Slater says. “That is a very high rate of retracement.”


“I’ve been working in the business for more than 15 years,” says Anders Elbe, a real estate agent with Sotheby’s International Realty in Sweden. “This is probably the quickest drop we’ve had since our 1992 banking crisis. But you have to remember that prices increased really fast in a short time, so most people in Sweden are still in a very good position. They bought a lot cheaper than prices are today.”


What does it all mean for the UK?

A chorus of agents say there can’t be a crash with low supply to prop up the market. However, Slater points out that the significant house-price falls in the early 1970s and the global financial crash of 2008-2009 were preceded by relatively low supply levels. Higher supply levels may accelerate a crash, but they are not a prerequisite. And while owner occupiers may be able to ride out a downturn and stay put in their properties, he is not sure the same will be true of cash-strapped investors.


The prognosis is not all bad. “Our price falls are modest — 4 per cent since peak,” Slater continues. “When I did my scorecard, the UK ended up somewhere slightly below the middle in terms of risk factors. I’d stick with that view. I do think more price falls are coming. I think we have sufficient negative features in the market here, in terms of the structure of mortgage financing, in terms of debt levels, and in terms of the trajectory of the real economy.

We have a peak-to-trough forecast of 11 per cent stretching into the middle of 2024. We’ve already had 4 per cent so there’s another 7 per cent to go.”


What £1m gets you around the world

Canada: one-bedroom condo in upmarket Yorkville, Toronto, has 1,145 sq ft of living space. For sale through Sotheby’s International Realty


New Zealand: two-bedroom townhouse is in Auckland’s affluent Parnell suburb, close to its schools, cafés and bars. For sale through Sotheby’s International Realty


Sweden: an elegant apartment in Sodermalm, Stockholm, has high ceilings and three bedrooms. For sale through Sotheby’s International Realty


London: a three-bedroom maisonette on Munster Road in Fulham, southwest London. For sale through Knight Frank


Investment Synergy - the world is shrinking....... the UK has always been a nation of property owners, not so in some parts of Europe and the wider world, and now we are comparing the vagaries of wider markets with the ever - over analysed - over thought - UK property market....




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