Why the housing market is about to crash

The existence of the 50-year mortgage shows lenders are desperate.

The New Statesman is not usually in the business of giving financial advice, but following the announcement that a new lender, Perenna, has been awarded a licence to bring 50-year mortgages to the UK market, I will make an exception and tell you this: do not apply for a 50-year mortgage. These are ludicrously expensive products that the government should never have allowed, and the very fact that they exist suggests that the housing boom is at an end.

The idea might not sound too bad to begin with: 50 years of paying 4.5 per cent interest, and never having to worry about where interest rates will go. Just buy a house, and very slowly pay for it. A slight snag is that to achieve full ownership of your home by the current average retirement age of 65, you’ll need to have found that house, plus a good job to pay for it (and also probably a life partner) by the time you’re 15.

Let’s imagine you are a happily married 15-year-old with two children and a solid career: the 50-year mortgage is still a terrible idea. Borrowing any amount of money over such a long time is a bad idea because mortgages are amortising loans. This means each payment is made up of a payment towards the balance, plus an interest charge. These interest charges are highest towards the beginning of the term (because there’s more interest to pay on a bigger balance), but to keep your payments equal for the whole term, the lender just takes a bigger portion of the earlier payments. What this means in practice is that your first year of payments on a mortgage is almost all interest, which your bank keeps, and the last year is almost all balance, which you keep (as the bricks and mortar you’ve bought). The longer the period of any amortising loan, the longer it takes to start really paying it off.

An amortisation calculator is a useful tool to show why a 50-year mortgage is such a terrible product: a £250,000 mortgage at 4.5 per cent will have payments of around £1,000 a month. After 20 years of these payments, you’ll have spent more than £240,000 but cleared less than £45,000 from the debt. It will take 37 years to clear half the loan, and after 50 years, that £250,000 mortgage will have cost more than £629,000.

Clearly, almost no one is going to make it to the end of a 50-year mortgage. The average first-time buyer, now in their early 30s, would need to be able to guarantee their income (and probably their relationship with their partner) well into their 80s to do so. But the fact that there is a market for them – and that the government supports them – is a strong indicator that house prices are due to fall.

Danny Dorling, a professor of human geography at Oxford University and author of All That is Solid: The Great Housing Disaster (2014), told me the 50-year mortgage indicates that Britain’s housing market has reached “a point of desperation”, and that the product itself is the “last gasp” of an industry that is on the brink of running out of demand. The huge increase in energy costs coming in October, the current inflation in prices across the economy, the arrival of a new cohort of school and university leavers just as companies see their bills rising still further, and the arrival of a new prime minister will all bring a number of new challenges to Britain’s already struggling economy this autumn. A government that has spent tens of billions inflating house prices may find it can no longer afford to do so: “The choice,” said Dorling, “may be between propping up the housing market, or ensuring that people don’t freeze over the winter.”

Everyone considering buying a house will be thinking about this. “This is the most predicted recession ever,” Dorling said. “And as soon as you get hunkering down, and the feeling of ‘wait and don’t buy now’, that’s it. It’s all it takes.” The signs are already beginning to emerge: no-fault evictions have risen by 41 per cent over pre-pandemic levels, and there are signs that this may be a result of buy-to-let landlords deciding that the market has peaked. Dorling said landlords, who buy and sell more quickly, are a “key indicator” of where demand is headed.

But the most telling sign is the 50-year mortgage itself. In the 1970s, as mortgages were rationed, buyers scrabbled for new long-term deals before the market slumped. In 1989, many couples rushed to buy at inflated prices before tax relief was outlawed; within a few years the average London property had lost almost a third of its value. The fact that once more people are being encouraged to use a new and yet more desperate measure, when house price affordability had dropped to a level not seen since the late 19th century, is a very strong sign that the pattern is about to repeat.