Is the property market’s conceivable approaching collapse bad for the UK economy?

What is going on with the real estate market?

In order to combat ongoing inflation, interest rates were raised again last week, and if the inflation rate continues to be persistently high, additional hikes are expected by Christmas. This will result in enormous monthly mortgage payment increases for homeowners with mortgages who are transitioning from fixed-term interest rates. Many individual homeowners will suffer tremendously as a result of this, but what will happen to the UK’s economy and social structure in the long run?

Mortgage interest relief at source (MIRAS), a tax cut on mortgage interest payments that was first implemented by the Thatcher administration and eliminated by Gordon Brown, then chancellor of the exchequer, in 2000, is being sought after by some Conservative MPs. These calls have been rejected by the current chancellor, Jeremy Hunt, on the grounds that they will cost the Treasury considerably more than they will help the economy.

At the end of the 1980s, when the housing “bubble” burst and interest rates increased by over 15%, the UK housing market saw its most recent big collapse. House values fell by 30% or more in some places as the slump persisted long into the 1990s, prompting banks and building societies to seize an unprecedented number of homes. Without a doubt, this played a significant role in toppling the Thatcher administration. In order to foster social mobility, Margaret Thatcher established the “right to buy” for council renters and pushed for a market that valued property ownership.

What distinguishes the present from the early 1990s?

Housing prices have risen consistently well above inflation and other savings interest rates in a period of low inflation and interest rates, giving investors a goldmine in bricks and mortar across the nation. The housing market’s economic status is therefore not drastically different from that of the 1980s.

But compared to the past ten years or more, there were a lot less ‘investors’ in the real estate market back then. This has made it more difficult to offer decent and reasonably priced housing across the entire country. Foreign and domestic investors have accumulated prime real estate in recent years, either to rent out as vacation houses or even to keep vacant as investments that will outperform all others. In the 1980s, this was not a very frequent investment.

Holiday houses account for a sizeable fraction of properties in some regions, increasing to over one in five residences in Salcombe (Devon), Marlborough (Wiltshire), and Thurlestone (Devon), according to an analysis of census data from 2021 by the Office for National Statistics (ONS). The statistics indicate that 70,000 second addresses, particularly in coastal regions, national parks, and Areas of Outstanding Natural Beauty, are utilised as vacation homes throughout England and Wales.

Cornwall, with more than 6,000, had the most vacation properties in 2021, followed by Gwynedd (2,590), and North Norfolk (2,195). In certain areas of Devon, Gwynedd, Cornwall, King’s Lynn & West Norfolk, and North Norfolk, holiday homes account for at least ten percent of all dwellings.

The housing market economy has benefited home owners and real estate investors, but it has hurt efforts to provide housing for important workers and other people who have been driven out of the growing housing market. Over the past ten years or so, low mortgage rates have helped drive up property values and this direction in the UK housing market.

If investors are forced to give back “investment” properties to the communities that need them to maintain the services that are provided by those crucial key workers who have been priced out of the housing market in such areas, a collapse in the real estate market may be advantageous for the majority of us even though it will be devastating for some of us.

Where are we going with this?

Regardless of all the unknown unknowns, forecasting the economic and social effects of a market crash is riddled with known unknowns! One of the known unknowns is who is to say that the housing market is about to crash. But since I have a sneaking suspicion that it is, I’ll pop my head above the parapet and tell you the two primary possibilities I see as well as what you can do to help local communities by guiding it in the proper way.

I anticipate the following two key outcomes:

–  The property market’s investors will have the resources to hang onto those properties for years to come,           raise rents, or leave homes vacant to maintain their yield until interest rates fall and real estate values               rise.
–  Investors will seek to cut their losses and sell any homes that aren’t earning as much money as they were        prior to the (perhaps coming) collapse of the property market.

People who fit under the first scenario are more likely to be businesses than individual “buy to let” investors. The second result will most likely be that private investors find it difficult to pay higher mortgage interest rates.

Regarding both of those scenarios, I see the following as the potential function of councils:

– Increasing pressure on the central government to approve new legislation allowing for such surcharges            and even harsher penalties. raised council tax on vacant dwellings.
– The acquisition of, or long-term leasing of, such buildings in order to fulfil municipal housing and                      homelessness obligations.

Comment

The UK economy is struggling due to the cost of living crisis, but other sectors of the economy are also at fault. One of the contributing elements to that issue, in my opinion, is the unchecked expansion of the UK property market in recent years. When a country’s housing market is completely open to the global economy and is out of control, it can jeopardise the provision of services to local communities.

Maybe it won’t be so bad for our country’s economic and social health if the housing market in the UK collapses? Time will tell, but with the freedoms made possible by the relaxation of central government restrictions on local authority planning and regulatory controls, local authorities can take the lead in directing their local economies to manage any collapse in the housing market and achieve the best results for the social health of local communities.