The housing market appears to be teetering on the brink of a crash, with signs of a rapid decline becoming increasingly apparent. The stage is set for a looming housing market crash that is expected to worsen significantly in the coming months. As sellers are become aware of falling prices, house prices in the UK are finally starting to correct. The eventuality of a house market crash comes closer with every passing month.
House Market Crash: UK House Prices Falling At The Fastest Rate In 14 Years
UK house prices experienced their sharpest annual decline in 14 years in September, with a 4.7% drop year-on-year, according to Halifax. The UK’s largest mortgage lender said this decline was driven by high mortgage costs. This marks the sixth consecutive monthly decrease in what is now considered a “buyer’s market.” The average price of a typical UK home fell to £278,601, down from £292,197 in the same month the previous year. Halifax anticipates that higher mortgage costs will continue to exert downward pressure on prices into the coming year.
In terms of regional variations, all UK nations and English regions experienced declines in house prices on an annual basis. Prices are under the most significant downward pressure in the South East of England, with a fall of -5.7% over the last year (average house price of £376,450). London, being the most expensive place in the UK to purchase a home, saw the biggest fall in cash terms.
House prices in London fell by -4.8% over the last year (-£26,514). On the other hand, Northern Ireland had the most resilient house prices, down by just -0.2% compared to the same time last year (average house price of £184,108). This suggests there will be regional variations in the depth of the house market crash in the UK.
Disclaimer: This is not financial advice and you are responsible for your own financial decisions. I am not a mortgage broker or advisor and I don’t give financial advice! Please consult professional advice before making any kind of mortgage decision.
Halifax House Price Index: UK Prices Are Falling
According to Halifax, have also put a soft spin on market activity. Outlining that “activity levels continue to look subdued compared to recent years, with industry data showing lower levels of new instructions to sell homes and agreed sales.” This subdued activity is primarily due to “borrowing costs as the primary factor, given the impact of higher interest rates on mortgage affordability.”
Homeowners are becoming more realistic about their selling prices, reflecting the evolving landscape of what has increasingly become a buyer’s market. The Bank of England’s decision to hold the Base Rate at 5.25% ended a series of 14 consecutive rate increases, marking the fastest monetary policy tightening cycle in recent history. According to Halifax, despite these rate hikes, house prices have proven more resilient than expected.
Although property prices are currently around £14,000 below the August 2022 peak, they remain +1.0% above the level seen in December 2021 (£275,889). This is the month when Base Rate first edged up from 0.1% to 0.25%. However, as Halifax acknowledges, “there is often a lag-effect between rate increases and the full impact of higher mortgage costs on house prices.”.
Halifax: Fixed Term Mortgage Rates Are Falling…
Kim Kinnaird, the director of Halifax Mortgages, further explains, “However, with Base Rate now likely to be at or around its peak, we are seeing fixed rate mortgages deals ease back from recent highs.” Additionally, “Wage growth also remains strong, which has helped with affordability, with the house price to income ratio now at its lowest level since June 2020 (6.2 in September vs 6.3 in August).”
Nonetheless, “Many economists and financial markets predict that Base Rate will remain higher for longer, with any significant cuts appearing unlikely until inflation gets closer to the Bank of England’s 2% target.” Consequently, “Overall, these factors are likely to keep mortgage rates elevated in comparison to recent years, constraining buyer demand and putting downward pressure on house prices into next year.”
Will The House Price Crash Be Averted By Wage Growth?
Kinnaird’s comment that wage growth remains strong, and has helped with affordability is fundamentally incorrect. Nominally real wages have grown as we can see below. However, due to inflation real wages have only slightly recovered in July. Real wage growth is the true predictor of house price growth. Historically it has been highly correlated with a UK house market crash.
In the United Kingdom, wages saw a nominal increase of approximately 7.8 percent in July 2023. However, when adjusted for inflation, real wage growth was much lower at 0.6 percent. Even when bonus pay is factored in, nominal wage growth was 8.5 percent, but real wage growth only stood at 1.2 percent. This indicates that while wages have risen nominally, their real purchasing power has declined significantly due to high inflation.
Halifax’s messaging that the housing market has remained resilient and that activity is a little subdued is concerning. With the RICs property price survey suggesting that things are as bad as 2009. The last financial crisis and housing crash. We can clearly see from the Halifax table above, house price falls are accelerating into winter.
Find more statistics at Statista
Wage growth must also be considered within the recent historical context. The COVID-19 pandemic caused a noticeable drop in wage growth between March and June 2020. The growth rates in the first half of 2021 were also affected by pandemic-related factors. From June 2021 to July 2022, real wage growth declined substantially, dropping from 4.6 percent to -3 percent.
