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Buyers should 'under no circumstances' take out large mortgages, warns property expert

·4-min read
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Homebuyers should "under no circumstances" take out large mortgages to buy property, one of Britain's leading housing experts has warned.

Paul Cheshire, a former government adviser and emeritus professor at the London School of Economics and Political Science, said the market was the most exposed to persistently falling prices since the early 1990s and predicted a nationwide drop of at least 10pc.

He warned prospective buyers from taking out big loans just as the market could be about to go into freefall.

“The last time the housing market looked this bad was 1989. That’s when the hairs on the back of my neck were telling me there would be real problems. My instinct right now is that under no circumstances would I borrow a lot of money to buy a house," he said.

Today's outlook is worse than during the global financial crisis because the pressures of rising inflation and falling real incomes will be felt across the entire market, said Mr Cheshire.

He added that there could be house price falls of more than 10pc, depending on uncertain economic factors.

“The events of 2008 were catastrophic for northern cities, but London recovered fairly quickly. Now the outlook is generally worse across the country as a whole, but it is also more uncertain. There are more things that can go wrong,” said Mr Cheshire.

Soaring house prices have left homeowners exposed

After house price growth hit a high of 32pc in 1989, values plunged 11pc and continued to fall for three-and-a-half years, according to Nationwide, a building society.

Now, the rapid house price growth recorded during the pandemic has already started to cool. Data from the Office for National Statistics showed house price growth in March slowed to 9.8pc, down from 11.3pc in February, in a clear sign that the market has peaked.

In 15 London boroughs house prices fell according to analysis of ONS data by Anthony Codling, of Twindig, a property website.

The added threat is inflation, which has just hit a 40-year high of 9pc. It means that households are about to experience the largest drop in real incomes on record.

House prices are so vulnerable now partly because they are at record levels. The ratio of house prices to earnings is the highest it has ever been, according to Nationwide. In the first three months of this year, the average home cost 6.8 times the average salary. This ratio has surpassed the 2007 peak of 6.4 for more than nine months.

“That is a very bad signal when real incomes are likely to fall. In the long run, real incomes are the most important factor for the housing market,” said Mr Cheshire.

End of the cheap mortgage

Real wages are falling just as the protection of low interest rates disappears. The dislocation between house prices and earnings has so far largely been masked by low interest rates, which has kept the share of median income needed to repay a mortgage relatively low.

But the Bank Rate has now hit a 13-year high, and by some forecasts is expected to triple next year.

Capital Economics, a research group, expects the cost of a monthly mortgage to exceed monthly rent for the first time since 2004 later this year.

Andrew Wishart, of Capital Economics, said: “When mortgage payments have exceeded rents in the past, it has been a harbinger of house price falls. That’s because prospective buyers choose to rent instead when buying is more expensive, weighing on demand.”

How far could house prices fall?

Mr Cheshire said that a 10pc drop in prices would be logical. “It could be bigger, but there is a lot of uncertainty. We don’t know how the war in Ukraine will feed through, or how heavy-handed the Government’s attempts to renegotiate an EU trade treaty will be. There are several uncertainties that could bring really nasty turns of fortune.”

Rural house prices, which saw some of the largest jumps in the country in the wake of the pandemic, are now most exposed, said Mr Cheshire.

“There was a significant relative price increase for rural homes. I think that is coming to an end. When the pressure to return to the office increases and people are faced with the reality of commuting, the value of those houses might fall further,” said Mr Cheshire.

ONS data showed house price growth in March fell most sharply in the places that had previously seen the fastest pace of growth. In Wales, annual house price growth in March was 11.7pc, down from 14.5pc in February.

City property markets are better hedged, but London is more exposed to Brexit uncertainties as trade negotiations continue, said Mr Cheshire. Prices in large, prosperous regional cities, such as Bristol, Manchester, Leeds and Birmingham are the best protected.

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