Navigating a housing market crisis

Mortgage affordability and the cost of living crisis. As financial markets remain in flux following the government’s mini-budget, commentators and analysts have been debating the effects of rising interest rates on the housing market. Higher interest rate expectations are leading to soaring costs of mortgage repayments for homeowners, exacerbating the already chronic affordability crisis in the UK housing market.

• Housing market crisis? Last week, the interest rate on a typical two-year fixed rate mortgage surpassed 6% for the first time in 14 years. If mortgage rates remain at 6%, a family with a £300,000 mortgage, coming off a 1.5% fixed interest rate would end up paying £659.79 more a month in mortgage repayments (a ~65% increase). Sky’s Ed Conway notes that “the impact for mortgage affordability will be the worst this country has seen since the late 1980s/early 1990s…the worst housing crash in the modern era.” MoneySavingExpert Martin Lewis argues that a “ticking time bomb” on mortgages may come in the Spring, where higher mortgage rates interact with more difficult affordability tests and falling house prices. He called for a raft of regulatory changes put in place before Christmas, including “forcing the banks - with the extra money they’re making by putting mortgage rates up and not putting saving rates up - [to have] much stronger forbearance measures for people who can’t pay.”
• End of an era. The sharp rise in the Bank of England base rate and therefore in mortgage rates brings to an end the post-financial crisis era of rock bottom rates, which has been the only reality that many younger homeowners have known. This era has been defined by cheap mortgages, soaring house prices, and demand-side policy interventions such as Help to Buy, which have encouraged people to borrow huge sums in the belief that rates would remain low and the value of their property would continue to rise. Adjusting to the end of this era will be painful, especially when put alongside high levels of inflation.‍
• Ongoing fiscal fallout and interest rate predictions. Chancellor Kwasi Kwarteng has brought forward the date of the next fiscal event to the end of October in an attempt to calm financial markets. There will now be a ‘medium-term fiscal plan’ with associated independent assessments and forecasts from the OBR, but no formal spending review until next year. Chair of the Treasury Select Committee Mel Stride says that if the OBR’s forecast “lands well with markets then the MPC meeting on 3rd Nov may result in a smaller rise in interest rates”. However, the interest rate on government borrowing is now (at the time of writing) almost the level before the Bank of England announced its bailout less than two weeks ago, making a steeper interest rate rise more likely. (Read last week's Digest for more on the impact of the government’s tax-cutting fiscal plans on financial markets.)

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The housing market and the Conservative’s electoral coalition. A drop in house prices and increase in mortgage interest rates could harm the government's chances of winning the next election. Resolution Foundation’s Torsten Bell highlighted that although 50% of Conservative voters own their home outright, two in five households in Red Wall seats will be affected by rising mortgage rates. A recent YouGov poll for the Times asked respondents who is most to blame for fixed-term mortgage rates rising beyond 6%: 52% blamed the UK government, 24% blamed the global economy and 5% blamed the Bank of England. Academics Jane Green and Roosmarijn de Geus have previously highlighted the cost of living crisis could ‘very easily change’ the Conservatives’ electoral fortunes as more people become economically insecure. 

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Could a housing market dip increase affordability? Credit Suisse have predicted house prices “could easily fall 10 to 15 percent” next year. City economist Roger Bootle argues that this “plunge in house prices is now inevitable” as interest rates constrain people's ability to afford to buy housing and demand falls through the floor. However, he notes that there may be benefits to this as, “For new borrowers, lower prices will improve affordability”, but they must fall gently as “it is in no one’s interest that they should crash” due to the risks of financial and macroeconomic instability. (For more on the relationship between the financial system, housing and land read this summary of Rethinking the Economics of Land and Housing)

• Navigating a crash. If a wave of homeowners are forced to sell their homes, there is a risk that richer buyers (without the need for expensive mortgages) could snap up more of the UK’s housing stock, further increasing asset inequality. An independent report for the Labour Party from 2019, Land for the Many, explored the risk of falling house prices for recent buyers. Chapter 4 proposes setting up a Common Ground Trust, a publicly-backed but member-owned organisation that supports housing demand by buying up the land underneath houses being sold. Tenants apply to take out lower mortgages on the bricks and mortar, usually at only 30% of the average property price. In a situation of lower housing demand, having a public entity standing ready to buy up properties that come on the market can ensure that tenants can afford the houses being sold to protect demand. Longer term, this also “creates a mechanism for the gradual, voluntary, but potentially large scale, transfer of land – our single most valuable asset – into a form of shared ownership, so that the associated land rents can be pooled and distributed according to need (in the form of discounts), rather than captured by private landowners and banks at society’s expense.”

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Could renters benefit from falling house prices? The New Statesman’s Emma Haslett explores whether falling house prices could bring a “silver lining for the UK’s beleaguered renters”. Katrina Hill, of the estate agent Chestertons, explains how decreasing mortgage affordability could lead to more homeowners renting out their houses when they need to move, instead of selling their homes at lower prices. This would, she argues, create more rental stock and provide a solution to “one of the rental market’s most inflationary problems”. However, Haslett argues that instead, landlords are more likely to pass on higher mortgage rates in the form of increased rents meaning that it is “unlikely” that renters will benefit from falling house prices. 

• Rent controls are growing in popularity. Rent controls are a form of price control which are used in many cities across the world to prevent housing becoming unaffordable. Economist J W Mason explains how and when they work (for a wider survey of the evidence see this by the Economics Observatory). The Scottish government has recently introduced legislation which will freeze most rents until the end of March 2023 and put a six month ban on evictions. However, exceptions apply to situations in which a landlord faces increased property costs, mortgage interest payments or some insurance costs leading the Scotland tenants’ union, Living Rent, to say that the legislation is not comprehensive enough. The New Economics Foundation has called on the government to “protect those most exposed to the cost of living crisis” and freeze social rents at a cost of £2bn.‍
• Renters reform. The Times’ Steven Swinford reports that Liz Truss “is shelving Michael Gove's plans to end no-fault evictions”. However this move has met with criticism, including from Onward’s Will Tanner who argued that “there is now broad consensus between landlords, tenants and campaigners on the package of reforms that's needed, including abolition of no fault evictions. Everyone agrees.”