The World Bank has warned that countries around the world are facing the threat of a recession as a spate of high inflation and low growth, known as ‘stagflation’, continues to plague economies. The last time the UK entered a prolonged recession in 2008, house prices crashed and left many homeowners in negative equity, however, David Hannah, Group Chairman of Cornerstone Tax, believes that there is an adequate amount of liquidity within the UK property market and doesn’t expect to see a sudden drop. House prices in the UK have seen a continued rise with the average asking price hitting a new high, surging to £360,101 in April.
Alongside this, 53% of properties are selling at or over their final advertised asking price and 98.9% of properties are achieving their final advertised asking price according to Rightmove. The continued rise of property prices, combined with rising interest rates and inflation, has caused anxiety within the property world and worries of a recession have only heightened this. The persistent growth of UK house prices can be attributed, mainly, to the shortage of homes for sale. The supply and demand levels in the UK property market remain unbalanced with buyer inquiries 65% above the level seen in 2019. The nature of the open market for UK property has attracted not only domestic purchasers and investors looking to buy, but also inbound investors and people looking to relocate to the UK.
The constant increase in house prices is caused by demand – coming from people who have cash or property offers to spend. This indicates that there is still a reasonable amount of liquidity in the property market. If wages are raised, in line with inflation, the spending power of Brits across the nation may not decrease as much as expected.
David Hannah, Group Chairman at Cornerstone Tax discusses why there won’t be a crash in the UK property market:
“I don’t predict a property market crash in 2022. The surge in demand, even with rising interest rates, represents an adequate amount of liquidity, which is a good sign. The crash of 2008 happened because of a sudden loss of liquidity in the international banking market and we aren’t in that same situation again. We have had the pandemic, and substantial government spending because of it which has increased interest rates. But the question has got to be – will the global lending system be able to maintain the liquidity that it lost in 2008? And I think the answer is yes it will. We are certainly not going to see, as some people have predicted, 20, 30 or 50% falls in UK housing.
“If we look at what has been going on – house price growth, retail inflation, energy costs surging, that’s going to put pressure on employers to raise wages. I believe wages will rise, meaning real spending power will not actually decrease. If you borrow a hundred thousand pounds today, the fixed figure of one hundred thousand pounds doesn’t rise in line with inflation. So, in five years time that debt is probably worth half what it is today. In high inflationary times with relatively low interest rates, it makes sense to borrow. The debt is being eroded by inflation, whereas the value of the asset (the house) is actually going up in line or ahead of inflation. It’s a way to make real returns
“The problem we do have is the rate of demand and supply. If builders are building and they’re over supplying, it will soften the increase and the appreciation in asset value. But, if the number of people wanting to buy houses continue to exceed the supply, then those prices are going to rise.
“We have an open market in the UK which means not only are domestic purchasers and investors looking to buy but we have inbound investors. We also have quite a number of people relocating to the UK. Overall, I expect demand for UK housing to continue to outstrip supply – pushing price increases ahead of inflation and provided wages are increased, the affordability of housing will stay in lockstep.”
