Property News

There Won't Be a House Price Crash... Yet!

There Won't Be a House Price Crash... Yet!

We speak to the man who forecast the last two slumps on why he believes values will rise until 2026.

There is no shortage of property price forecasters predicting falls in the near future.

House prices are set to fall 12 per cent by mid-2024, according to analysts at Capital Economics, whilst Credit Suisse expects prices to fall as much as 15 per cent.

It comes off the back of a property price boom that started a few months into the pandemic alongside mortgage rates rocketing in recent months. 

However, according to the man who correctly predicted the last two property crashes years before they happened, no such house price collapse in Britain will occur - for the next few years at least.

Harrison is able to make his predictions having identified an 18-year cycle that he has mapped out from hundreds of years' worth of data.

Harrison is able to make his predictions having identified an 18-year cycle that he has mapped out from hundreds of years' worth of data.

Fred Harrison, a British author and economic commentator, is sticking by his prediction that house prices will crash in 2026.

Until that time, Harrison believes they will continue to rise, albeit not at the same pace of the past two years.

'I am sticking with the 2026 end-of-house-price-rise cycle,' Harrison told This is Money, 'subject to Putin not launching a nuclear weapon - at which point, all bets are off.

'There will be no crash, just a slowing of the rate of increase over the rates achieved during the Covid period.

'Governments in the UK, USA and China are on the cusp of splurging out large amounts of debt-fuelled spending, which will buoy up the property markets.

Harrison's predictions rely on more than government spending splurges, however. 

It is based on his 18-year property cycle theory, which he mapped out using hundreds of years' worth of data.

Harrison says he has identified the cycle as operating within the UK for at least 300 years.

He has also cross checked his theory against US-wide evidence for the 19th century and against the diverse cultural and geographic evidence from Japan and Australia over the 20th century.

Although the property cycle is not an exact timeline, it is made up of two main phases, according to Harrison. 

After each crash happens, the property market takes about four years to restart its upward trajectory again.

This, he says, is followed by six or seven years of modest growth in what is known as the recovery phase.

Next, there is a mid-cycle dip, often a one or two-year downturn in the market, before another phase of growth ensues, which typically lasts for another six or seven years.

According to Harrison we currently have at least another three years of growth before the bubble finally bursts in 2026.

Rob Dix, co-founder of the property forum, Property Hub, broadly agrees with Harrison's point of view.

Dix says: 'In our view future interest rate rises won't be as dramatic as some are predicting, and mortgage rates will settle once the markets price this in.

'When this happens, the underlying supply and demand imbalance that's driven the growth in the market for the last couple of years will drive prices higher again.

'It's also worth remembering that the effects of higher rates will be felt differently in different locations and sub-markets – with London and the South East being the most vulnerable.

'There will be good buying opportunities over the next few months while people are nervous, but some buyers will be more comfortable sitting it out and waiting for things to settle.'

Could the 18-year cycle be broken this time?

Many within the industry expect property prices to fall. Knight Frank, for example, is expecting prices in the UK to fall by 5 per cent next year and by the same level in 2024, representing a total decline of almost 10 per cent.

However, while predictions make for stark reading, it would be wise to take them all with a pinch of salt.

" There are only two types of "expert" when it comes to predicting house prices – those who don't know and those who don't know they don't know."
Henry Pryor - buying agent 
After all, Knight Frank predicted property prices would fall 7 per cent following the outbreak of Covid-19, while its competitor Savills forecast a 10 per cent fall. 

Both were proved very wrong - largely after a stamp duty holiday ignited the market.

Henry Pryor, a professional buying agent says: 'There are only two types of "expert" when it comes to predicting house prices – those who don't know and those who don't know they don't know.

'Most people thought that house prices would slump in April 2020. Instead they rose.

'As the Danish nuclear physicist, Nills Boor, said in 1922: Prediction is very difficult - especially about the future.

'I expect interest rates will go over 6 per cent and I expect house prices nationally will fall next year by over 10 per cent, but really, my guess may be as good or bad as anyone's and certainly as likely to be right.'

The average house price in the UK dipped in September to £293,835, according to the latest Halifax index, but prices have remained relatively flat since summer.

The average house price in the UK dipped in September to £293,835, according to the latest Halifax index, but prices have remained relatively flat since summer.

The way property prices soared during the Covid crisis reinforced in Harrison's mind that it will take something truly existential to break the economic cycle.

Many will argue however, that the cost of living crisis with its 40-year high inflation combined with rapidly worsening mortgage rates is indeed the perfect storm for property.

The research company, Capital Economics, has said that as mortgages get more expensive, the impact on house prices would become more severe.

Homebuyers and homeowners attempting to secure a fixed mortgage deal at present are facing up to the highest rates seen since the financial crisis.

That may be a warning sign in itself, but it is just the sheer pace of change that has occurred over the past year alone that many expect to cause problems.

This time last year, it was still possible to secure a mortgage charging under 1 per cent, now the best available deals are all above 5 per cent.

