House prices are falling but are we heading for a crash?

It’s the third month in a row that we’ve seen a fall in house prices (May -0.2%, April -0.4%, March -0.3%). The last time that happened was in the 2009 property crash . Whilst prices are still higher than they were this time last year (+2.1% on May 2016) Nationwide are predicting a mere 2% this year – a drop once you take inflation into account.

So what’s happening?

Is it Brexit or other political events or is something else throwing a spanner into the works? Well for a start, since last year, anyone buying a second home is now paying an extra 3% on stamp duty and since April this year, the mortgage interest relief that buy to let landlords previously benefitted from is being gradually axed in the lead up to 2020. All this means it is now significantly more expensive to buy or own a second house or a buy to let property. In addition, the high end property market still hasn’t recovered from the 2014 changes.

Basic economics dictates that if something becomes more expensive, then demand falls. This isn’t the result of Brexit or any other political event. It’s affordability. All that really matters is whether you can afford to make those monthly payments (house prices are really irrelevant …. ish). If you can afford £800pm then the size of the loan that costs you that much is pretty much what you’ll pay, as long as you can get the credit.

However these recent changes in legislation mean that buyers now also have to take into account a hugely increased upfront cash payment for stamp duty and far less mortgage interest tax relief. All this makes a buy to let far less appealing.

If, for example, you were collecting £800pm from your tenant pre-changes and it was enough to cover your interest only mortgage payments, maintenance, contingence fund and still leave a bit over for profit, you now find yourself with a higher tax bill, no contingency fund and after maintenance, you’re probably making a loss. If a previously active, specific group of buyers are removed from the market then you have your answer as to why prices are falling.

So prices are falling, is it likely to continue?

These factors probably aren’t enough to crash the market unless we also see tighter credit controls and higher interest. The government aimed to increase home ownership and that can’t rise if landlords keep outbidding the first time buyer. So they have succeed in changing that! But all they’ve really achieved is exchanging one set of buyers for another and most first time buyers have far less buying power than your average landlord.

So is that the end of buy to let?

Banks are still keen to lend, so landlords may shift away from London and towards cheaper regions where yields may make more sense. This may well narrow the affordability gap as London prices dip and the regions pick up. But as much as I’m desperate to get on the property ladder, the reality is wages are growing faster than house prices so we are unlikely to see any major drop in house prices as long as interest rates remain low and the banks remain keen to lend.

 

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