By Neil Driver
Every time someone announces a sudden rise in property prices, there are an equal number of experts predicting that the bubble will burst.
This creates a good deal of uncertainty for property investors and landlords, as they wonder whether to cut their losses and sell up.
Predictably, as house prices continue to rise across the UK many commentators are beginning to predict a crash is imminent.
The last crash
The last time house prices took a dive in the UK was in 2008. In fact, the value of homes was a precursor to the wider economic crash that followed.
At the time prices were high, but the subprime mortgage crisis in America – itself the result of irresponsible lending on increasingly higher-value homes – lead to an international credit crunch.
Overnight lenders stopped offering new mortgages in the UK and as a result, houses stopped being sold and it all came tumbling down like a house of cards.
While many of us will have the memory of these events within our minds, the reality is that the property market, and to some degree, the mortgage industry, has been permitted to do the same again.
Is the crash coming?
The latest Nationwide price index has revealed that the average house price in the UK has increased for the eleventh consecutive month to a record high of £271,613.
While at first seems like a good thing for developers and property investors, it is against a backdrop of rising inflation, interest rates and growing indications of another recession.
To deal with these issues, the Bank of England (BoE) has steadily increased interest rates since December 2021 in an attempt to control inflation.
However, as yet this has had minimal impact as inflation has continued to rise to 9.1 per cent – a 40-year high. This prompted the most recent increase in the BoE base rate to 1.25 per cent.
Although the BoE claims that it acted responsibly, based on the Financial Conduct Authorities rules around responsible lending, which aim to prevent unmanageable household debt, the fact is that wages aren’t rising in line with the cost of living.
Should homeowners begin to default on their mortgages, the UK and much of the world face a scenario very similar to 2008, when lenders stop lending and house prices plummeted.
Although lenders are being very careful not to say that a crash is likely, they are making indications that things are about to change.
For example, Nationwide’s Chief Economist, Robert Gardner, recently said: “There are tentative signs of a slowdown, with the number of mortgages approved for house purchases falling back towards pre-pandemic levels in April.
“Nevertheless, the housing market has retained a surprising amount of momentum given the mounting pressure on household budgets from high inflation. At the same time, the stock of homes on the market has remained low, which has helped to keep upward pressure on house prices.”
Should property investors be worried?
Despite these concerns, there is no immediate reason to panic. While a slowdown in property prices is looking increasingly likely, the prospect of considerable value being wiped from the value of most homes is so far just conjecture.
However, these changes in the market should be carefully monitored and advice sought. Should you decide to sell your investment properties while the market is at a high, you must get tax planning advice to minimise your Capital Gains Tax bill. Contact us for assistance.