Will the Present Economic Unrest Trigger a Housing Market Crash?

Oct 1, 2022 | Eyesurvey

If you’ve been reading the news recently, you’ve no doubt seen the current turmoil that the housing market has been going through. With rising mortgage rates, a wider cost of living crisis, and economic instability, UK house prices growth is set to slow to single digits.

In stark contrast, property prices in the UK enjoyed a healthy growth between 2020 and 2021, getting a boost from the working-from-home trend and stamp duty ‘holiday’. Unfortunately, the picture in 2022 is much bleaker as the UK housing market faces aggressive rate hikes in a bid to contain sky-high inflation, having risen to over 10% on figures released on 19 October.

What is a housing crash?

A housing crash is essentially a period of plummeting house prices due to a fall in demand for buying houses/more people putting houses on the market. A housing market crash will typically happen after a housing bubble – an unusual period of growth in demand for housing. As demand outpaces supply, money is injected into the house market, driving prices up further.

However, when a central bank raises its benchmark interest rate, like we have recently witnessed with the Bank of England amid the political uncertainty, then it becomes more difficult to find new buyers. You then have a situation where homeowners who are unable to pay their mortgage could face defaults and foreclosures, and thus a wave of properties flood the market.

If the effective Market Value in these conditions falls below the amount the buyer first borrowed to buy, the mortgage is described as being in “negative equity” – you owe more than it’s worth, and still can’t sell – even if you find a prospective buyer – unless you have savings to pay off any balance owed.

UK property prices in 2022

Halifax said a typical UK property now costs £293,835 as the pace of annual growth slowed for the third month in row, from 11.4% in August to 9.9% in September, the first time it has dropped into single digits since January.

After Kwasi Kwarteng’s mini-budget was announced, approximately 1,000 mortgage deals were pulled from the home finance market as the news triggered a sell-off in both UK and overseas financial markets and further raised expectations for even higher interest rates to come.

Will there be a UK house price crash?

With higher mortgage rates, increasing energy costs, and a possible recession, is it likely that the UK will face a property crash? With 1.8 million borrowers coming off a fixed-rate deal in the next 12 months, amidst households feeling the financial squeeze already, some simply won’t be able to afford the mortgage repayments and will be forced to sell-up or have their homes repossessed.

When a country goes into recession, house prices will inevitably fall. This will also affect people’s ability to move home as banks will become more risk adverse to lending to homebuyers.

“Eyesurvey has been around long enough to have experienced five such market cycles. This does happen at intervals, and we have seen those occur about every eight to fifteen years apart”, said Leslie J Long FRICS FISVA, the Principal at Eyesurvey. “Sometimes, the down-swing is shorter, perhaps three to five years with a slow recovery, or may be nearer eight years. That can then begin to reverse quickly if buyers who have cash or access to house purchase finance see “a bargain”, and the market cycle is then returning to a positive phase.. It’s not unlike the Stock Markets, but the property cycle is far slower to respond.”

Although it is not certain that house prices will fall in 2022/2023, the current economic outlook suggests that is becoming increasingly likely.

Is now a good time to buy a house?

The author, Mark Twain, is quoted as saying “buy land, my friend – they’re not making it any more.”

First time buyers may be hoping that house prices dip over the coming months, however, with no guarantee what will happen in the UK housing market, you may be asking yourself if you should purchase a home now, or wait?

Special Stamp Duty reliefs to help first time buyers recently announced by the Government can be attractive incentives.

If you’re in a position where you can afford to buy a house, then it may be in your best interest to go for it, especially if you plan to live in that house for several years to come. Should house prices drop dramatically due to interest and mortgage rates rising further, then ultimately borrowing to buy your home becomes more expensive, and please be careful of our explanation of “negative equity”, shown above.

Buying a home in the current economic climate is a bit of a balancing act! Remember that waiting for lower house prices may then come at the expense of an affordable mortgage.

Fortunately, as typically a property will continue to rise in value over time – ten to fifteen years – you’re still likely to turn a profit on any long-term investment.

Les Long FRICS FISVA Principal, Eyesurvey

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