UK housing market at risk of a sharp downturn as recession fears loom

Economists predict that rising interest rates and falling prices will mark the end of the UK’s 13-year housing boom, potentially leading to a slump in house prices.

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LONDON – The UK housing market may be on the verge of a steep downturn, with some market watchers warning of prices plummeting as high as 30% as data points to the biggest slump in demand since the global financial crisis.

New homebuyer applications plunged in October to the lowest level since the 2008 financial meltdown, excluding the period during the first Covid-19 blockade, the latest report from RICS real estate appraisers showed last week.

Meanwhile, the MSCI UK Quarterly Property Index, which tracks retail, office, industrial and residential property, plummeted 4.3% in the three months to September, marking the industry’s worst performance since 2009.

The market slowdown marks a respite from a pandemic-induced two-year home buying frenzy, with real estate transactions in September down 32% annually from their 2021 peak.

But as the era of cheap money fades and the Bank of England doubles its inflation rate hikes to counter the chaotic mini-budget, economists say the downturn may be more acute than previously thought.

Although a housing price correction is widely expected … it appears to be unfolding faster than expected.

Kallum Pickering

senior economist, Berenberg

“Although a correction in house prices is widely expected as part of the ongoing recession, it appears to be unfolding faster than expected,” wrote Kallum Pickering, senior economist at Berenberg, of the UK market on Thursday.

The investment bank now sees UK property prices falling by around 10% by the second quarter of 2023. But some lenders are less optimistic.

Nationwide, one of the UK’s largest mortgage providers, said earlier this month that home prices could plummet by up to 30% in the worst case. Meanwhile, darker 2023 estimates from Lloyds and Barclays banks point to falls of nearly 18% to over 22%, respectively.

In fact, prices have already started to drop in some places, according to real estate research site Rightmove, which said on Monday that sellers cut prices by 1.1% in October, bringing the average price of a home just marketed at £ 366,999 ($ ​​431,000).

Increased fears of mortgage insolvency

The UK is not alone. Rising interest rates, rising inflation and the economic shock of the Russian war in Ukraine weighed heavily on the global real estate market.

A recent analysis by Oxford Economics showed that property prices look set to fall in nine of the 18 advanced economies, with Australia, Canada, the Netherlands and New Zealand among the markets most at risk of downturns by up to 15% -20%.

“This is the most troubling housing market outlook since 2007-08, with markets hovering between the prospect of modest downturns and much steeper ones,” Adam Slater, chief economist at Oxford Economics, wrote last month.

Property appraisers reported the largest drop in new buyer requests in October since the financial crisis, excluding the period during the Covid-19 freeze.

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But the UK’s unique economic landscape exposes it to a greater risk of mortgage defaults, according to Goldman Sachs. Factors at play include Britain’s worsening economic environment, the sensitivity of default rates to declines and the shorter maturity of UK mortgages relative to the eurozone and US peers.

“Looking across countries, we see a relatively greater risk of a significant increase in UK mortgage default rates,” Yulia Zhestkova, an economist at the bank, wrote last week.

Meanwhile, rising unemployment risks – a historic barometer of default rates – add to the pressure on the UK, which Goldman Sachs says is “already in recession”.

The risks of unemployment weigh heavily

The UK economy contracted 0.2% in the third quarter of 2022, the latest GDP data showed on Friday. A further consecutive quarter of decline 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 facing its longest recession since record breaking a century ago, with the recession expected to last until 2024.

If unemployment were to rise dramatically, the dangers to the housing markets would be greatly magnified.

Adam Slater

chief economist, Oxford Economics

Describing the outlook as “very challenging,” the central bank said unemployment is likely to double to 6.5% during the two-year slump, affecting some 500,000 jobs.

Such a spike in unemployment could “substantially” increase the risks to the housing market by potentially creating a wave of forced sales and foreclosures, warns Oxford Economics in its report. In fact, according to Goldman Sachs’ analysis, for every percentage point the UK unemployment rate rises, mortgage arrears tends to grow by more than 20 basis points after one year.

“If unemployment were to rise dramatically, the dangers to housing markets would be greatly magnified,” Slater said.

Not a 2008 financial crisis

However, much of the outlook will hinge on the government’s upcoming fiscal declaration on Thursday, when Finance Minister Jeremy Hunt is expected to unveil £ 60bn ($ 69bn) of tax increases and spending cuts set to weigh heavily on growth.

Some strategists have said Hunt could delay much of his savings until after the next election – scheduled for January 2025 – in an effort to protect the economy during the height of the recession. However, Hunt was sincere in warning of “outlandish” decisions in sight.

The Bank of England, for its part, has insisted that it will continue to raise rates, albeit to a potentially lower peak.

However, even with a small slowdown expected for the housing market in the near term, economists say the risks of a shock reverberating to the financial market in general are minimal.

Greater regulation and adequate capitalization of the banking sector following the financial crisis limited exposure to risky mortgages. Meanwhile, most of the real estate debt rests with households with reasonable savings reserves, Berenberg’s Pickering said.

“We see limited risk that the ongoing housing market correction will turn into another financial crisis,” he added.


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