By Colin Wiles, housing consultant.

This blog tries to avoid being overly political, but what fresh hell is this?

A bunch of people equivalent to a nine-tenths-full Wembley stadium elects a new prime minister and within a matter of days the “Party of Sound Money” has trashed the UK economy, put the pound almost at parity with the dollar (in 1918 the dollar stood at $4.80 to the pound), and forced the Bank of England to intervene again and again to stop the economy imploding.

And all in pursuit of growth and lower taxes.

I have lived through 13 prime ministers and just when you think that they could not become any worse another one comes along to confound you.

The autumn mini-budget was a disaster, not least for housing. Unfunded tax cuts have left a huge £60 billion hole in the UK’s finances that will lead to big spending cuts. You can bet that housing will be in the firing line. And although the budget made no mention of social housing it was the same old story about “stimulating” the housing market and making life easier for first time buyers.

The energy price guarantee is certainly to be welcomed and the Energy Bill Relief Scheme will help businesses, including housing providers, to reduce their energy bills. The other initiatives that impact on housing were the changes in universal credit rules to “encourage” more people into work and the announcement of new investment zones with relaxed planning rules, business rate relief and other inducements  to speed up investment. If you look at the map of the local authorities that could be covered by the new zones (see here) it covers more than half of England. But this prompted a huge blowback from conservation charities like the RSPB who feel that existing protections will be cast aside.

The Conservatives are not really doing much to nurture their core vote!

But the big story in housing was the change to stamp duty, all in an effort to boost the market. Doubling the stamp duty threshold from £125,000 to £250,000 and increasing the threshold to £425,0000 for first time buyers will undoubtedly help some people in the short term, but we have been here before. I benefited from the last stamp duty cut in 2020 but in the longer term it just pushed up prices – if you load the demand side of the housing market without boosting supply that is the inevitable outcome. Cuts in stamp duty also encourage people to buy more space than they need and discourage downsizing.

But this time it is different, because the cut in duty coincides with huge rises in interest rates – up from 2.25% to 6% or more. This will have a huge dampening effect on the market, with significant increases in mortgage payments for millions of people. Someone on a £200,000 mortgage will be paying around £870 a month at 2.25% interest but this will increase to almost £1,300 a month if rates rise to 6%. That is an extra £5,000 a year and any cut in stamp duty will not disguise or soften such a huge increase.

Around one in four borrowers are on variable or tracker mortgages and their payments will increase straight away. All those who might well have been tempted into the market by the stamp duty changes will find that they simply cannot afford the additional cost of borrowing. Inevitably that means a crash in house prices. It is a dumb policy.

Compare and contrast these headlines. In May The Daily Mail was gloating that house prices had soared by a “record breaking” £55,000 since the pandemic began, with average prices rising to £367,501, a £7,400 increase in one month alone (a story that will delight homeowning Mail readers, but depress anyone trying to climb on the ladder).

Six months on and the Mail has a different headline: “House prices could drop 12% by 2024, analysts warn, as average mortgage rates reach 6%”.

The Mail comments that a crash in house prices will lead Tory voters to desert Liz Truss in droves, with four in 10 people who voted for the Conservatives in 2019 less likely to do so again if property values crash by 10%.

No wonder the Conservative back benches are jittery.

The current ratio of house prices to wages is 9.1, the highest ever. In 2002 it was 5.1. Prices have risen by 66% since 2012 and the Oxford Economics Consultancy reckons they are overvalued by 30%. So, a fall in prices of up to 25% is possible. That spells disaster for many Conservative MPs and proves the point that for too long we have relied upon the feelgood factor of rising house prices to determine our politics.

Yet an adjustment in house prices is fundamentally a ‘good thing’ in the long run, as it will make homes more affordable once interest rates come down, and this will filter through to rents too.  Of course, it will be painful to recent buyers who will find themselves in negative equity, but the last few years of low interest rates and houses making more money than jobs was simply not sustainable.

The lesson is that the housing market is complicated, and you mess with it at your peril. But well done to the Conservative government for doing what successive governments have failed to do, even if it is the opposite of what they intended!