Housing prices look set to crash over 2023 to 2025 but how far will they fall? According to new data from Halifax, UK house prices are experiencing their sharpest decline in 12 years as rising interest rates impact the housing market. The number of homes sold in May 2023 was down 27% compared to the previous year. With mortgage costs increasing and fewer people able to afford homes, fears of a housing market crash are growing. Predictions vary, but experts suggest a potential drop of anywhere between 10% and 30% in real terms.
The housing market has relied on cheap credit to sustain rising prices, even as wages failed to keep up. However, this unsustainable approach has created a growing gap between workers’ wages and housing costs. Experts warn that without cheap credit, a significant decline in house prices could lead to negative equity for homeowners who purchased during the pandemic years. Furthermore, interest rates above 6% are considered an affordability tipping point for mortgage repayments. If a housing market crisis ensues, it could have wider economic impacts, reducing people’s spending power and overall growth.
While the government may intervene to stimulate the housing market, flooding it with more debt would only perpetuate unaffordable prices. The situation highlights the precariousness of the housing market and the need for sustainable policies. Suggestions such as house price inflation targets and the development of truly affordable social housing are gaining traction. As interest rates rise and house prices become unaffordable, it may be time to revaluate the housing market and who it truly benefits.
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.
The Warning Signs Of A UK Housing Market Crash
In August 2022 I warned the UK had reached the final stages of a late stage housing bubble. Back then, I outlined that the housing market has been driven by record-low interest rates over the past two decades. Which resulted in a significant rise in house prices. All house price growth can be tied back, not to demand-supply but to falling interest rates since even before 2008. The supply shortage is largely due to cheap debt. It was made easy for moderately wealthy people to borrow money, to build property portfolios. Why else would two-thirds (68%) of buy-to-lets be owned by people over the age of 55?
The COVID-19 pandemic led to a temporary freeze in the housing market. In response, the government implemented initiatives like the stamp duty holiday and the 95% mortgage scheme. This artificially stimulated the market, to even more extreme. all-time-highs. This gave many people the impression the housing market was infallible. Which caused panic buying over 2022. These policies aimed to support existing homeowners and first-time buyers but contributed to the housing crisis by fuelling demand and overleveraging buyers.
I then called out that the global trend of soaring inflation, would lead to a correction in interest rates. The end result – a worldwide house price crash. You can see how I connected interest rates with house prices back in June 2022. This was clearly the common thread behind all global housing booms. I also predicted the UK’s buy-to-let industry would also be impacted as rental market reforms and rental caps make it less profitable for landlords. This could result in a flood of supply in the housing market as landlords exit the market
Signals Of The Crash In The UK Housing Market
Then In December 2022 I warned that UK house prices were set to crash in a monumental way. Sales volume has also plummeted, reaching its lowest point since the COVID-19 lockdowns and falling at the fastest pace since 2008. The Bank of England’s base rate plays a significant role in housing price forecasts, and the recent rapid increase in interest rates has already caused prices to fall at the fastest rate in 14 years. Rising mortgage burdens and a mass exodus of buy-to-let landlords are also contributing to the downward pressure on prices.
At the time there was a consensus that house prices will experience a decline of 5-10%. These estimates may underestimate the severity of the problem. In reality, the shift from ultra-low interest rates to normalized rates, combined with the impact of inflation, suggests that house prices could fall by even more than the current predictions. All signs point towards a house market crash.
The Bank Of England Know About The Coming House Price Crash
The leading indicator any evidence of a house price crash once inflation hit the scene was a 2019 Bank Of England Working Paper. This research demonstrated that there was genuine house price growth between 1985 and 2008. However, almost all the house price growth between 2008 and 20018 is due to changes in Gilt Yields. Real house price growth is only at <1% per year in real terms between 2008 and 20018. This gives you an indication of how far house prices would need to fall to correct.
The paper also outlined that “were real gilt yields to rise to 0% (levels last seen around 2011), this would imply a 31% fall in house prices”. This was in 2019 before the stamp duty frenzy in the UK housing market, which ultimately lead to the average house price increasing to £292,404 in September 2022.
