House prices are up by 14% in the last year, by over 20% since the onset of the pandemic. Interest rates are rising and the cost of living is soaring. Is a substantial correction due?
Stock markets have seen it before. Optimism drives prices higher then reality sends them tumbling. It might seem logical that house prices could do the same.
However, property behaves quite differently. While the past is no guarantee of the future, history tells us that house prices rarely fall.
Residential property prices have dropped in exactly eight of the last 60 years. The most recent example was the Global Financial Crisis, where the root cause of the fall was the banks' withdrawal of mortgage credit.
To oversimplify, when the banks are lending freely, prices go up. When the mortgages stop, they fall. Whilst the BoE's Credit Conditions survey last month anticipated a slight slowing of mortgage advances in the second quarter, there is no suggestion of a shortage of credit availability.
No-one expected that the pandemic would create such demand for larger properties, pushing prices to their current levels. It would be normal to think that as the race for space eases, prices would fall back.
The figures so far suggest that this is not the case. Mortgage approvals - a strong indicator of market movements - were higher than forecast in the first quarter. House prices have increased for the last eight months in a row. Although the number of properties coming to market has seen a modest 5% increase, this has been heavily outweighed by demand, with estate agents continuing to report a shortage of stock.
The larger property services companies have so far stuck to their price forecasts, typically modest increases over the next two to three years. The consensus view is that yes, prices are stretched, but they are not in bubble territory.
Capital Economics are an outlier. Based upon rising interest rates, they are expecting a small gain this year, with a fall of 3% in 2023 and 1.8% in 2024.
If they are right, this would represent a small correction which the majority of investors will take in their stride.