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He FTSE has had a promising start to the year, defying doom mongers who thought 2023 would go from bad to worse. However, there is a big shadow hanging over the economy, as analysts warn that the UK could see a complete collapse in house prices this year.
Halifax has forecast an 8% drop over the next year, while Capital Economics is forecasting a 12% drop, with the worst-case scenario at 20%. Today he delivered grim figures from the Bank of England, which showed net mortgage borrowing fell from £4.3bn in November to £3.2bn in December.
Let’s not panic yet
If that happens, it would be a real blow to domestic morale. Falling property values are making tens of millions of homeowners feel poorer. Those who have bought in the last few months could fall into negative equity, where their house is worth less than what they borrowed to buy it.
Falling sales would have a ripple effect across a host of related industries, from plumbers to electricians to kitchen fitters to sofa sellers. Big banks could be hit by a wave of debt deterioration, forcing them to repossess property in a bid to recoup their loans.
A fall in house prices is bad news for homebuilders, affecting demand for new construction, lowering sales prices and creating holes in their future order books. That explains why Barratt developments now trades at just 5.51 times earnings, while taylor wimpey trades at 6.41 times, and Khaki at 5.72.
The past 12 months have been tough on its share prices. Barratt and Taylor Wimpey are down 24.47% and 21.15%, respectively, while Persimmon is down 39.77%. House prices may not have crashed yet, but homebuilding stocks have.
I recognize the dangers, but I think the chances of a full-blown house price crash have been overstated. Mortgage rates soared after former foreign minister Kwasi Kwarteng’s disastrous mini-budget on September 23, terrifying borrowers.
The FTSE can survive this
However, figures released yesterday by mortgage broker L&C show that two-year average rates have now fallen from a high of 5.90% in November to 4.67% today. Five-year fixed rates have plunged to 4.32%, also easing pressure on borrowers and homebuilders. Barratt and Taylor Wimpey shares are up 20% in three months. Persimmon’s recovery will take longer.
The Bank of England is expected to raise base rates to 4% on Thursday, but mortgage rates may not rise as much. Most banks estimate that interest rates are near their peak and may even start to fall by the end of 2023.
As mortgage costs fall and home ownership becomes more affordable, buyers should return to the market.
With property supplies still desperately short for the UK’s growing population, I think demand could hold up better than we all expected just a few weeks ago. Anything could happen of course, but if I’m not mistaken the outlook could improve for the UK economy, the FTSE in general and homebuilding stocks in particular.
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