How much further will house prices fall?

Merryn Somerset Webb: This time last year, we asked you all where prices would be in a year’s time. Almost everyone thought they’d be down at least 5%, except Stuart Law, who isn’t here tonight, who thought they’d rise 4%. But they’ve only fallen 2%. So everybody was wrong.

Henry Pryor: But in real terms they are down 7%.

Merryn: Yes, but none of you thought there would be inflation. I mentioned it, but you all disagreed with me. In any case, we are only down 2% in nominal terms – so what went wrong? Why haven’t prices fallen as far as we’d thought?

Henry: The average person is still being encouraged by politicians to become a homeowner. They’re not making decisions based on the macro-economic arguments. That’s why we were all wrong.

James Ferguson: But it’s not rational to expect people to take an economics degree to learn all this stuff. Instead, they look at the prevailing interest rates, and assume the future will look the same. The trouble is, at 0.5%, the current bank rate is five standard deviations away from the 317-year mean. In other words, it’s way lower than it ever is normally. If these things have a tendency to revert to the mean, then anyone who assumes that rates will stay at this level is likely to be proved wrong. If anything, the authorities should be warning people that they shouldn’t assume base rates will stay this low for the duration of their mortgage.

Our Roundtable panel

James Ferguson

Head of strategy, Arbuthnot Securities

Ed Mead
Director, Douglas & Gordon Estate Agents

Jeremy McGivern
Managing director, Mercury Homesearch

Henry Pryor
Independent housing expert & buying agent

James Wyatt
Head of valuation & surveying at John D Wood & Co

Jeremy McGivern: I agree. People are now happier borrowing £1.3m at 3% than they were half a million at 8%, yet Armageddon could be around the corner.

Merryn: But until it happens, and we don’t know when that will be, house prices won’t budge?

Jeremy: Well, they will drift outside of London and they will go up in London.

Ed Mead: In London, if someone has found something they think they can afford, they will still buy. Whether that’s the case outside London is another matter.

James F: Maybe they can’t afford it outside London. The latest batch of quantitative easing (QE) comes to £75bn. For the sake of easy maths, let’s say there are 75,000 dealers and bond traders in the City. They will each get £1m of this QE coming through their hands. Also, £75bn is about 5% of UK GDP, so that’s going to have a dilutive effect on sterling over the next 12 months, which will benefit foreign buyers as sterling weakens. So if you’re a foreign buyer or you work in the banking system, QE directly channels money into your pocket. Outside of London, that’s not the case, so that’s where you’re getting a fairer reflection of the economic reality.

Ed: Yes, the difference is quite extraordinary. I won’t say it’s never been better in London, but outside London, estate agents are clinging on for dear life.

James F: So taxpayers and the rest of the country are subsidising London for the first time. But the situation in Europe – which looks to be approaching an end game – could be interesting.

Ed: If the euro falls to something like €1.50 to the £1, then everything in London will stop in its tracks. But in any case, volumes are still way down. A few agents are doing OK, but no one is doing fantastically well.

Merryn: So why are volumes down so much in London?

Ed: A lack of sellers is the main issue.

Jeremy: Around the £20m mark it’s almost impossible to buy a property. People just want to hold on to their assets. Yes, they are worried about the euro, but not just the euro – they are worried about fiat money in general.

Merryn: So your clients are buying for currency safe-haven reasons?

Jeremy: A lot of them, yes.

Ed: Your average good property in central London is trading now at about 25% more than at the peak. It doesn’t have to be particularly expensive, just a good example of what it is. But if you go immediately outside of central London, to the likes of Battersea or Putney, then properties are still trading at slightly below the peak.

Jeremy: That’s the difference between 2007 and now – in 2007 you could sell anything.

Merryn: So the market is very different now to during the bubble?

Ed: It’s changed so much. Everyone has started talking about average rental prices. People have almost stopped talking about average sale prices.

Merryn: Do you mean rental prices or yields?

Ed: Prices. The cost of renting is so high and the cost of mortgages so low that lots of buyers think: ‘we don’t really care what happens in the next few years. As long as we don’t hold this for five years, we’re better off.’ If we see five-year fixes at under 3% – and I think we will – that’ll tempt an awful lot of people who have otherwise been thinking about renting.

James F: But that’s an interesting point, which goes back to what we were discussing earlier. Central bankers are trying to make people think that 0.5% base rates are quite normal, and so base their buying decisions on that.

James Wyatt: Yes, people are prisoners of their short-term memory and the central banks are manipulating the market. They are pumping in more credit to stave off a depression. If you look at the fundamentals of property – the ratio of house prices to earnings for example – then property is still overvalued nationally.

James F: Basically, printing money and having interest rates this low is all that prevented the US and Britain from falling into a hole, as Ireland did. But the central bankers are now in a real pickle. Eventually – maybe in three years’ time or so – they are going to start thinking to themselves, now how the hell are we going to get out of this?

