how bad will the housing crash be when it finally comes?

As deposits have risen beyond the reach of more and more buyers, subsidy schemes have sought to keep the show on the road.

Almost 350,000 people have taken out equity loans since 2013 under George Osborne’s Help To Buy scheme, for instance, offering a £21bn prop to those who were struggling to save deposits fast enough to keep up with prices.

Shared ownership allows people to buy as little as one-quarter of a home, then increase that share over time. Largely provided by housing associations, more than 200,000 properties are currently jointly owned.

The Government wants to encourage this and has cut the minimum purchase from 25pc to just 10pc.

Nonetheless, buying into the market at these levels still presents serious difficulties as families struggle to scrape together a big enough deposit and to show lenders they can service the debt even if interest rates rise sharply.

Pushing Generation Rent towards Labour

Buyers are now being forced to take matters into their own hands, stretching themselves to get a toe on the ladder before prices move completely beyond reach.

James, 27, has just had an offer accepted on a £250,000 one-bed flat in Brighton near the recruitment agency where he works.

“It is a great little place. It is not the biggest thing in the world, but it is perfect for me – less to keep clean, and less to heat,” he says.

“Prices at the moment are astronomical and they are just rising, and not to mention the rates of inflation we are experiencing at the moment, it is a really tough time to get on the ladder.”

So to keep the monthly cost down, he has stretched out the term of his loan.

“I have applied for a 35-year mortgage, two-year fixed rate,” he says.

This is increasingly common. Back in 2005, the average first time buyer took out a mortgage with a length of 25 years and six months.

By the end of 2021 the average was almost 29 years, according to UK Finance. Longer terms mean lower monthly payments, at the price of more interest in the end. One-third of loans are expected to run for more than three decades.

When it comes to his age, James would once have been entirely standard – through the 1970s and most of the 1980s, the average buyer was 26 or 27. By the 2000s the average rose to 30, and it now stands just shy of 32.

Some have given up on getting a home altogether. The share of Britons with their own home rose sharply through the 1980s, aided by policies including Margaret Thatcher’s Right to Buy for council house tenants.

In 1980, just under 57pc were owner-occupiers, according to the English Housing Survey. By 2003, more than seven in 10 owned their home.

But that was the high point. Now fewer than 65pc own, with private rental accommodation being the biggest growth market in housing since the turn of the century.

Politically, the effect of this shift has been to create a generation of renters more likely to vote Labour. Maidenhead, where the Herberts are battling to get a house, is a 20 minute drive from Wokingham, where the Conservatives lost control of the council for the first time in two decades on Thursday.

Around 46pc of private renters voted Labour at the last election, far more than for any other party, and 315 of the Tories’ 365 seats had above-average levels of homeownership.

Surging prices in London are thought to be one reason behind the city’s decades-long transformation into a Labour stronghold, as swathes of the working population were forced into long-term renting.

Taking the heat out of the market

Those signs of strain show there are vulnerabilities in such an expensive market. Crucial drivers of price growth risk being thrown into reverse. Most prominently, the long bet on falling interest rates could be about to run out of road.

The Bank of England has raised interest rates at four policy meetings in a row under Governor Andrew Bailey, sending its base rate from 0.1pc to 1pc since December.

Anyone seeking a mortgage will have noticed: the average rate on a loan with a 25pc deposit has almost doubled from September 2021’s low of 1.2pc to just over 2.3pc last month.

That equates to repayments of an extra £109 per month for a typical £200,000 loan, or a rise of almost 14pc in the total bill.

Rates have only just begun to rise. Financial markets expect the Bank’s base rate to hit 2.5pc in a year’s time, more than double the current level.

That represents a hole in new buyers’ pockets, as well as a threat to movers and a pain for anyone on tracker or variable mortgages.

Ben Broadbent, a deputy Governor at the Bank of England, says that when it comes to family finances, even this rise will pale in comparison to the jump in living costs, led by energy bills which are set to rise another 40pc in October.

“The effect of higher interest rates on mortgage payments will be a small fraction of the unfortunate and unavoidable hits from rising import prices,” he says.

“I’d be surprised if it was much more than one-tenth of the rise. That is the unfortunate position which we are in.”

Inflation is already running at 9pc, the Bank estimates, with annual price rises to hit 10pc in the final months of the year – a big enough blow to send the economy into reverse.

Those price rises in turn have pushed the Bank to raise interest rates in a double hit to borrowers.

Inflation means it is harder for would-be buyers to save up for their deposit, and tougher to convince mortgage lenders that they can afford the rising bills.

Rising rents are also eating away at buyers’ savings. Rental costs are up more than 6pc in Northern Ireland and almost 4pc in the East Midlands over the past year, though London’s market is still reeling from the pandemic and the shift away from cities: rents in the capital are up just 0.4pc, reversing some of the outright falls of lockdown.

Banks are already showing signs of caution.

A survey of lenders by the Bank of England showed the availability of mortgages in the first quarter dropped a touch, its first fall since the height of Covid, with banks set to cut back lending further in the current quarter.

It is already hitting buyers.

“I could see four, five, six weeks ago that the volume of enquiries was down, transactions were taking longer,” says Jeremy Leaf, an estate agent in Finchley, north London.

