Many commentators are forecasting that property prices will fall this year.* It’s generally thought that falling property prices are a bad thing for everyone. But is a fall in house prices necessarily a bad thing? Here we’ll consider the situation.
First let’s look at what happens when property prices are falling :
There’s no longer any ‘feel good factor’. Rising property prices – the simple fact that your property is worth more than you paid for it – make everyone feel good about the market, and the economy in general. People are more likely to think about moving, about spending more money and making better offers on a new house.
Falling property prices can have the reverse effect and cause something of a ‘feel bad factor’. People feel poorer, at least on paper. People are less likely to want to move. Those who do are likely to make lower offers. Sellers may be reluctant to sell unless they really have to.
Some people can slip into a negative equity situation. That is, where their house is worth less than the amount they paid for it. Or, more specifically, less than the mortgage they owe. People who have bought very recently with high LTV mortgages are, particularly at risk.
While negativity equity doesn’t have to be a problem for homeowners who don’t want or have to sell it can be a serious problem in some cases. Homeowners who are in financial difficulties could be at more risk of repossession. And, homeowners can’t remortgage if better deals become available – some people become ‘mortgage prisoners’.
Mortgage finance becomes harder to get. Lenders aren’t so keen to offer high LTV mortgages. Or they might up the interest rate for high LTV mortgages. Which means some buyers struggle to buy. Lenders are likely to down value properties, meaning sales can fall through. That can lead to a vicious circle of falling prices.
Now let us look at why falling property prices are not necessarily such a bad thing:
Prices would have to fall by quite an amount to have any serious affect on the market. That’s partly because they have risen so much of late. For example, prices in some areas have risen by 10% over the last year. So they will have to fall by more than 10% to have any real impact. Most commentators aren’t predicting anything like a 10% price fall. In fact, even many of the forecasters who predict price falls this year expect them to pick up in 2022.
Most people are in the property market for the long term. Over 10 or 20 years or whatever they’ll still see the value of their property rise.
Falling property prices can actually encourage market activity, and encourage more people to buy property. First time buyers who have found it impossible to find anything they can afford may well be able to start buying. They might find that their deposit will get them a more expensive house than they expected.
Buy to let landlords may be more active in the market, as prices fall but rents stay the same or rise .... so yields increase. Developers may find more projects are viable.
Overseas buyers and investors in particular, who are frequently very wealthy and frequently cash buyers, may see the opportunity to find bargains and become very active in the market.
It's worth bearing in mind that there are exceptions to every rule. The property market is made up of many sub-markets. When property prices fall nationally, on average, some areas might be badly affected while others (for example where demand remains brisk and supply is tight) might be hardly affected at all.
Let’s look for a moment at the situation for agents. How might estate and letting agents fare if house prices fall?
Will they see a reduction in commission income? Quite possibly, but most likely it will be too small to make much difference. For example, if prices fall 5% the difference in commission between a house that would have sold at £300,000 but now will only sell at £285,000 is only, at 1% commission, £150.
Will sales volume fall? Quite possibly. Although not to the extent that might be expected, as more people become able to buy. Agents who handle both sales and lettings could find that one balances the other to some extent. History tends to suggest that when house prices fall rents don’t.
Property price falls have been predicted for some time now, partly as a result of Brexit. So many agents will (or should) have planned for these eventualities anyway.
Lastly it is important to remember that house prices are not an exact science and there are many variables. Much will depend on what happens with the economy, interest rates, taxation, any further Covid stimulus measures, buying schemes and changes to Stamp Duty, general taxation and Capital Gains Tax.
So, it’s probably true to say that property price falls are not necessarily a bad thing for everyone involved – the market simply undergoes a shift change.
* OBR predicts house price fall in 2021 | Mortgage Strategy
UK house prices fall as end of stamp duty holiday nears | House prices | The Guardian
UK property could cool sharply from six-year high, say lenders | House prices | The Guardian
House prices set to suffer stamp duty holiday blues | Business | The Times