Brace for impact: Is the housing market heading for a crash?

Published: 18/11/2022 By Lucy Goodgame

The housing market faces its toughest challenge since the 2008 financial crisis. Rising cost of mortgage borrowing could cause a crash, with analysts forecasting that house prices could drop by up to 15% next year.

The housing market has ducked more punches than Rocky Balboa over the past six years, remaining remarkably resilient throughout Brexit, a global pandemic, war in Ukraine, and now the cost of living of crisis. However, there are signs this run is ending, as the property market is set to face its toughest test since the 2008 financial crisis.

All Rise: Inflation, Interest, and Taxes

The Office for National Statistics said inflation, currently sitting at 11.1%, is at its highest level since October 1981. The Bank of England voted for another interest rate rise of 0.75% to 3% earlier this month in an attempt to reduce inflation, seemingly with little effect. This increase marks the eighth consecutive rise since December 2021.
Those with tracker mortgages are undoubtedly yearning for the halcyon days of 0.1% interest rates. You know - less than a year ago.

If rising interest rates and inflation aren’t enough to dampen your mood, Chancellor Jeremy Hunt has cautioned that we can all expect to be paying "a bit more tax" and warned he will be acting like Scrooge this Christmas, with “horrible decisions” ahead concerning tax and spending.  
All of this means that affordability and borrowing inevitably become more problematic for those looking to move home and analysts have warned that the property market could take a big hit as a result.

Bank of England data shows that more than two million borrowers with fixed-term deals will need to remortgage between now and the end of 2024. Analysts at Pantheon Economics have estimated that the average household refinancing a two-year fixed-rate mortgage in the first half of next year would see monthly repayments jump from £863 to £1,490. With the soaring cost of living, this increase could simply be unaffordable for many.

Buyer Enquiries Down

The Royal Institution of Chartered Surveyors (RICS) Residential Market Survey in October has identified an overall weakening of the property market, and particularly noted a drop in buyer enquiries.
The survey showed that new buyer enquiries fell for the sixth month running in the sales market, dropping to -55% last month compared to a -36% decrease in September. Data also showed that survey feedback on buyer demand is negative across all areas of the UK.

This marks the biggest drop since the global financial crisis in 2008, not including the housing market shutdown in 2020 because of covid restrictions.

This fall in the number of potential buyer enquiries is undoubtedly in response to the sharp rise in mortgage costs, as well as the general feeling of economic unease many are experiencing right now.

Falling House Prices

House prices fell for the first time in 15 months in September, according to the Nationwide house price index.  This drop has been attributed to the fallout of Liz Truss and Kwasi Kwarteng’s Famous-For-All-The-Wrong-Reasons ‘mini budget’. Despite most decisions being reversed, the consequences are still being felt by mortgage holders.

Meanwhile, data from Halifax has shown three monthly falls in house prices between June-September, with the lender warning that “a clear downward trend is developing”.
With the Bank of England recording a drop in mortgage approvals from 74,400 in August to 66,800 in September, it certainly seems likely that prices will continue to fall to some extent.

So, is a Crash Inevitable?

 With interest and inflation rising, house prices and buyer enquiries falling, things certainly feel bleak.

 It can be easy to expect the worst, but it bears repeating that the housing market has a habit of defying expectations. If we take Brexit as our example, many predicted the ensuing economic uncertainty would force property valuations downwards. But over the following six years, the average UK house price actually climbed from £213,000 to £281,000.
There is some hope that Jeremy hunt’s new budget will offer greater stability going forward. With a clear focus on tackling inflation, the chancellor acknowledged that “High inflation is the enemy of stability,” and means “higher mortgage rates”, with lowering inflation and interest rates being very much the goal.

And let’s not forget that the word “crash” could be an overaction when you consider that a fall of even 20% would actually be returning house prices to pre-pandemic levels.  The reality is that demand still outstrips supply and unless that changes, a true crash seems unlikely.

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