Will Oil Shock Crash UK House Prices

At the start of the year, the consensus was that 2026 would see moderate house price growth. But with mortgage rates soaring and the global economy grinding to a halt, these forecasts need to be thrown out. With oil prices seeing their biggest monthly increase on record, the Bank of England are warning that they will need to increase interest rates to prevent a has sent mortgage rates soaring. They've risen 109 basis points, which is close to the mortgage shock of a 2022 mini budget. And so for those hoping to buy, the market has been sent into turmoil. It's not just rates rising, but mortgages withdrawn. And the problem is that no one really knows how events in the Gulf will unfold. Will it be bad, very bad, or much worse than we would like to contemplate? Stock markets have started to slide, but they're still assuming that the Straits of Hormuz will reopen fairly soon. And if it doesn't, as is increasingly likely, energy analysts warn it could be one of the most devastating oil shocks. And even though we are much less dependent on oil than the 1970s, it could cause oil prices to rise to mouth-watering levels. This is a model of what could happen to oil prices over $200 a barrel, depending on how bad the conflict is. Now, so far, the price of Brent crude has reflected speculation. But four weeks into the conflict, the actual shortages of physical oil are becoming a reality. The supply of oil already on the ocean is exhausted. And it's not just oil. We are seeing a rise in the price of nearly every commodity, from fertilisers to plastic, aluminium, and helium. But you might well be asking, how does this affect the UK housing market? Well, the problem is that rising oil prices in 2022 caused a much bigger secondary effect than expected on inflation. And even now, three years later, inflation in the UK is persistently stubborn. Now, back then, the Bank of England hoped that the inflation would prove temporary. And so they were slow to raise interest rates. But then inflation kept rising. And when the trust budget passed inflationary tax cuts, interest rates went through the roof. And this caused a significant correction in house prices, as mortgage rates nearly doubled in a few years. But it's not just the impact on mortgage rates. Well, unfortunately, there is more bad news too. The uncertainty of all the global events is already causing people to pull back from the housing market. The housing market was pretty moribund even before the crisis. But in recent weeks, there's been a surge in people searching can't sell my house. And this was actually an even bigger problem in the US, even before the crisis. In many ways, the US housing market is more vulnerable than the UK. US house price to income ratios are still at record levels. The last time US house prices fell 2006 or seven, it wasn't pretty. There were also other pressures on the UK housing market by to let landlords and slowly squeezed out with new housing regulations coming into effect. But I think that a bigger concern will be the impact of the crisis on real incomes. And as you probably know, the UK have suffered low income growth over the past 15 years. And that's been a big factor in falling real house prices in the past decade or so. But this oil shock, and subsequent global recession will have another negative effect on disposable income. And it's this that really threatens the housing market. Income is one of the biggest determinants of housing demand. If unemployment continues to rise, and real wage growth falls, then people simply won't be able to afford to buy and will pull back waiting to see what happens. Now there is still some good news, it's not quite as bad as it may first appear. In fact, I would argue the housing market is still in a better place than 2022. Let me explain. Well, firstly, real house prices have fallen 10% since 2022. And this fall in house prices has led to an improvement in housing affordability. Now, of course, housing is still expensive in the UK, it's still above long term trends, but it is significantly more affordable than a few years ago. In fact, it was this improvement in affordability, which was tempting some people back into the market. The Nationwide reported that annual house price inflation picked up last month, entirely as you might expect, but that was all before the Iran crisis. Now also, although mortgage rates have soared in recent weeks, this is not due to interest rates actually rising. It's a kind of market expectation that interest rates will probably increase. However, I think the Bank of England is playing a bit of a game. They talk about higher interest rates to try and keep inflation expectations low. But when it comes to the crunch, I don't think they will actually want to increase interest rates. Firstly, higher rates don't solve the problem of high oil prices. Secondly, they do have a dual mandate, and higher interest rates on top of falling real wages will be devastating for an already weak economy. Thirdly, although inflation is forecast to jump this year, it's not like 2022. In 2022, demand was relatively strong, because at the end of COVID lockdown, people were spending their excess savings. And also there was cost push inflation from the end of lockdown, even before the oil and gas prices surged due to the Ukraine war. And although gas prices have risen, they're nothing like 2022 yet. But I think the biggest problem for the UK economy will not be inflation, but the growing risk of recession, or at the very least stagflation. So the good news is that interest rates are unlikely to rise significantly. I would even hazard a bet that may be lower in 12 months time. But although that will support the housing market, you don't actually need higher interest rates to cause a housing crash. The last major UK housing market crash occurred in 2008-09. And if you like bad omens, it was after a period of surging oil prices. Real oil prices in 2008 were higher than now. Now in 2009, the Bank of England actually cut interest rates to 0.5%, but it didn't stop a 20% fall in house prices. The crash of course was caused by the credit crunch and shortage of finance, US subprime mortgages going bust, and the global banking system all affected by a shortage of credit. The big question is, could the current oil crisis cause similar chaos in the global banking system? It is feasible, though still speculative. And this time it wouldn't be credit default swaps, but private finance heavily exposed to investment in software firms, and the growth of AI threatens to make many software firms unprofitable. Private credit has been falling for quite a few months. Firms have started to restrict withdrawals. Also, rising energy prices threaten the AI boom, which has done much to underpin recent economic growth. And if a worst case scenario of a gulf crisis occurs, then you will start to see market stress, everywhere from the bond market to shares and ordinary bank lending. Now of course, because we're on YouTube, you always have to be wary of people talking up worst case scenarios, and it does become quite speculative. But one thing worth pointing out is that so far, the conflict has been closer to worst case scenarios than best case scenarios. And a reasonable question to ask is, are the people making the big decisions know what they're doing? A long lasting partial closure of whole moves would really have an unprecedented effect on a fragile global economy. But the truth is, no one can tell what is going to happen in this regard. So long term house price forecasts start to become quite hazy. It's also worth asking, why didn't house prices crash more in 2022 when we had that combination of surging interest rates and falling real wages? Well, partly it was the effect of inflation, real house prices did fall. But more importantly, the housing market has a certain resilience. It's not just income, wealth plays an important role. UK households have actually seen a big rise in their private savings. And if we are fearful about the future, we may well cut back on foreign holidays, we won't be able to afford the jet fuel, but of course, we will still want to buy houses to live in. At the end of the day, if you're buying a house to live in, it's a pretty good choice in the UK when you consider the really high cost of renting. I would never hold back from buying a house because of the risk that prices might dip. If it makes economic sense, don't let events hold you back. However, I would be reluctant to lock in mortgage rates at the current level. Now, do I see a big housing crash? Well, I would say no, not from rising interest rates. I remain optimistic or perhaps hopeful the conflict will lessen. The only real risk of a housing crash will be from a big financial crash caused by worsening recession and unexpected losses. Now, this scenario is feasible, though still quite speculative. So I wouldn't panic about a housing crash just at the moment. The market has changed, though, and rising house prices look much less likely than just a few months ago. But who are the big winners and losers from this oil crisis? This video goes into more detail about how it is changing the fortunes of different countries and different sections of the economy. Thanks for watching. Do subscribe. See you soon.