What is a house price crash? A house price crash is simply a collapse in house prices and whether the house price index falls by more or less than 10% determines whether there is a house price correction or a house price crash.
House price corrections happen fairly frequently and are necessary for balancing out the housing market supply and demand. A house price correction is a minor drop in the market. Where the house price index falls no more than 10% from the highest price within the same year.
A house price crash happens less frequently. In fact, house prices in the UK have crashed just twice in the last 20 years, between 1990 and 1992, followed by another between 2007 and 2010. A crash is defined as being when the house price index falls by more than 10% from the highest value month in the same year. This can mean that for millions of home owners, their house is worth less than their mortgage.
The housing market is currently showing a drop in the house price index for three consecutive months with some speculating that a house price crash is imminent. Others are more of the ‘don’t believe the hype’ philosophy.
The data causing the headlines is from the Nationwide Building Society and reports that prices across the country dropped by 0.2 % in May compared to the previous month. Prior to May, there was a 0.2% drop in April and a 0.3% fall in March. Though house prices are still 2.1% higher than they were at the same time last year. (Though this is the lowest growth figure in four years)
The reasons behind the recent house price index drop could be a number of things. Having a sudden election bang in the middle of EU negotiations may have had an impact. But mainly the drop in house prices is a result of the situation where house prices were continually rising at a much faster rate than earnings and this pattern was simply unsustainable in the long term. Inflation reached 2.9% in May, yet incomes only went up by 2.1%.
The housing market is cyclical. What goes up must always come down. In some parts of the UK, house prices have risen at 10% a year and in some parts of London, homes are worth twice as much as they were in 2010. A correction will always be required to stabilise the market and some suggest, this is what is happening right now.
Reports of house price crash predictions will always be the headlines when house prices begin to lose momentum. Though with recent figures from the National Association of Estate Agents revealing that more than three quarters of homes are selling for under the asking price backed by research from Rightmove which shows that house prices fell too in June for the first time since 2009, the future of the housing market certainly looks ambiguous. Others however put a brighter spin on the situation believing these latest predictions to be pure sensationalism. After all demand for housing will always be higher than supply. We shall keep you posted!