House prices have further to fall but a crash is 'not the most likely outcome', says OBR Chief

The interest paid on the average two year fixed-rate mortgage deal has risen by almost 1% since the start of May, ITV News' Business and Economics Editor Joel Hills reports

If you listen carefully you can hear the sound of economists hurriedly revising their forecasts for the housing market.

The interest paid on the average two year fixed-rate mortgage deal has risen by almost 1% since the start of May and continues to creep upwards.

The consensus holds that high borrowing costs will accelerate the fall in property prices in the UK, which until now, has been fairly gentle.

David Miles says a crash in the housing market is unlikely:

In March, the Office for Budget Responsibility (OBR) - the government’s official forecaster - predicted the housing market would fall by 10% from its peak last year.

David Miles, one of three members of the OBR’s top committee, now thinks a steeper fall of nearer “12, 13 or 14%” is more probable but that the market is unlikely to crash.

2.4 million households are due to refinance their mortgages between now and the end of next year. 

Miles agrees that it is “inevitable” that some will struggle but he argues that, although painful, most homeowners will find a way of muddling through.

“I think there are many things that lenders can do and have said they will do to help people,” Miles says, citing mortgage term extensions and switching to interest-only payments as examples.

The Bank of England. Credit: PA

He also points out that since 2014 and until very recently, the Bank of England and the Financial Conduct Authority had compelled lenders to test if borrowers could cope with interest rate rises of 3% before issuing new mortgages.

“I think we can be reassured to some extent by that,” Miles told ITV News.

“That we’re not going to face something similar to the early 1990s when rates went up and there was a really massive problem of both affordability, paying the mortgage, and house prices having fallen a lot relative to the mortgage, so people were in negative equity. I think we’ll see much less of that this time”.

David Miles was a member of the Monetary Policy Committee at the Bank of England between 2009 and 2015.

In November 2006, while Chief UK Economist at Morgan Stanley, he warned that a “substantial fall in real house prices” in the UK was “likely at some point in the near future”. 

The housing market went on to crash during the financial crisis in 2008/9. Miles doesn’t think another slump is imminent not least because he believes the economic outlook is set to brighten soon.

“If one defines a crash as house prices falling 20-25% in a year, nobody should ever say never, but it seems to me that is not the most likely outcome,” Miles says.

“I think the inflation numbers will improve over the course of the rest of this year - that may have an impact on mortgage rates and things might not look so grim come the end of this year”.

Banks and Building societies have been repricing on the back of the market expectation that the Bank of England will have to raise interest rates as high at 6.25% to bring inflation back to a reasonable level.

Miles thinks the financial markets are underestimating the speed with which the headline rate of inflation will fall in the months to come. The wholesale price of gas and oil has fallen, agricultural commodity prices have eased, manufacturers have been reporting that their costs have been stabilising.

“It does look more likely than not that inflation really is set to come down and by meaningful amounts over the next few months,” Miles insists.

Could the government meet the pledge it made to get the headline rate down to 5% by the end of the year? 

“Oh, I think that’s not an implausible outcome at all,” says Miles.

“We may get back to more normal inflation rates by recent standards, and I don’t think it necessarily involves a recession or further dramatic increases in rates from the Bank of England.”

The Bank of England didn’t raise the cost of borrowing at all in the six years David Miles spent on the MPC but they have now risen thirteen times in the last eighteen months.

The full impact of this tightening is yet to be felt because so many people in the UK are on fixed rate mortgages. For this reason, David Miles suggests he would have voted to pause this month when Bank Rate was increased again to 5%.

David Miles says he wouldn’t have voted to raise interest rates last week

On Friday morning Nationwide revealed that house prices in the UK edged up by 0.1% in June, despite the recent surge in mortgage rates.

The price of the average home stands at £262,239. That’s 4% lower that the peak, last August of £273,751. If David Miles is right then it’s just a matter of time before the market turns South again and, in his view, a fall in property prices is welcome.

“We all know that there’s an enormous problem of affordability for young people getting into the housing market,” Miles says.

“Prices have risen so much over the last few years and certainly over the last couple of decades that even a 10 - 15% house price adjustment wouldn’t really increase affordability and take it back to where it was when I bought a house.”

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