Economists are predicting that rising interest rates and falling prices will mark the end of the UK’s 13-year housing market boom, potentially leading to a house price crash.
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LONDON – The UK property market could be headed for a major downturn, with some market watchers warning of a price fall of up to 30% as data point to the biggest slump in demand since the global financial crisis.
Searches from new home buyers fell in October to their lowest level since the 2008 financial crash, excluding the first Covid-19 lockdown period, the latest RICS housing surveyors report showed last week.
Meanwhile, the MSCI UK quarterly property index, which tracks retail, office, industrial and residential property, fell 4.3% in the three months to September, marking the sector’s worst performance since 2009.
As the market slump eased a two-year, pandemic-induced home-buying frenzy, property transactions in September fell 32% annually from their 2021 peak.
But as the era of cheap money fades, and the Bank of England doubles down on inflation-busting rate hikes to deal with a chaotic mini-budget, economists say the recession could be more severe than first thought.
“While a house price correction is widely expected as part of the ongoing recession, it looks set to unfold faster than expected,” Calum Pickering, senior economist at Berenberg, wrote of the UK market on Thursday.
The investment bank now sees UK property prices falling by around 10% in the second quarter of 2023. But some lenders are less transparent.
Nationwide, one of the UK’s biggest mortgage providers, said earlier this month that house prices could collapse by up to 30% in its worst-case scenario. Meanwhile, the gloomiest 2023 projections by banks Lloyds and Barclays indicate a drop-off of around 18% to more than 22%, respectively.
Indeed, prices have already started to fall in some places, according to property search site Rightmove, which said on Monday that sellers had cut prices by 1.1% in October, taking the average price of newly marketed homes to £366,999 ($431,000).
Increased mortgage delinquency concerns
The UK is not alone. Rising interest rates, rising inflation and the economic shock of Russia’s war in Ukraine weighed on the global housing market.
A recent analysis by Oxford Economics found that property prices look set to fall in nine of 18 advanced economies, with Australia, Canada, the Netherlands and New Zealand at risk of falls of between 15%-20%.
“This is the most worrisome housing market outlook since 2007-2008, when markets oscillated between the prospect of a slight fall and the prospect of a much steeper one,” Adam Slater, chief economist at Oxford Economics, wrote last month.
Housing surveyors reported the biggest drop in new buyer inquiries in October since the financial crisis, excluding the period of the Covid-19 lockdown.
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But the UK’s unique economic landscape puts it at high risk of mortgage delinquency, according to Goldman Sachs. Factors at play include Britain’s improving economic picture, the sensitivity of default rates to recessions and the shorter duration of UK mortgages compared to euro zone and US peers.
“Looking across the country, we see a relatively high risk of a meaningful rise in mortgage delinquency rates in the UK,” the bank’s economist Yulia Zestkova wrote in a report last week.
Meanwhile, rising unemployment risks – a historic barometer of crime rates – add to pressure on the UK, which Goldman Sachs said is “already in recession.”
The risk of unemployment is high
The UK economy shrank by 0.2% in the third quarter of 2022, the latest GDP figures showed on Friday. More consecutive quarterly declines in the three months to December would indicate that the UK is in a technical recession.
The Bank of England warned earlier this month that the UK is now facing its longest recession since records began a century ago, with the recession expected to last well into 2024.
Describing the outlook as “very challenging”, the central bank said unemployment could double to 6.5% during a two-year recession, affecting around 500,000 jobs.
Oxford Economics warned in its report that such a spike in unemployment could “significantly” raise the risk to the housing market by potentially creating a wave of forced sales and foreclosures. In fact, for every one percentage point increase in the UK unemployment rate, mortgage delinquency rises by more than 20 basis points a year later, according to analysis by Goldman Sachs.
“If unemployment continues to rise sharply, the dangers to the housing market will increase significantly,” Slater said.
Not the 2008 financial crisis
Still, much of the outlook will hinge on the government’s upcoming financial statement on Thursday, when Finance Minister Jeremy Hunt is expected to unveil a £60 billion ($69 billion) tax hike and spending cuts aimed at weighing heavily on growth.
Some strategists say Hunt may delay much of the savings until after the next election — after January 2025 — to protect the economy during the height of the recession. However, Hunt was candid in warning of “eye-watering” decisions ahead.
The Bank of England, for its part, has insisted that it will continue to raise rates despite a possible lower peak.
Even with the slight slowdown expected for the housing market in the near term, economists say the risk of a shock reverberating across broader financial markets is minimal.
After the financial crisis, the banking sector has greater regulation and adequate capital with limited exposure to risky mortgages. Meanwhile, most housing loans sit with households with reasonable savings buffers, Berenberg’s Pickering said.
“We see limited risk that the housing market correction will turn into another financial crisis,” he added.