Merryn: Hang on, do you think the banks will be fixed within three years?

James F: I think there are American banks that are already fixed and some that are within 12 to 24 months of being fixed. In Britain, HSBC is probably already fixed to all intents and purposes. Give Barclays and Lloyds another two to three years, and as long as all goes smoothly, they should be well out too.

James W: So on that basis the Bank of England has done quite well. It’s been buying time to recapitalise the banks.

James F: Except, of course, that it’s not necessarily the Bank of England’s job to make that choice between having a recession and taking the pain upfront, or hiding it from people and allowing them to make terrible, inefficient economic decisions because they were assuming that things were normal.

Merryn: Back to house prices. Henry, what’s happening at your end of the market?

Henry: Outside the M25 they are having a miserable time. There’s a huge gap between the aspirations of sellers and what houses are actually selling for. In Newcastle you find whole rows of classic Coronation Street-style houses for sale. They are starting to get boarded up and dilapidation is creeping in and having a serious impact on those still living there.

James W: In the last couple of months I have taken two phone calls from owners looking to sell their West Country properties through London agents because they can’t sell to the local market – there is just no money. Yet meanwhile, the average first-time buyer’s age is going up by a year every year – it’s now 37.

James F: It’s 43 in London.

James W: The market is still so high that it’s taking first-time buyers 15 or 17 years of employment before they can buy.

Henry: Added to that you’ve got a whole load of people who were first-time buyers five years ago, who are now in negative equity. You may be able to take that hit on the chin and sell, but you’ve got no money to put down for the next house.

Merryn: So when are sellers actually going to capitulate and start selling at something approximating a market price?

James F: Or why don’t the people who are waiting for house prices to revert to the mean all get placards and go storm the Bank of England?

Henry: Because the vast majority of people who put out information have an interest in selling a house or selling a mortgage, and that fuels this perpetual idea that rising, or high, house prices are a good thing.

Ed: Hang on a second Henry. We’ve had four years of people telling us that house prices are going down – and they have.

James F: But Ed, wouldn’t you have preferred it if house prices had dropped 25% in one year, then we bang the floor, and from now on it’s going to go up?

Merryn: Everybody would.


Henry: But that’s not realistic.

James F: No it’s not, but it does go to show how destructive this policy is. House prices are one area where quantitative easing (QE) is becoming most distorting and dangerous: it’s locking us into this idea that house prices now can’t go anywhere for the next decade or longer.

Ed: If nothing changes radically, we’ve got another five or more years of this dirge. Maybe people will get so fed up that they will stand outside the Bank of England and give Mervyn King a hard time, but I think they’ll just put up with it.

Merryn: So thanks to QE and low interest rates, the next five to eight years will see prices stay static in nominal terms, and fall by 4% or 5% a year in real terms, before it’s all over?

Ed: That’s the most likely scenario. Unless the banks get fixed and they suddenly start lending and people start buying.

Henry: Well, I’d say that what Merryn just said is the most optimistic outcome. But it’s not necessarily the most likely.

Jeremy: Yes, what if austerity measures kick in and people start losing their jobs in greater numbers? The banks are going to slash jobs and make 2008 look like a picnic. That will have a huge impact on prices. Even with unbelievably low interest rates, people will struggle to pay their mortgage or their rent, which will then cause a lot of problems for landlords.

James F: Already £60bn-worth of mortgages in Britain have been modified to interest-only. If you got modified to interest-only during a time when base rates fell from 5.5% to 0.5%, that shouldn’t come under the heading of ‘modified’ – that should be considered ‘distressed’, or even ‘delinquent’.

Merryn: There are more interest-only mortgages in issue now in Britain than there were in 2007, which, given that no new ones have been issued…

Ed: It’s extraordinary when you think about it.

Merryn: So what’s going to spark a sudden flood of forced sellers?

James F: The most likely catalyst is a serious banking crisis in Europe. We are too close to remain unscathed.

Merryn: How will that affect house prices here?

James F: Well, Europe is facing exactly what happened in America, but it’s a good three years behind. What we don’t know is whether European politicians will understand that, or whether those 17 countries will be able to pull together and agree to do the right thing. The people who have been supporting the London property market are Europeans. If their banks blow up, then that source of demand could dry up.

Merryn: And outside of London?

James F: For the rest of the country, it’s about the policy response to any sort of blow-up. If the eurozone ends up doing QE, that will inflate commodity prices.

Merryn: So we have a big banking failure in Europe, which forces Europe into QE, which pushes up commodity prices, which hits disposable incomes in Britain, which in turn hits UK house prices?

James F: Which in turn hits those British homeowners who have already been pushed onto interest-only. There is nowhere to go after that.

