Everyone’s been predicting a house price crash for years – but this time it’s different

Brexit, the pandemic and Ukraine didn't dent the housing market – but our latest crisis might

Property market watchers have warned that house prices will fall more times than I can count – and I know, because I reported on them each time.

In fairness, each alarm was rung for logical reasons, such as during the pandemic, when the housing market was shut down, or when a no-deal Brexit looked like it would lead to an uncertain economic future. Common sense dictated that such huge events would affect the property market.

It turned out that leaving the EU, a pandemic and a war in Europe barely dented buyers’ confidence and house prices continued their inexorable rise. But this time, higher interest rates and a cost of living crisis should be enough to end the party.

So far, the peak of the market is visible in small but important signals. Online property searches have plunged to their lowest level since the housing market was shut. There has also been an uptick in “down valuations” – when a bank doesn’t think a property is worth the sum agreed between buyer and seller and doesn’t lend the full amount.

In some areas, more homes are coming on the market than buyers, a reversal of the years-long dearth of supply that has pushed up prices. Suddenly, it is becoming a buyer’s market.

As long as inflation and interest rates remained low, the property market was strong enough to overcome what seemed like dangerous geopolitical events. This is despite the fact the house price-to-income ratio is at its highest ever level. Inheritances topped up stretched mortgages, cash buyers ruled and the “bank of mum and dad” stepped in.

We’re only hitting the peak now because households’ finances have been crunched. Homebuyers could deal with political uncertainty, but they can’t fudge the numbers. The threat to household finances is immense.

Capital Economics, a consultancy, has forecast that “real” household disposable incomes – which affect consumer confidence – will plunge by 3.3pc in 2023.

In the same period mortgage rates will have risen from 1.8pc to 3.6pc. Because of recent rises in house prices, only those who buy right now with vast 95pc mortgages face the real prospect of negative equity.

Capital Economics has pencilled in house price falls of 5pc in 2023 and 2024. But since the pandemic values have risen by a fifth, so most homeowners have plenty of cover.

The negative equity crises of the 1990s and late 2000s – when banks handed out 100pc or 125pc mortgages – will not hit again.

But danger does lie when homeowners’ ultra-cheap fixed deals end and those squeezed incomes are further hit. Mortgage arrears, repossessions and forced sales loom for those buyers who are most stretched.

This crisis will largely pass by the equity-rich homeowners who have been propping up the market during its most uncertain times.

Instead, it will disproportionately hit those first-time buyers with smaller salaries and huge mortgages.

This is the first time they have seen their real wages fall, bills double in 12 months and mortgage repayments soar. It’s not negative equity that will force them to sell – it’s everything else.

You can contact Isabelle at [email protected]