According to the latest data from the lender Halifax, house prices in April 2022 were 10.8 per cent higher than they were in the same month in 2021. That’s their tenth – yes, tenth – consecutive monthly rise. This is the longest run of month-on-month hikes since 2016.
Overall, house prices are up £47,568 over the last two years. Average property prices have just reached another record high of £286,079.
In any other sector, this sort of inflation causes panic. The energy price cap is rising 40 per cent, to £2,800, in autumn. Ofgem boss Jonathan Brearley called this a “once in a generation event not seen since the oil crisis in the 1970s”. Similarly, rising food prices are causing concern. According to analysis from consumer group Which?, the average prices for 21,000 groceries at eight major chains over the last 24 months showed that 265 items had soared in cost by more than 20 per cent.
But when house prices go up, we celebrate it. The reality is that overpriced housing can have devastating economic effects and could even trigger a financial crisis.
Home buyers are not only paying more for their homes but more to service any debts they take on. Rising interest rates mean that borrowing to pay these high house prices is getting more expensive. The Bank of England raised interest rates to 1 per cent on 5 May. It was the fourth rise since December 2021 and will add around £300 a year onto the cost of a £200,000 mortgage (2.25 per cent variable rate). The next interest rate review will come in mid-June.
Sabrina Hall is a mortgage broker with decades of experience. She told me that banks are withdrawing agreed rates on mortgages in principle and replacing them with higher rates before they approve a mortgage. “It’s happening quite a lot,” Hall says.
House prices are rising but mortgage approvals, according to the Bank of England, are not. The number of people able to buy a house is not magically increasing at the same time as housing costs.
Against this backdrop, banks are appearing nervous too. “Some lenders are tightening their criteria for who they will lend to. For instance, we are seeing the minimum income for borrowing more than four times your income is going up for some lenders,” Hall explains. “This means that some clients who were told they could borrow 4.7 times their income, for instance, are being dropped back down to four times.”
Brokers are deliberately kept in the dark about the exact lending criteria, Hall adds. But they work it out by talking to one another. “In the background they’re making decisions about how comfortable they are lending to self-employed people or people in professions that are at risk of redundancy all the time,” she says. “If something is making them nervous, they will tweak the credit score system in the background to set the bar higher for those people that they consider to be a high risk.”
Traditionally, politicians like it when house prices rise, and they endorse inflationary measures. Remember Rishi Sunak’s 2020/2021 stamp duty holiday for all properties up to the value of £500,000? This was not limited to first-time buyers and instead available to everyone and anyone – including investors.
Those in charge get excited by house price inflation because debt greases the wheels of the economy. As the Bank of England itself notes, our post-industrial economy relies on the cost of housing going up. Mortgage lending is a moneymaker for banks, and we don’t really make anything in Britain today, so we rely on the buying and selling of homes to contribute to our GDP.
When house prices rise people feel wealthier – whether that’s actually the case or not – because their home is, however briefly, worth more than they paid for it. This makes them feel secure enough to borrow – with loans and credit cards – and spend more. The economy gets a nice injection of positivity as a result and, when everyone is feeling hopeful and confident, sitting governments are more likely to be re-elected.
It’s fair to say that there’s a lot going on in the background of the housing market. Politicians seem to be choosing to ignore it.
A house price slowdown is expected. Halifax notes that growth ought to be curbed soon because incomes are being squeezed by inflation. But ordinary people are already paying the price of our reliance and obsession – they’re borrowing more, over longer periods of time and paying more when they do.
There is a knock-on effect for private renters too. It’s harder for them to save to buy a home and rents are also rising along with the cost of essentials, forcing them to curtail their spending on other things.
Any economy which relies on people taking on large debts is not sustainable. All it takes is for inflation and a catastrophic event – such as a pandemic or war breaking out – and everything can change. Fast.
A study by the International Monetary Fund (IMF) shows that while rising household borrowing, such as mortgages, boosts economic growth in the short-term, it can have grave consequences a few years down the line when people need to rein in their spending to repay their debts. When this happens, economic growth becomes slower than it would have been without that borrowing, and the odds of a financial crisis increase.
As the leading economist Roger Bootle recently told me, housing is not a safe investment. Yet politicians continue to behave as though it is.
Ordinary people are already shouldering the financial burden of house price inflation via higher asking prices and rising interest rates and, if living costs keep going up too, the real cost of our overheated housing market could be a fall in house prices which leaves ordinary people servicing huge debts taken out when the market was incredibly hot.
Vicky Spratt is i’s Housing Correspondent