Merryn: But your transmission mechanism doesn’t hit UK interest rates, does it? Whereas James [W], you think that a European crisis will affect gilt rates?

James W: Yes. We’ve got inflation at 5.2% already. Let’s say Europe does QE. We will import that inflation. So when is the Bank of England going to raise interest rates? Will foreign buyers really carry on buying gilts if they see us printing money and letting inflation rip roar ahead? And at what point will the actual population turn around and say, inflation is too high?

Ed: But isn’t the more immediate problem that if the European banks blow up, British banks are exposed to some greater or lesser degree to the European banks, and therefore will be even less keen to advance mortgages?

James F: Well, as far as we can work out, there is not much continental exposure as a whole in the British banks.

Jeremy: Can I just raise another issue? I think we could be on the verge of a mansion tax. That really would hit central London. I’m not in favour of it, but the Lib Dems have been talking about it for some time, and it was reported that several senior Conservative MPs are supporting it too – the Tories want to drop the higher rate of income tax, so it would be a quid pro quo. So you could see a mansion tax of, say, 1% per year on anything above £2m.

Ed: They would lose too many votes.

James W: You say that, but Knight Frank and Savills keep on saying that right now 60% of buyers above the £2m bracket are foreign; they don’t vote.

James F: And you could change the voting easily by just saying overseas or non-doms.

James W: I’m not in favour of more taxes either. But a wealth tax is very easy to collect, because the District Valuers’ Office has the information on all the properties and their values to hand. For the politicians it’s a no-brainer.

Merryn: The problem, of course, is that you then get fiscal drag – give it a decade and everyone will be paying it. Now, what about the rental market?

Ed: It is definitely beginning to come off outside London. Supply is increasing.

Merryn: Why and how?

Ed: I think a lot of them can’t sell. There are more people becoming landlords who didn’t really intend to be in the first place.

James W: Outside of London, rents over the last year have gone up because people can’t sell and they can’t afford to buy. But a colleague was saying that there is now almost a ceiling to rents outside London.

Jeremy: In London it certainly remains a strong market. Rental yields have jumped up to about 4% or 4.2% gross.

Henry: Which is woeful for property.

James W: It is. Again, it’s down to artificially low interest rates. In thereal world we’ve got inflation at 5.2%. Historically speaking, the Bank of England base rate should be – what – 2% above that?

James F: I’d say 3.5%.

James W: OK, so we’re talking about a base rate of 8% or 8.5%. Your mortgage rate then, in today’s market, should be at 9% or 10%.

James F: More like 11% or 12%!

James W: How many people could afford to buy or buy-to-let at those levels? We are living in a false market.

James F: But that’s the problem. At some point, when we get out of this environment, policymakers will have to go back to ‘normal’. So in the medium to long run, property has to come down. For now, we’re just looking at what it costs you day by day, or year by year, to live in the property. And so rental costs versus mortgage rates will be all important for new buyers.

James W: But there are a lot of other changes going on that you have to beaware of. Owner occupation peaked about five or six years ago – it is projected to fall from 69% to 57% by 2020/2025. Then there’s density. When I was an agent in the early 1990s, most of the houses I looked at in Chelsea and Kensington had a basement with a self-contained flat, which they used to rent out. So density of occupation is going to change as we go through these straightened times – especially if a mansion tax comes in.

Merryn: All right. We are going to be back here in a year’s time. So where do you think house prices will be then?

James F: Down 7% in real terms, probably 3% nominal.

Jeremy: Real terms, down 10%, nominal down 4%.

James W: In real terms, falls of about 10% to 12%. And I think inflation will continue to spike, so about 5% to 6% falls in nominal.

Ed: I’m just going to say nominal down 5% – more grind.

Henry: Down 7% nominal.

  • silverkris

    Apologies for repeating myself.
    On the Mansion Tax theme, are there any comments out there about the system in Switzerland where any owner of a second home gets taxed on it’s market rental income, whether it’s rented out or not..?

  • Andy

    My comment on your suggestion of a taxed based on notional market rental income is that it seems a very sensible idea.

    Policy (whether by design or as an unintended consequence) almost exclusively favours those already on the property train. Until it stops at a station where people can afford the ticket price, then it seems dangerous to try to get on board whilst it’s still careering down the tracks.

    Anything which could help free up empty houses (and in a small way start to redress the imbalance between the haves and have nots) seems sensible.

  • Brian

    Spain adopted a similar approach with patrimonio on holiday homes a few years ago but, I think, they were forced to drop it by Brussels.
    That was a shame as I think it is a fair tax.

  • Tom O’Neill

    And now the government announces that the taxpayer will have the privilege of underwriting 95% mortgages for FTBs.
    Cue the music from ‘Jaws’.