Read: 5 Reasons House Prices Will Keep Falling In The UK
Nominal Vs Real Wage Growth In The United Kingdom
One of the primary reasons for the decline in real wages is the high inflation rate, which has outpaced wage growth. UK inflation peaked at 11.1 percent in October 2022 and remained above double figures as of March 2023. Forecasts suggest that annual UK inflation is expected to average 6.1 percent in 2023. This high inflation has contributed to the ongoing Cost of Living Crisis, leading to a significant decrease in living standards for many.
Therefore, if we’re running with the average, as many house price indices do, then there is a £130,274 gap in asking prices to sold prices. However, this is the sale agreed price based on the asking price. Therefore, is may be even lower once fall-though and renegotiations are accounted for.
Read: New Evidence: Faster Deterioration Of The Housing Market Expected
UK Economy Stagnation Will Drive Further House Price Falls
The forecast for the UK economy look bleak. The UK Is predicted to have the lowest growth in the G7. The International Monetary Fund has also warned that UK interest rates will need to stay high into 2024, peaking at 6% and staying at 5% until 2028. The UK is also set to have weakest growth among G7 in 2024
The pressure of both inflation and interest rates, and low growth, could result in stagflation. This will put downward pressure on real wages. Which is period of high inflation coupled with a stagnating economy. When this happens, measures that are not adjusted for price growth can rise quickly.
All of which would mean that real incomes would continue to fall. As you can see below, I’ve mapped real income and house price growth. There is a clear trend between the two house prices and real wages. As real wages grow, so do house prices. The reverse trend is also true, with house prices falling as real wages fall. Although as mentioned, there is a lag in house price reporting, so the two lines will never fully align.
2. Our World In Data: Nominal wages, consumer prices and real wages, United
Kingdom, 1750 to 2015
Sellers Discounting Prices Is Driving House Market Crash
All of this means that buyers have less purchasing power, especially first time buyers. As the cost of living bites, existing more home owners are selling. Those in larger homes are downsizing. Buy-to-lets are flooding the market. Lower affordability, means lower demand. The higher supply vs demand* of properties means lower prices.
Asking price discounts are at 4.2% on average, the highest level since 2019. In a recent report, it has been revealed that UK house sellers are currently slashing their asking prices at a rate not seen in over a decade. More than 36% of properties on the market have experienced at least one price reduction, marking the highest level since January 2011.
This trend can be attributed to a combination of rising interest rates and decreased housing market activity during the summer holidays, with the number of new properties coming up for sale in August being 6% lower than the 10-year average. These price reductions are quite substantial, with sellers knocking an average of 6.2% off their initial asking prices, amounting to over £22,000.
Read: Expert Insight: UK Housing Market To Crash – Here’s What You Need To Know
Best Agent House Price Index
House asking prices have substantially much further to fall. This is because these is a massive disconnect between asking prices and sold prices. The BestAgent All Homes Index, uses front-line data from estate agents in the UK. It presents an unbiased view of house prices. A UK snapshot from 13 October reveals:
- There is a 20% gap between the median For Sale and Sale Agreed price.
- The gap between the average For Sale and Sale Agreed price is 38%.
- There is 6:1 listings for every sale*.
There Is Substantial Downward Pressure On House Prices
The Best Agent data therefore suggests there is significant downward pressure on house prices. However, there is still a substantial gap between seller expectations and buyer affordability. This will mean there is a slow grind of house price falls over the coming months, or even years. This will happen as seller expectation aligns with reality. Millions of homeowners come of low interest fixed term rates, more homes will come to the market. Further inverting property supply and demand. This will place further downward pressure on house prices.
The best source of front-line information on house prices is the Moving Home with Charlie Youtube channel, podcast. Charlie, like myself predicted house price falls as far one year ago. Whilst my predication was grounded in macro-economics, Charlie uses information direct from the Coal-Face. This is because he has directly links and data with estate agents and their CRM systems.
Charlie estimates that house prices are down 15-20%. This is on top of the falls we’ve seen so far. However, this won’t be reported upon until around February-March 2024. Which paints a far darker picture of UK house prices than mainstream media would lead us to believe. Here’s a short clip but I’d highly recommend you watch his other videos, this applies to both buyers and sellers.
Conclusion: The House Market Crash Is Only Just Starting
In conclusion, the housing market is well over the cliff edge. The downward trend of house prices is now undeniable. Sellers are beginning to lower their asking prices, a clear indication of the distress in the market. However, this is just the tip of the iceberg, for a more profound plunge in house prices.
As sellers start to come off their fixed-rate mortgages, the supply of available homes will swell, further intensifying the downward pressure on house prices. Moreover, it’s essential to bear in mind how slow moving the housing market is. There is a time-lag effect between macro economic events (e.g., base rate rises) and the housing market. The impact of reductions at the front-line typically manifests with a 6-9 month lag.
In this light, we have, in reality, only just begun to see the effects of interest rate increases. As these take even longer to feed through into, asking and sold prices. The road ahead for the housing market appears to be a long and turbulent one, with plenty of uncertainty and further price drops on the horizon. Once thing is for sure, the house market crash is well underway.
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