At the time the BOE wrote their research paper, the average UK house price was just £231,792; a further increase of 26%. It’s also also worth mentioning, that at the time the real yield on a 10 year index-linked gilt was -2%. This figure now stands at 1.31% as of 10/07/2023. Given the increase in house prices and the yield, a 31% fall may seem moderate.
Housing Market To Crash: How Fall From Peak To Trough Will They Fall?
To my knowledge, there are only two channels that have been covering the housing market crash with an unbiased analytical approach. These two channels offer true expert insight into the housing market. One is Darren at Honest Money, who sold his house in advance of the housing market crash and covers the market in great detail.
The other is a Youtube channel called Moving Home with Charlie. Charlie Lamdin has 22 years working with agents and implementing CRM systems, he’s as close as you’ll get to the ‘coalface’ of UK housing. Alex (Stig) backs Charlie up with in-depth analysis of macroeconomics. Charlie and Alex, emphasize the importance of using verifiable data rather than media sources. They give an extensive overview of the three turbochargers that have contributed to the current state of house prices. These guys are the real experts here.
Macro Economics Of The UK Housing Market Crash:
- Prolonged period of low interest rates since 2008: Which allowed people to borrow more money and afford more expensive houses. Charlie and Alex note that interest rates were kept low even below inflation for a significant period. This made it more attractive to be in debt than to save money. However, Alex and Charlie emphasize that interest rates have now risen. Removing one of the turbochargers supporting high house prices.
- Government’s Help to Buy scheme: this provided additional loans to homebuyers, particularly for new build properties. The scheme allowed buyers to borrow a significant percentage of the property’s value on top of their mortgage and deposit. Which made it possible for them to afford more expensive homes. They highlight that the Help to Buy scheme has ended, and even if it is replaced, its impact won’t be felt immediately.
- Stimulus provided during the COVID-19 pandemic: This includes furlough money, bounce-back loans, and stamp duty holidays. These measures injected a substantial amount of money into the economy and created a frenzy in the property market. They assert that this stimulus, combined with the previous factors, prevented house prices from falling sooner.
What Is The Worst Case Scenario For A UK House Price Crash?
Charlie and Alex then analyze the correlation between interest rates, inflation, debt per person, GDP growth, real wage growth, and house price growth. They discuss how low interest rates have influenced debt levels, affordability, and the relationship between wages and house prices. The analysis indicates that without the turbochargers of low interest rates, Help to Buy, and COVID-19 stimulus, house prices would have fallen more steeply.
Based on the data and analysis presented, the Alex suggests that house prices are likely to experience significant declines in the next couple of years. They cite projections ranging from a nominal house price fall of 20% in the best-case scenario to 45% in the worst-case scenario.
Current State Of The UK Housing Market
According to UK Finance, more than 2.4 million fixed-rate homeowner mortgage deals in the UK are set to expire between now and the end of 2024. This raises concerns about a potential financial timebomb as more than a quarter of homeowners on fixed-rate mortgages could face a sharp increase in monthly payments. The Bank of England is expected to increase its key interest rate, and recent turbulence in financial markets has led to speculation that the Bank rate could reach close to 6% by Christmas.
Economists warn that the mortgage crunch could have significant consequences, with total annual home loan payments projected to rise by £15.8 billion by 2026. This would deliver a blow of £2,900 for the average household re-mortgaging next year. The impact of the rising mortgage rates is expected to hit households before the next general election, causing additional payments of up to £15 billion by Christmas 2024. This is the mortgage timebomb that will cause the UK house price crash.
No Bailout For Mortgage Holders
Experts note that the mortgage timebomb is not limited to fixed-rate mortgages and that renters are also facing higher costs as landlords increase rents. The government is under pressure to address the cost of living crisis and provide support to the most vulnerable households dealing with increased borrowing costs. This mortgage crisis is at the centre of the house market crash.
The Liberal Democrats have called for an emergency mortgage protection fund, while Labour has linked the turmoil in mortgage markets to the government’s handling of the economy. However, this has now been ruled out as no feasible. In short, the governments printing of money is what has driven inflation to record levels.
While the Treasury is cautious about intervening and potentially undermining the Bank of England’s efforts to tackle inflation, the mounting pressure on the government may make it increasingly difficult to ignore the issue, especially as the country approaches the next election cycle. The current government would love to avert a UK house price crash, but they have already kicked the can down the road too many times.