  • Michael

    Silverkris – The Swiss system applies to your first property as well. You are taxed on the notional rental value of your home. You can offset this against such things as mortgage payments and house maintenance. In practice, this means that people maintain huge mortgages and maintain their houses well. House prices continue to rise in Switzerland (which is very bad for first-time buyers), but this is probably more to do with a sound, low-tax, business friendly economy which is both outside the EU and the Euro and suffers little from constant government interference (UK, please take note). Also, only a very small percentage of the country owns a property, so it does not face quite such a huge threat from a crash in house prices.

  • joe bloggs

    we are all doomed, exept the banks.

  • Jim

    My story is typical for a property investor who started in the early 2000’s, buying one property, seing it go up in value, remortgage to release funds to buy another. Over 7 years I amassed 55 properties worth £15m with £12m borrowings. The same properties I est are now worth £11.8m. My rents cover mortgage payments – but only just. Most are in negative equity so I cant sell as no funds to subsidise. An interest rates of 1% on £12m is £10 000 per month – when this happens I will drown. As far as I can see there is no way out! There is no opportunity to restructure borrowings. The only hope is that inflation continues and interest rates remain until a point is reached where property is seen as cheap. This I believe is the status quo which the government wants for debt in general. However, any global crisis will wipe this out and then as interest rates rise, repossessions will jump, and property prices collapse.

  • Clive

    I wonder if the government have any idea just how many flats and houses they could make available to the market overnight without having to commit any more public money at all.

    How? By simply making it illegal for occupational pension schemes to include clauses allowing them to withdraw pensions, earned by virtue of late spouses’ contributions, from widows and widowers who wish to re-marry or co-habit with a new partner.

    I personally know three couples where each individual has decided to maintain their own residence – empty for most of the time – because the costs of so doing are below the value of the pensions they would have to forfeit were they to officially co-habit or re-marry. Ideally, of course, these couples would prefer to sell one, or even both residences, so that they could openly live together in a single residence.

    Nationally, we would be talking of several thousands of extra residences!

  • ken

    When James Ferguson talks about banks ‘being fixed’ or not, what happenings to the mortgage holders who borrowed from lenders who are not fixed? What would happen to these lenders? Will they be compelled to honour the mortgage contract or could the mortgage be bought by another lender on a completely different product?

  • swisssteve

    Silverkris (& Michael). A few more points on Switzerland…
    - Its relatively easy to get around the second property tax in many Kantons – just register with a rental agency – then you dont have “use” of the flat (but you can always can have first call on it as long as no-ine is renting it on a given day).
    - There is also a Property appreciation tax which applies to all properties (Different rules and rates in each Kanton) regardless who owns them and for what purpose. This is a significant but efffective “capital gains tax” paid when it is sold. If the house is your primary residence and you sell in order to buy somewhere else you can have the tax debt passed to accumulate on the new property. The tax rate is very high if you seel within the first five years, and is a significant brake on speculators.

  • Michael


    sorry Jim but I don’t have any sympathy for your predicament. Why did you need 55 properties anyway ? To make money you hoped. And because of people like you and your greed, combined with the stupidity of the banks our whole financial system has been brought to its knees, and is only being propped up by artificially low interest rates and money created out of thin air. The system deserves to crash to teach bankers, politicians and BTL landlords the errors of their ways. I’m disgusted that my tax will go to keep this ponzi scheme going. A free market should accept the losses as much as the gains. Whilst you wallow in self pity, spare a thought for the public services and jobs that are being slashed to keep the banks out of the s***. I refuse to pay stupid money for over priced rabbit hutch housing. Bring on a crash, and then society can re adjust accordingly.

  • Pyewackitt

    One of the best articles highlighting the current situation that affects everyone in this country.

    I sincerely wish this could have been seen in a mainstream broadsheet as i think the mass media is remiss in their interpretation of the current crisis.

    Thanks again to Merryn and the team for telling it how it is and bringing the discussions back into the context of reality.

  • Jim

    Michael. I posted not in self pity but to converse the position that many ‘Property Investors’ are in. Property is a commodity that is traded like in any other business. Yes there has been greed and yes the property market is being kept alive by low interest rates, however isnt this scenario just the same as in most business’. The debate is on how best to get out of the mess. A crash and start again? or Controlled? No one would propose to ‘Bring on’ a crash so the only option for any business/government is to Attempt ‘Control’ and it is this that is happening now.

  • Chris

    Jim are you not limited, and if so doesn’t that you only lose the ltd company, and are able to cream off via dividends and a wages a profit that can’t be taken from you when it does go wrong. Or an I missing something

Paul Hodges: house prices could fall 50% in 'Great Unwinding'

Merryn Somerset Webb interviews Paul Hodges about deflation, the global economy's 'Great Unwinding', and how Britain's house prices could halve.

Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.

23 January 1967: Milton Keynes founded

The most famous of Britain's garden cities, Milton Keynes in Buckinghamshire, was founded on this day in 1967, along an American-style grid pattern.