UK homeowners have already been struggling with higher interest rates and rising energy bills over the last year, so a potential house price crash is the last thing anybody wants to experience, especially as economists have stated that this entire situation should have been foreseeable and potentially even avoidable.
The UK has experienced over a decade of extremely low-interest rates, and unfortunately, this situation wasn’t sustainable. The pandemic and policy interventions poured fuel onto an already flaming housing market, with the stamp duty holiday during lockdown a huge catalyst for the chaos. The Conservative government's heavy tax regulations are also burdening middle-class households.
What is happening now with UK house prices?
Unfortunately, most banks and property experts are painting a rather grim picture of the current state of the property market. The general consensus is that house prices are now falling, leading the UK into a crash.
According to the Nationwide Building Society, house prices have fallen 3.5% as of June 2023. This is the most significant annual decline since 2009.
As of July 2023, Rightmove published data to show that the average asking price fell by £905 or 0.2% to £371,907. Prices had already fallen by an average of £82 in June, so these statistics show a steady decline.
Halifax published its house price index in July, showing that average house prices fell by 2.6% as of June 2023. This is the biggest annual decline for Halifax's house price index since June 2011.
However, information published by Zoopla in May 2023 showed that although property prices had fallen by 1.3% within the past six months, the decline has slowed compared to the end of 2022. This data also showed that house prices were around 1.5% higher in May 2023 than in May 2022.
According to predictions made by the OBR (Office for Budget Responsibility), house prices could fall by 10% over the course of 2023 and 2024.
However, house prices are still extremely high compared to historical standards and are rising more than wages. The average home price in the UK has nearly tripled since the start of the 2000s, and according to the Nationwide Building Society, house prices have increased by more than 60% over the past decade.
One of the biggest factors currently impacting the housing market is the government's struggle to handle soaring inflation, which has remained at 8.7% from the beginning of 2023 until May 2023.
This dramatically influences interest rates, and low-interest rates have been fueling the UK property market for the past decade. But now, as the Bank of England raises interest rates to a base rate of 5%, people are struggling to keep mortgage payments and are no longer benefiting from house price growth.
Can a house price crash be a good thing?
Although everything about a house price crash may sound intimidating and negative, there are advantages and disadvantages to house price crashes.
Uncertain times like this can create openings in the housing market to make properties more affordable for first-time buyers. However, as unemployment rises, lenders may tighten their eligibility requirements or withdraw their high LTV (loan-to-value) ratios.
Unfortunately, there are many more negative consequences of a house price crash for homeowners and homebuyers than there are positive outcomes. If the value of properties begins to fall quickly, homeowners may be stuck with underwater mortgages. This means they owe more on their mortgage than their home is now worth, and they must either keep that property until the market recovers or they will lose money in a sale. This significantly impacts the general housing market, especially the buy-to-let market, as property owners can no longer use rent payments to cover extortionate mortgage costs.
Different types of existing mortgages will be affected in different ways by a house price crash. Interest rates are locked for a set period of time (usually an average two-year period), so fixed-rate mortgage holders will not experience an immediate change. However, those with variable mortgage rates would immediately see increased payments due to rising interest rates.
A house price crash is not likely to significantly impact people not looking to buy or sell a property during this time, apart from those with existing unpaid mortgages, as non-fixed interest rates will begin to soar. This puts mortgage owners at risk of being unable to meet new higher payments, and in times of housing crashes, many homeowners lose their homes in foreclosures. House price crashes can also bring on times of high unemployment and bankruptcy, so many aspects of our economy become extremely volatile and uncertain.
The latest figures from the Land Registry on UK house prices show that the average property price was £286,000 in April 2023; this is £7000 less than the peak from September 2022. Savills reported in 2023 that properties in the UK have a total value of up to £8.68 trillion, with an additional £425 billion added in 2022. As so much of our money is tied up in housing, a price crash would hugely impact many aspects of our economy and day-to-day life.
A house price crash is also extremely bad for the house-building industry, which could lead to a housing shortage in the future.
How do mortgage rates affect house prices?
Mortgage rates have been continually rising recently, making it more and more challenging to purchase a property. This has had a wider effect on the housing market as further rate rises are expected in 2023, and prices are extremely at risk of crashing.
There was a fall in mortgage rates after the peak of October 2022, which created further demand in the UK housing market. Mortgage repayments are expected to continue rising in 2023, which could have serious implications for the entire housing market.
The UK is currently struggling with a huge cost of living crisis, which is a big factor in the decreasing housing market. Very few people can afford to stretch their budget to new housing whilst general household bills and costs are constantly rising. Real estate experts typically advise first-time buyers to wait to purchase a new property, and this hesitancy also has a detrimental impact on the property market's recovery.
Have house prices crashed before?
There are many previous house price crashes in the UK that we can look back on for an idea of what may be about to happen to our current housing market. Previous housing market crashes have considerably impacted the UK economy and general day-to-day life.
The 2008 financial crash
The most recent house price crash was a global financial crisis caused by the downfall of the US housing market. House prices in the UK fell by almost 20% between 2007 and 2009. This caused chaos in the UK economy and heavily impacted daily life in the UK. Many homeowners were left with negative equity as their homes were now worth less than their mortgages. Banks caused this by recklessly lending and offering unfavourable mortgages.
The early 90s recession
The 90s was a difficult time financially as the UK was in a period of economic downturn. Inflation began to soar, and interest rates were raised to 15% to try and get a hold of this. House prices decreased by almost 20% between 1990 and 1993, and many homeowners could not meet their mortgage repayments. However, the UK housing market began recovering by the end of the 1990s.
The mid-1970s
The mid-70s held a period of time named the "Winter of Discontent" in Britain as high inflation and political problems caused havoc with the UK economy. Unemployment rose, and house prices fell by almost 25% between 1974 and 1977. Many homeowners were again unable to meet their mortgage payments and struggled to sell their properties. A combination of economic recovery and political intervention eventually managed this period.
The 1950s
House prices fell by around 17% between 1952 and 1958. Although the economy began to grow rapidly in 1952 after the end of post-war austerity, the Suez Crisis in 1956 led to the end of this economic growth. The government introduced new regulations to control rising inflation, and the economy began to grow again.
The Great Depression (1920s)
One of the most well-known periods of economic downturn in the UK is The Great Depression of the 1920s. This social and economic upheaval period involved high unemployment, social unrest and revolution, and failing industries. Between 1920 and 1922, house prices fell by over 30%, demand for housing decreased, and borrowers struggled significantly with the affordability of mortgage costs. There was a building boom in the 1930s, which experts describe as the main reason for economic recovery after The Great Depression.
We have learned many things from previous house price crashes and are aware of many issues caused by such economic struggles. We know these times cause high unemployment, repossessions, and economic uncertainty. It is essential to keep yourself updated and prepare for these potentially uncertain times, as although experts do not all agree on if there will be a house price crash, there is a chance of a significant economic struggle to come.
What will happen to house prices in 2023?
Although experts have provided mixed predictions on what will happen to the UK housing market over the next year and following years, the general consensus is unfortunately quite negative for most homeowners.
On the one hand, the current housing shortage in the UK could be a factor that keeps house prices high enough to avoid a house price crash. On the other hand, unforeseen circumstances such as the COVID pandemic and policy interventions introduced due to this have significantly impacted the already struggling property market.
If you are looking to buy or sell a property during the next few years, speak to a mortgage expert and stay up-to-date on the latest UK property market information, as the housing market is extremely complex and constantly changing.
