The British property market is at risk of suffering a sharp decline as fears of recession loom

The British property market is at risk of suffering a sharp decline as fears of recession loom

Economists predict that rising interest rates and falling prices will mark the end of Britain’s 13-year housing market boom, which could lead to a house price crash.

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

New home purchase inquiries fell in October to their lowest level since the 2008 financial crash, excluding the period during the first Covid-19 lockdown, the latest RICS housing surveyors’ report showed last week.

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

The market decline marks a reprieve from a two-year, pandemic-induced home-buying frenzy, with property transactions in September down 32% annually from a peak in 2021.

But as the era of cheap money fades and the Bank of England doubles down on inflation-busting interest rate hikes to counter the chaotic mini-budget, economists say the downturn could be more acute than first thought.

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

Callum Pickering

senior economist, Berenberg

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

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

Nationwide, one of Britain’s biggest mortgage providers, said earlier this month that house prices could collapse by up to 30% in a worst-case scenario. Meanwhile, the gloomiest estimates for 2023 from banks Lloyds and Barclays point to declines of almost 18% to over 22% respectively.

In fact, prices have already started to fall in some places, according to property search site Rightmove, which said on Monday that sellers cut prices by 1.1% in October, taking the average price of a newly manufactured home to £366,999 ($431,000).

Increased concern about mortgage delinquency

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

Recent analysis by Oxford Economics found 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 declines of up to 15-20%.

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

Housing surveyors have reported the biggest drop in new buyer inquiries in October since the financial crisis, excluding the period during the covid-19 lockdowns.

Isabel Infantes | Afp | Getty Images

But Britain’s unique economic landscape puts it at higher risk of mortgage defaults, according to Goldman Sachs. Factors at play include the UK’s deteriorating economic picture, the sensitivity of defaults to downturns and the shorter maturities of UK mortgages relative to eurozone peers and US competitors.

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

Meanwhile, risks of rising unemployment – a historic barometer of crime figures – are adding to pressure on Britain, which Goldman Sachs said is “already in recession”.

Unemployment risks weigh heavily

The UK economy shrank by 0.2% in the third quarter of 2022, latest GDP figures showed on Friday. Another consecutive quarter of decline in the three months to December would suggest 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 downturn expected to last well into 2024.

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

Adam Slater

chief economist, Oxford Economics

The central bank described the outlook as “very challenging” and said unemployment was likely to double to 6.5% during the two-year slump, affecting around 500,000 jobs.

Such a rise in unemployment could “significantly” increase risks to the housing market by potentially creating a wave of foreclosures and foreclosures, Oxford Economics warned in its report. According to Goldman Sachs analysis, for every one percentage point increase in unemployment in the UK, mortgage delinquencies tend to increase by over 20 points after a year.

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

Not a 2008 financial crisis

Still, much of the outlook will depend on the government’s upcoming fiscal policy statement on Thursday, when Chancellor of the Exchequer Jeremy Hunt is expected to unveil 60 billion pounds ($69 billion) of tax hikes and spending cuts that will weigh heavily on growth.

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

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

Still, while the housing market is expected to see a small rebound in the short term, economists say the risks of a shock reverberating through the broader financial market are minimal.

Increased regulation and adequate capitalization of the banking sector after the financial crisis have limited the exposure to risky mortgages. At the same time, the majority of housing debt lies with households with reasonable savings buffers, said Berenberg’s Pickering.

“We see limited risk that the ongoing correction in the housing market will turn into another financial crisis,” he added.

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