A crash is unlikely, but the fall in UK home prices has a long way to go | Nils Pratley

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Inquiries by would-be buyers of homes hit an eight-month low last month, according to the Royal Institution of Chartered Surveyors, which talked about “a renewed deterioration in UK home sales”. On the same theme, Barratt Developments’ trading update on Thursday related a near-halving in reservations from first-time buyers year on year. And the estate agent Winkworth warned this week on profits because of a slump in activity. In other words, the news from the housing market is exactly as you would expect when buyers are adjusting to the new reality of sharply higher mortgage rates. The big slowdown is on, even if Barratt added that demand among existing homeowners was more resilient. A typical two-year fixed deal has risen to 6.66%, a 15-year high on Moneyfacts data. Here’s the mini-mystery, though: house prices have fallen only about 4% so far, which feels a gentle response to a fundamental shift in what buyers can afford. Why such a small fall? Two big factors make the picture more nuanced than in previous house price downturns. First, we’re not (yet) in recession and, even if we get there, the downturn is not expected to be as deep as the one after the financial crisis in 2007-08 or as prolonged as the early-1990s slump. Both episodes coincided with proper house price falls. Second, sharp rises in unemployment aren’t on the cards this time, according to most forecasts. Instead, we have earnings growth ripping along at 7.3% in the three months to May compared with a year earlier. Thus all the big banks sound relaxed about their default rates and are happy to sing the chancellor’s tune about the need to show forbearance to struggling mortgage-payers. Yet, from a house prices perspective, that backdrop still feels weak when you remember where we came from. We had a decade of rock-bottom interest rates and help-to-buy subsidies and then a whoosh of extra demand with stamp duty holidays during Covid. Even if the rise in mortgage rates had been gentler, the market would still have looked overstretched on important historical yardsticks. At the top, the price of houses expressed as a multiple of average earnings was seven times, higher even than in the heady days of 2007-08. These days, a 10% deposit on a typical first-time buyer home is equal to about 55% of gross annual income, calculated Nationwide last month – down from the all-time highs of 59% of late 2022 but still marginally above 2007-08 levels. In theory, higher interest rates also make it easier to save for a deposit (when the banks get round to passing on the change); in practice, still-surging rents, energy bills and general inflation make the task impossible for most. skip past newsletter promotion Sign up to Business Today Free daily newsletter Get set for the working day – we'll point you to all the business news and analysis you need every morning Privacy Notice: Newsletters may contain info about charities, online ads, and content funded by outside parties. For more information see our Newsletters may contain info about charities, online ads, and content funded by outside parties. For more information see our Privacy Policy . We use Google reCaptcha to protect our website and the Google Privacy Policy and Terms of Service apply. after newsletter promotion Thus the only sensible prediction is that the price of houses has further to fall. No, it probably won’t be another era-defining crash, which would require a deeper recession. But the thinktank Capital Economics’ forecast of another 8% decline over the next 12 months, taking the drop from the peak to 12%, sounds entirely plausible. There is a long way to go yet.