There are reports that investors are growing concerned about the property market. We ask is the property market set for a crash?
Over the past month, there have been an increased number of investors and market commentators expressing concerns about the housing market in various corners of the globe.
In New Zealand and Australia the property market has already started to fall with figures down by over 5% from previous highs.
This situation is a far cry from only a few months ago when New Zealand had experienced one of the biggest property booms in the world. The median house price had surged by 43% in the preceding two years, stated Sense Partners, an economics consultancy. That has resulted in the median house price now being 10 times the median annual income, thereby putting home ownership out of reach for many.
The FT reported that the government and the central bank in New Zealand had struggled to find ways to cool the market without triggering a crash.
Like many other countries, property prices in New Zealand surged during the pandemic. This was due to policymakers internationally launching a fiscal and monetary stimulus to protect the economy from a global meltdown.
The result has been worldwide inflation. However, wage growth internationally has not followed suit. This has resulted in a lack of disposable income for many. The halting of central banks’ and governments’ stimuli coupled with rate rises to curb inflation has magnified this lack of disposable income.
In the United States, we have seen the property market retract significantly due to lower affordability. The Daily Mail reports that the US property market could be retracted by as much as 10% with many cities already seeing bigger falls. They report that Toledo (Ohio) -18.7%, Rochester (N.Y.) -17%, Detroit -15.4%, and Pittsburgh -13.7%, are the worst performers.
Paul Farrell reported in the Daily Mail that the US situation is dangerous. The former hedge fund boss Michael Burry, of The Big Short fame, has likened the slowing housing market to 2008. It’s like “watching a plane crash”, he said.
However, the US like New Zealand has seen a huge rise in property prices in the previous two years. According to Fortune, property in the US had risen by over 37% in the last 24 months. They also reported that the rise is partly due to an increase in buy-to-let investors. “In the first quarter of 2022, investors made up a record 28% of single-family home sales, according to a report published last week by the Harvard Joint Center for Housing Studies. That’s up from 19% in the first quarter of 2021. It’s also far above the 16% that investors made up of single-family home sales between 2017 and 2019.”
The chart below is taken from the Federal Reserve Economic Data and shows how US property has surged over the past 10 years. From the chart, you can see that the prices have risen most rapidly during 2020 and 2021.
In Canada, the situation is very similar. Bloomberg reported that “the average selling price is down nearly 9% (in Toronto) in three months. And with the pain now spreading to other parts of Canada, such distress threatens to both accelerate and deepen a housing market decline that’s already underway. ”
Bloomberg cites rising interest rates to combat 30-year highs in inflation as the major contributor to Canada’s housing downturn. “To cool inflation from a 30-year high, the Bank of Canada has raised the benchmark rate from 0.25% to 1.5% since March, and opened the door to lifting it to 2.25% next month.”
Their prognosis for the US and New Zealand isn’t rosy. “In the US, 30-year mortgage rates have nearly doubled in a year, reaching levels not seen since 2008, while in New Zealand houses are failing to sell at auction since the central bank started raising rates.”
News journal The Week reported negative sentiment in the eurozone. “The European Central Bank has warned that rising interest rates are likely to lead to “a correction” for eurozone house prices, which it judges to be “15% overvalued”, said Martin Arnold in the FT. Indeed, “a reversal in the region’s housing markets was one of the main risks identified by the ECB’s twice-yearly financial stability review”.
For some economists, there are fears that the affordability of mortgage interest will pull the property market down. Pantheon Macroeconomics believes that UK property prices will fall in the second half of this year. “The recent surge in risk-free interest rates and mortgage rates has been so severe that we now doubt that a period of falling house prices can be avoided,” states Gabriella Dickens, Senior UK Economist at Pantheon Macroeconomics.
However, in the UK, most forecasters remain quite positive about the UK housing market. Frank Knight believes that the housing market will rise more than originally anticipated in 2022. “Knight Frank had originally forecast five per cent growth in 2022 but it has now pushed this up to eight per cent,” reported The Evening Standard. With inflation at a 40-year high and interest rates at their steepest in 13 years, annual house price growth rose to 12 per cent in April, data from the ONS showed last week. Nationwide and Halifax also both reported double-digit growth in May.
Tom Bill, head of UK residential research at Knight Frank, said: “We still believe annual growth will return to single digits by the end of the year as supply builds and demand is put under pressure by rising mortgage rates and spiking inflation.” This was in response to the announcement of the BoE raising interest rates to 1.25%.
Why is the UK bucking the trend?
Sentiment remains broadly positive in the UK for its housing market in contrast to other western economies. The answer as to why this in the case is quite complex and is built around a number of key economic factors.
Housing shortage. There is a major housing shortage in the UK, as the UK has fallen short of its commitment to build 300,000 new homes each year. There were only 216,000 new homes according to statistics from the government. This lack of supply is probably the most important contributor to the UK’s robust housing market.
Supply shortage. A lack of new homes coming to the market has contributed to a supply shortage. As has the increase of stamp duty. In reference to stamp duty, the payment holiday has closed for home movers. Whilst there is now a surcharge for buy-to-let investors. This has taken the liquidity out of the market. At the start of this year, there were 350,980 properties for sale in the UK, according to consultancy TwentyCi, 36 per cent fewer than at the start of 2020, and the lowest amount since the company began collecting data in 2008.
Inflation is a blip. According to the Bank of England, inflation won’t remain long term. “The rate of inflation is forecast to keep rising this year. But we expect it to slow down next year, and be close to 2% in around two years. That’s both because the main causes of the current high rate of inflation are not likely to last and because we have raised interest rates several times over the past few months.” So Whilst affordability is constrained currently there is optimism on the horizon.
Buy-to-let investors. They are accounting for a larger portion of the market. This creates more demand for property and drives up prices. Demand is growing in this sector and for good reason. Property over the longer term has continued to deliver income and capital growth. This contrasts with UK equities which have not performed as well in the last five years. The chart below shows the performance of the FTSE 100, which is the UK’s benchmark index. The FTSE 100, tracks the UK’s largest companies by market capitalisation. As you can see the index has moved sideways over the past 5 years.
Concerns about the UK property market
Aside from inflation and rising interest rates, there is another concern about UK property. Shares in property-based instruments have fallen. Prices for UK REITs have fallen in 2022. As have the share prices of the major UK house builders. The three largest housebuilders have seen their shares plummet by over 30% since the start of the year. Taylor Wimpey is down 34.61%. Barratt Developments is down by 40.58%. Whilst Persimmon is down 35.61%. This shows declining sentiment toward the profitability of the property market moving forward.
UK property overall
Generally speaking, the market is mildly optimistic that growth will continue.
Savills project that average house price values are set to rise by a total of 12.9% by the end of 2026, but affordability pressures will create a market slowdown.
The latest UK mainstream house price forecast analysed data from Nationwide which found the average house price rose 5.0% in the first quarter of 2022 – driven by a continued imbalance between demand and supply. Values are anticipated to rise by a total of 7.5% in 2022.