UK property market at risk of major downturn as recession fears loom

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

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LONDON – The UK property market could be headed for a major downturn, with some market watchers warning of a price collapse of up to 30% as data shows the biggest drop in demand since the global financial crisis.

New home buyer inquiries fell in October to the lowest level since the 2008 financial crash, outside the period during the first Covid-19 shutdown, the latest report from housing surveyors RICS showed last week.

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

The market slowdown reflects a two-year slowdown, caused by the home buying pandemic, with home transactions in September down 32% year-on-year from the 2021 peak.

But with the era of cheap money coming to an end, and the Bank of England doubling down on rising inflation rates to counter a chaotic mini-budget, economists say the downturn could be sharper than first thought.

Although a home price correction is generally expected … it appears to be unfolding sooner than anticipated.

Callum Pickering

senior economist, Berenberg

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

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

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 bleakest forecasts for 2023 from Lloyds and Barclays banks show a drop of more than 18% to 22% respectively.

In fact, prices in some areas have already started to fall, according to property search website Rightmove, which said on Monday that sellers cut prices by 1.1% in October, bringing the average price of a new-market home down to £366,999 ($431,000).

Rising mortgage delinquency concerns

Britain is not alone. Rising interest rates, rising inflation and the economic shock caused by Russia’s war in Ukraine weighed on the global housing market.

Recent analysis by Oxford Economics has shown that property prices look set to fall in nine out of 18 advanced economies, with Australia, Canada, the Netherlands and New Zealand among the markets most at risk of falling by up to 15%-20%. are in

Adam Slater, chief economist at Oxford Economics, wrote last month: “This is the most alarming outlook for the housing market since 2007-2008, with markets hovering between the prospect of moderate and much steeper declines.”

But the UK’s unique economic landscape puts it at increased risk of mortgage defaults, according to Goldman Sachs. Factors at play include Britain’s worsening economic picture, the sensitivity of default rates to downside, and the shorter duration of UK mortgages compared to eurozone and US peers.

“Looking across countries, we see an increased risk of a meaningful increase in mortgage rates in the UK,” Yulia Zhestkova, an economist at the bank, wrote in a report last week.

Meanwhile, rising unemployment rates – a historical barometer of crime rates – are adding pressure to the UK, which Goldman Sachs said is “already in recession.”

The dangers of unemployment are serious

The UK economy shrank by 0.2 percent in the third quarter of 2022, the latest GDP figures showed on Friday. The last quarter of recession 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 decline expected to last well into 2024.

If unemployment rises significantly, the risks to the housing market will increase significantly.

Adam Slater

chief economist, Oxford Economics

Describing the outlook as “very difficult”, the central bank said unemployment would reach 6.5% during the two-year recession, affecting around 500,000 jobs.

Such a rise in unemployment could “significantly” increase risks to the housing market by potentially creating a wave of forced sales and foreclosures, Oxford Economics warned in its report. In fact, for every one percent increase in the UK unemployment rate, mortgage defaults increase by more than 20 basis points after a year, according to Goldman Sachs analysis.

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“If unemployment rises sharply, the risks to the housing market will increase significantly,” Slater said.

Not the 2008 financial crisis

Still, much of the view will depend on the government’s budget statement on Thursday, when Chancellor of the Exchequer Jeremy Hunt is expected to announce £60 billion ($69 billion) in tax increases and spending cuts that will weigh on growth.

Some strategists have said Hunt could delay much of the austerity until after the next election — no later than January 2025 — in an effort to protect the economy during the height of the recession. However, Hunt is candid in warning of “eye-rolling” decisions ahead.

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

But even if the housing market is hopelessly low in the near term, economists say the risks of a shock reverberating throughout the broader financial market are low.

More regulation and adequate capitalization of the banking sector after the financial crisis has limited the number of risky mortgages. Meanwhile, the majority of housing debt is sitting with households with reasonable savings buffers, Berenberg’s Pickering said.

“We see limited risk that the unfolding housing market correction will lead to another financial crisis,” he added.

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