In just two years, the average rate on a two-year fixed mortgage has increased by 4.08 percentage points, according to Moneyfacts, rising from 2.38 per cent to 6.46 per cent.

On a £200,000 mortgage this means someone buying or remortgaging now could be paying an extra £460 each month, or an extra £5,520 a year.

House prices could drop 12% by 2024, analysts warn, as average mortgage rates reach 6% and limit what buyers can afford

House prices could drop 12% by 2024, analysts warn, as average mortgage rates reach 6% and limit what buyers can afford

With roughly two thirds of buyers requiring a mortgage, according to Capital Economics, higher mortgage rates will likely dampen buyer demand by making homes at current values simply unaffordable for many more people.

First-time buyers in particular may now begin delaying house purchases and turn instead to the rental market as a cheaper option. 

Almost four million first-time buyer mortgages have been issued since the era of ultra-low rates began in 2009, according to analysis by Knight Frank, underlining how many borrowers are not used to monthly repayments rising meaningfully. 

Karen Noye, mortgage expert at Quilter says: 'Rising interest rates will simply make mortgages less affordable.

'This will precipitate more people to put their houses on the market so they can downsize and achieve lower monthly payments.

'When more houses hit the market there is naturally more choice and crucially more room for bargaining.

Wrong' house price forecasts following start of pandemic

Bank of England: Fall of 16%

CEBR: Fall of 13%

Savills: 10% drop

Liberum: Fall of 7% in real prices

Lloyds Banking Group: 5% to 10% fall

EY's Howard Archer: Fall of 5%

Knight Frank: Fall of 7%

JLL: 8% fall

These predictions were before the stamp duty holiday, which ignited the market.  

'The seller's market, we've been witnessing for the past few years quickly becomes a buyer's market.

'The problem is buyers are also struggling massively with the cost-of-living crisis so demand is also set to soften, therefore those that can still afford to move will have more choice and more leverage to put in lower offers and house prices drop.'

While rising mortgage rates could starve the property market of buyers, it could also flood the market with homes that people find they are suddenly unable to afford.

Lewis Shaw, founder and mortgage expert at Shaw Financial Services said: 'I've been told by an insider at one of the UK's leading high street lenders that they're gearing up for a significant rise in repossessions, arrears and defaults over the next 24 months.

'The fact this particular lender is making these moves already speaks volumes.

'The biggest worry is households on shorter-term fixed rates due to expire in the next 12 months, rolling off sub 1 per cent mortgages that are set to jump up to somewhere around 6 per cent.

'For an average-sized mortgage loan, this could be an increase of up to £600 per month. This could well be the straw that breaks the camel's back.'

Imran Hussain, director at Harmony Financial Services agrees: 'This will definitely be the case for some who are leveraged up to the hilt.

'As we roll off ultra-cheap money onto rates of 5 per cent and 6 per cent, without any form of an increase in salaries over the past decade, repossessions and reluctant sales will almost certainly rise.'

There seems to already be signs coming from the property industry of buyer demand falling away.

Britain's largest homebuilder Barratt Developments, revealed in a trading update that average new home reservations were running at 181 per week, a third down on the 281 per week seen in its last full financial year.

Buyer numbers fell for the fifth consecutive month in September, according to the Residential Market Survey released by RICS.

Meanwhile it also revealed that agreed sales fell for the fifth month in a row – and we saw the biggest monthly fall since the market shutdown in May 2020.

The survey found that most property agents are expecting prices to fall over the next 12 months.

Jeremy Leaf, north London estate agent and a former RICS residential chairman, says: 'The RICS survey has always been regarded as one of the most accurate, not least because data is collected from surveyors and agents 'at the sharp end' just before release.

'New buyers are pausing for breath while considering the pace and size of future interest rate hikes, so activity has reduced.

'Risks of a correction are greater but the market has proved its resilience repeatedly in the recent past. 

'We’re told more borrowers have higher loan-to-value mortgage debt than in the last financial crisis of 2008 but we’re not seeing signs of a major correction in our offices yet.' 

What drives the 18-year cycle?

Many property commentators believe house prices in the past year have been driven up by low interest rates, the stamp duty holiday and people's desperation to move in the wake of the pandemic.

According to Harrison, although these all combine to substantially inflate prices, the underlying force behind rising prices in the property market is the finite supply of land.

This then combines with greed and speculation to turbo-charge sentiment and send prices spiralling before a bubble bursts. 

As our population and economy grows, our demand for new housing increases, forcing prices up.

Without the land supply to satisfy demand, property prices rise, causing banks to lend more against escalating asset values further reinforcing an upward spiral.

People begin to regard property as a safe haven for their money and a reliable investment vehicle meaning prices are further propelled by the appeal of capital gains.

Harrison adds: 'The driving force is the unique characteristic of land: they ain't makin' any more of it and the supply is fixed in the locations where people want to live or work.

'On top of that natural phenomenon is the speculative habit of exploiting this market for additional capital gains.

'Its effects help to elevate prices above what they otherwise would be and will drive the cycle towards the collapse.'