12 Months To Sell For Homeowners
To cover the cost of the mortgage timebomb, the government would need to print even more money, which would simply result in more inflation. Given the staggering level of debt in the mortgage market, it would not be realistic to even print that amount of money. This is why a house price crash in the UK is now unavoidable.
This is part of the reason why a 12 month grace period has been given to mortgage holders. The main points are:
- No home will be repossessed within 12 months of the first missed payment.
- Customers can seek advice from their lender without it affecting their credit score.
- Customers can switch to an interest-only deal for six months; or extend their mortgage term and revert back within six months if they want. Neither option requires an affordability check or will affect their credit score.
This will create a subset of very motivated residential sellers who are likely to drive prices down. According to the BOE 2023 Q2 Credit Conditions Survey, the indexed default rate jumped from 14 in Q1 to 30 in Q2. Buy to let landlords are also feeling the strain financially. Buy-to-let mortgages of over 6 per cent and many are set to sell up. On average were making ‘year one’ cash profits of 23% of rental income, but successive interest rate hikes have seen this figure plummet to under 4% this year.”.
With 2.4 million fixed rate payments ending in 2024 and with there being a 12 month grace period we could expect the turbulence in the housing market to continue way into 2025. However, due to low transactional volumes and an increasing number of fall-throughs in agreed deals. This may result in a race to the bottom for house prices.
How Much Have House Prices Fallen?
Let’s clarify the situation: The housing market is already experiencing a slide in prices. Even mainstream experts are now acknowledging the likelihood of falling house prices. However, as there is a time lag of around 6-9 months in the reporting of house prices the fall is always reported after the fact. In May 2023 Nationwide saw house prices fall 3.4% year-on-year.
While most reports indicate moderate declines and stagnant prices. Zoopla, for example, predicts a 5% decrease in house prices for this year. It’s important to keep in mind that housing market reporters often have their own agenda. Companies like Zoopla or Rightmove have a responsibility to avoid causing mass panic. Additionally, these companies own their predictive house price models, which means their calculations can be adjusted as they see fit.
When it comes to house prices, there are different perspectives to consider. This includes Asking Prices, Agreed Prices (subject to fall-throughs), and Sold Prices. Zoopla’s reporting involves a more complex modelling of prices, utilizing “matching pairs,” which falls somewhere in between.
Evidence Of A Much Greater Crash In The Housing Market
The evidence suggests a much more significant downturn. This downturn is primarily driven by the interest rate increases that set almost a year ago. With further rate rises occurring since then. To further explore historical reductions in asking prices, you can install a Chrome browser extension calledproperty log.This will show you the reduction history of properties on Rightmove.
In my area, it is evident that the market is facing reductions of 5-10% in prices. Agreed prices have been coming in at a further 5-10% below the asking price, indicating the direction of the market. The house price crash is now gaining momentum in the UK.
Conclusion: More Pain To Come With The Coming House Price Crash
In conclusion, recent data from Halifax reveals that UK house prices are currently experiencing their sharpest decline in 12 years. This can be attributed to the impact of rising interest rates on the housing market. The number of homes sold in May 2023 has dropped by 27% compared to the previous year. With mortgage costs on the rise and affordability becoming a challenge for many. There are concerns regarding a housing market crash are mounting. Experts offer varied predictions, suggesting potential drops in real terms ranging from 10% to 30%.
The housing market has heavily relied on cheap credit to sustain rising prices. This is driving a growing disparity between wages and housing costs. This unsustainable approach poses a risk of negative equity for homeowners who purchased during the pandemic years. Interest rates have now exceeded 6%. This is considered a tipping point for mortgage affordability, and will drive the house market crash.
If a housing market crisis ensues, it could have broader economic implications. Which would impact people’s spending power and overall growth. Would the government intervene to stimulate the housing market, this would flood the market with more debt. This would only perpetuate more unaffordable prices. This situation emphasizes the fragility of the housing market and the need for sustainable policies. Suggestions such as implementing house price inflation targets and developing truly affordable social housing are gaining traction.
Read my latest updates on the UK housing market crash here:
- New Evidence: Faster Deterioration Of The Housing Market Expected [Jul-2023]
- 5 Reasons House Prices Will Keep Falling In The UK [Sep-2023]