On top of that come Government policies adding to the pressure. National insurance contributions went up last month, taking money out of workers’ pay packets. Tax thresholds are frozen, so even sub-inflationary pay rises will result in higher income tax payments.

The Bank of England expects that workers’ real disposable incomes – after taxes and inflation – will fall by 3.25pc this year, the biggest drop since records began in 1990. They will fall again by 0.25pc next year.

Meanwhile stamp duty payments are rising ever higher, with frozen thresholds combined with rising prices pulling more homes into higher tax brackets and pushing up the cost of moving.

The Government’s annual haul from property transaction taxes is set to climb from £13.8bn in 2020-21 – which included a lengthy tax holiday – to more than £19bn by 2026-27.

Meanwhile the Help To Buy scheme is coming to an end next year.

Andrew Wishart at Capital Economics expects prices to slow to a halt by the end of this year then go into reverse in 2023 and 2024. He predicts the Bank of England’s base rate will rise to 3pc while mortgage rates will double, landing borrowers with a massive increase in their bills.

“This rise in interest rates is only the beginning,” he says, predicting the Bank faces a longer battle with inflation.

He does not anticipate a crash, but certainly a new hesitant era in which some of the recent dramatic rises are wiped out as prices drop by 5pc over two years.

Demand is already slowing: “Web searches are falling back and are now down to their lowest since May 2020,” he says, in an early sign offers and transactions will follow suit.

Is there anything left to support prices?

The reason Wishart does not expect an outright collapse is that there are still some props left in the market.

Firstly, the vast majority of those homeowners with mortgages have protected themselves by fixing their interest rate.

That means they will not immediately feel the effect of higher borrowing costs, and so should avoid the huge waves of sales suffered in, for instance, the early 1990s.

These mass sell-offs force prices down, panic banks and put off buyers, causing a self-reinforcing spiral of decline.

A decade ago, more than 70pc of mortgage borrowers had floating rates. Fewer than one in five locked in their rate for more than two years.

Now, Bank of England figures show, the situation is reversed. Just 18pc float while more than half are locked in, protecting their low borrowing costs as the Bank starts ramping up rates.

Nick Leeming, chairman of estate agency Jackson-Stops, says he is seeing buyers “rush to secure a mortgage”, meaning if anything there is a short-run boost to demand ahead of rate rises, to benefit from low borrowing costs.

Those costs really are low: back in the worst moments of the 1990s, households paid out more than 12pc of their incomes on debt interest, not including capital repayments, or one pound in every eight that they earned.

Now it is just 3.3pc, or one pound in every 30.

In part this is a deliberate strategy from regulators, who forced banks to stress test buyers’ incomes to make sure they can withstand a sharp rise in borrowing costs before they can qualify for a mortgage.

It also helps that the underlying economy is stronger than it was at the start of the 1990s, or in the financial crisis. Unemployment spiralled into double figures to hit 10.5pc in 1993, and rose to 8.5pc in 2011. That meant owners lost their incomes and had to sell their homes.

Currently unemployment is 3.8pc and is expected to drop to 3.6pc, the lowest level since the early 1970s.The Bank of England expects that to go up to 5.5pc by the middle of this decade, but that is still below the standards usually required to force a property crash.

At the same time structural changes in the economy are also expected to keep upwards pressure on prices.

Planning reforms which aimed to free up land for construction, boosting supply and so making it easier to buy, were ditched when the Government lost the Chesham and Amersham by-election to the Liberal Democrats in 2021.

Meanwhile the housing market was driven to new heights in the pandemic in part because of the vogue for home-working, which has only partially reversed. It means owners spend more time in their properties, require more office space, and have more cash to spend if they put less towards rail fares and petrol.

Martin Beck, chief economic adviser to the EY Item Club, says most owners should dodge the pain of higher interest rates, for the time being at least.

“80pc of the mortgage stock is fixed rate, so it takes time for Bank of England changes to feed through,” he says.

On top of that, most homeowners do not even have a mortgage. Around 30pc of the homes in England are occupied by owners with a loan, but 35pc are owned outright. That majority will feel no pressure from interest rates at all.

At the same time it is lower-income households who feel the biggest pressure from inflation, Beck says, rather than those better-off families who tend to own homes.

It means the pressure from rates, mortgages and inflation is going to be piled on those who do not own: those hopeful buyers including Katie Herbert.

“The main pain with interest rates rising is the fact that the borrowing market as a whole is becoming a lot more cautious, lending is tighter, restrictions are greater, a deposit will need to be larger,” she says.

“As time ticks on, house prices and borrowing get increasingly out of reach, what I thought I could buy, say, six months ago is very different to what I could now buy.”

Although experts disagree on when a crash could come, what might cause it, or how severe it would be, house prices are all but certain to go into reverse eventually. Previous drops have come with little warning and caused misery for millions of homeowners.

Prices plummeted 20pc between 1989 and 1993, sparked by a surge in interest rates, and took years to recover. In the late 2000s, the financial crisis triggered a sharp 19pc fall. A drop on such a scale now would plunge legions of first-time buyers into negative equity, some by as much as £100,000.

Eventually, the spark for another crisis will come. As mortgage rates rise, the cost of living bites and unemployment starts its slow upward march, the giddy heights reached by the market in the last decade may merely increase the size of the fall.