UK property market risks major downturn as recession fears loom

UK property market risks major downturn as recession fears loom

Economists predict that soaring interest rates and falling prices will mark the end of the 13-year British property market boom, which could lead to a fall in house prices.

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LONDON — Britain’s property market could be on the verge of a major downturn, with some market watchers warning of a collapse in prices of up to 30%, with data pointing to the biggest drop in demand since the global financial crisis.

New home buying applications plunged in October to their lowest level since the financial crash of 2008, excluding the period of the first Covid-19 lockdown, the latest report from housing surveyors showed. the RICS last week.

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

The market slowdown marks a respite from a two-year pandemic-driven home-buying spree, with real estate transactions in September down 32% year-on-year from the 2021 peak.

But as the era of cheap money fades and the Bank of England doubles its anti-inflationary rate hikes to counter the chaotic mini-budget, economists say the downturn could be more acute than we didn’t think so.

Although a house price correction is widely expected…it seems to be happening faster than expected.

Callum Pickering

Senior Economist, Berenberg

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

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

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

Indeed, prices have already started to fall in some places, according to real estate research site Rightmove, which said on Monday that sellers had cut prices by 1.1% in October, bringing the average price of a newly retailed at £366,999 ($431,000).

Increase in mortgage delinquency issues

The UK is not alone. Rising interest rates, soaring inflation and the economic shock of Russia’s war in Ukraine weighed heavily on the global housing market.

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

“This is the most worrisome outlook for the housing market since 2007-08, with markets balancing between the prospect of modest declines and much steeper declines,” Adam Slater, chief economist at Oxford Economics.

Housing surveyors reported the biggest drop in inquiries from new buyers in October since the financial crisis, excluding the period during the Covid-19 closures.

Isabelle Infantes | AFP | Getty Images

But the UK’s unique economic landscape puts it at a higher risk of mortgage defaults, according to Goldman Sachs. Factors at play include the deterioration of the UK economic situation, the sensitivity of default rates to downturns and the shorter duration of UK mortgages compared to the eurozone and the US.

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

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

Unemployment risks weigh heavily

Britain’s economy contracted by 0.2% in the third quarter of 2022, the latest GDP figures showed on Friday. Another consecutive quarter of declines 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 now faces its longest recession since records began a century ago, with the downturn expected to last until 2024.

If unemployment were to rise sharply, the dangers to housing markets would be greatly amplified.

Adam Slater

Chief Economist, Oxford Economics

Describing the outlook as “very difficult”, the central bank said unemployment was likely to double to 6.5% during the two-year crisis, affecting around 500,000 jobs.

Such a spike 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. Indeed, according to Goldman Sachs analysis, for every one percentage point increase in the UK unemployment rate, mortgage delinquencies tend to increase by more than 20 basis points after one year.

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

Not a 2008 financial crisis

Still, much of the outlook will hinge on the government’s next budget statement on Thursday, when Finance Minister Jeremy Hunt is expected to unveil £60bn ($69bn) in tax hikes and spending cuts that are expected to weigh heavily on growth.

Some strategists have said Hunt could delay much of the savings until after the next election – due no later than January 2025 – in a bid to protect the economy at the height of the recession. However, Hunt was candid in warning of the “tempting” decisions ahead.

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

Still, even with little easing expected for the housing market in the near term, economists say the risks of a shock rippling through the wider financial market are minimal.

Greater regulation and adequate capitalization of the banking sector following the financial crisis limited exposure to subprime mortgages. Meanwhile, the majority of home debt falls on 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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