Is a frozen market worse than a house price crash?

What’s worse than house prices crashing 20 per cent? How about them not crashing 20 per cent? With higher borrowing costs and inflation — and decades of tighter mortgage lending — the UK property market faces the prospect of not falling, but of freezing stiff.

And that might be the “worst of all worlds”, according to a new report by the Joseph Rowntree Foundation. In this scenario, low unemployment leads to relatively few forced sales, meaning prices hardly budget but transactions stall, housebuilding stops and cash-rich investors swoop in to outbid those on lower incomes.

The result is like what we have today but worse: home ownership remains inaccessible to all but the wealthiest and rents spiral ever upwards — it could last for years and no one gets to benefit from reduced prices as the cycle resets.

But is that worse than a full-on crash? I remember talking to a woman who, 30 years ago, worked for Citizens Advice. She still choked up at the thought of people caught in the downturn of the early 1990s, when house prices in the south-east fell 36 per cent — 20 per cent nationally. Worst were those who tried to hide how bad things were from their families, turning up to see her with sacks of unopened bills.

“We have a kind of folk memory of the house price crash of the early 90s,” says Toby Lloyd, co-author of the report. “But we haven’t realized how much things have changed since then.”

Compared to the early 1990s, or even 2008, today’s homeowners are far less exposed to price falls. For the past decade, most homeowners in England don’t have a mortgage, according to the English House Survey.

Line chart of Annual change in house prices, nominal and real ({b5e4caabb46945dac267f6fa1789e0b2b1831cce91f79b27f72a0de22e4bb018}) showing We are now entering the fifth housing downturn of the past 50 years

The report puts forward policy ideas to stop big housebuilders mothballing sites until market conditions improve; and to prevent investors and corporate landlords hoovering up properties — the most eye-catching involves allowing councils special powers to limit who can buy in their area.

Were UK house prices to fall 20 per cent from their peak last year, it would only take the average price back to where it was at the start of the pandemic. “There will be people who suffer [from negative equity] but they will be, thankfully, relatively few in number and help can be provided,” said Neal Hudson, another co-author of the report. “Stagnation is the big worry.”

So, how likely is such a market freeze? At the moment, things are looking chilly. Sales in January were down 11 per cent year on year, according to HM Revenue & Customs data released this week — and many of those deals were agreed before mortgage rates went bananas. According to Rics’ monthly market survey, buyer inquiries, agreed sales and new instructions are all falling.

So far, house prices have fallen about 3.2 per cent since their peak, according to Nationwide — but there may be a long way to go yet. When we listed our flat in north London last spring, it went under offer in a week. After the deal was wiped out by rising interest rates, we relied on it last month with a price cut of 5 per cent. Feedback from viewings is clear: not at this price.

Maybe we will avoid the JRF’s no-crash “worst of all worlds” scenario after all. Gulp.

Nathan Brooker is the editor of House & Home

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