JLL has issued its latest UK house price forecast, predicting that the housing market is set for a correction rather than a crash, as mortgage lending costs rise.
The company points out that over the past 15 years, the UK has seen property prices reach new heights due to a period of record low borrowing costs. Never before 2008 had the UK base rate fallen below 2%. However, in the post-Global Financial Crisis (GFC) period, it has averaged 0.5% and reached a low of 0.1% during Covid.
However, JLL says events over the past year, and more so the past six weeks, have led to a growing body of predictions that a UK house price crash is now imminent.
A rise in borrowing costs – and an expected further steep rise in mortgage rates – together with continued high inflation, the cost of living crisis and a looming recession have prompted predictions by the most bearish forecasters of a 20-30% fall in UK house prices, according to Marcus Dixon, head for UK housing research at JLL.
But he points out that these predictions fail to recognize that UK house prices have never fallen by more than 20%. And this raises the question of whether the underlying market outlook is really worse than the two previous crashes – the recession of the early 90s where house prices fell 20% cumulatively between 1989 and 1993 and the GFC where prices fell 15% between January 2008 and May 2009.
He explained: “In the early 90s, inflation was high [like today] and GDP was low and into negative territory [like today]. But one important difference was that unemployment was extremely high at around 10% in the early 1990s – today it is at a record low of 3.5%. And while the unemployment rate is expected to rise over the next 18 months, it is expected to reach 4.9%, below the 6.7% average since 1971 and the past 10-year average of around 5.2%.
“Meanwhile, the GFC was basically a credit crunch built on bad lending practices in the early 2000s which saw people with bad credit and no equity lend out sums of money they couldn’t afford to pay back. Ultimately the ‘house of cards’ collapsed, banks went collapsed, millions lost their jobs and people were forced out of mortgages they could never afford in the first place.
“In the period since then, lending practices have tightened considerably – and the housing market is now on much stronger foundations.”
JLL analysis of the Bank of England Mortgage and Lending Report found that 62% of the UK’s 8.4 million owner-occupied mortgaged households have at least 25% equity in their house. Another 34% have between 10-25% equity and 4% have between 5% and 10% equity.
Just 0.2% or around 17,000 owner-occupier households in the UK have less than 5% equity – and statistically, at least, there are no households with zero equity. Meanwhile, more than 95% of the UK’s approximately 3 million buy to let landlords who own with a mortgage hold at least 20% of their property.
But at the end of the day, the amount of equity held by UK homeowners only tells half the story.
Dixon continued: “An era of cheap borrowing is coming to an end and mortgage affordability is under pressure. However, mortgaged households in the UK have the highest post-employment incomes – averaging £80,000 a year.
“Prior to the recent rise in UK interest rates, the average household income spent on a UK mortgage was equivalent to 18%. With the average two-year fixed rate mortgage cost rising to around 6%, the ratio of income to mortgage expenditure has increased to around 27% – the same level as it was at the time of the global financial crisis.And if mortgage rates reach 7%, the average household income-to-mortgage ratio would reach 30% – the same rate as it was in the early 1990s.
“However, spending only 30% of a household income on housing costs is not a reason to assume a collapse in distress. With low unemployment and the highest average incomes, Britain’s leveraged households are on a more stable financial footing than the GFC or the recession of the early 1990s.”
Dixon believes that the vast majority of people should be able to squeeze their household incomes without having to sell their home to make ends meet. But it will be a further extension of the current cost of living crisis.
About 1.1 million households were on the current standard rate going into the latest rate hike.
Another 1.2 million households will expire in the coming year. JLL estimates that these 2.3 million households will collectively spend an additional £8 billion on mortgages by the fourth quarter of 2023. This could alleviate some of the current high inflation, but it could also hamper GDP growth.
He added: “The customers spending the extra on their mortgages would perhaps most likely transfer it from their previous savings/investment allocations or from their typical discretionary spending on food, leisure and entertainment.
“Also, banks currently have a low appetite for repossessing. In the early 1990s, banks repossessed around 100,000 homes a year. In the GFC, the rate was around 50,000 a year.
“Currently there are around 4,000 repossessions a year, which of the UK’s around 11 million mortgaged properties represents a rate of around 0.04% a year. It takes two years to repossess a home – and in the current cost of living crisis that can be a difficult public profile to be seen adopting a take-back strategy.
“But banks are a regulated entity so they can’t turn a blind eye to customer defaults. But there are other options that can be explored, such as tracker rates or interest periods, and it’s very likely that banks will exhaust all of those options before going down a foreclosure path.”
In the end, JLL expects there to be far less unrest in the market than there was in previous crashes – as long as there is no sharp rise in unemployment.
However, the company expects to see a steep decline in residential transactions in the UK.
He said: “The number of first-time buyers (FTBs) before the GFC was typically 400,000 per year out of a total of around 1.5 million annual transactions.
“After the GFC, FTBs fell to 325,000 and total transactions to 1.2 million. JLL predicts there will now be around 200,000 viable FTBs with sentiment among would-be home owners taking a hit, mortgage affordability being extended to new home owners and the end of help to buy, which typically helped around 50,000 FTBs up the ladder per year, this cocktail of transactional headwinds will cause total transactions to fall to around 1 million by 2023.
“The transactions that take place will be dominated by slightly more motivated sellers [but not financially distressed] facing a higher percentage of “opportunistic” buyers [such as cash buyers who will account for about 25% of all transactions, up from the current 18%]. These opportunistic buyers will not expect to pay asking price. But the suppliers who are not concerned will only accept a drop in value to a certain level – that is, more of a discount than a full correction and certainly not a crash.”
JLL believes this dynamic will create a sluggish market where buyers and sellers haggle over price and ultimately less transaction activity as the supply of new homes for sale gradually becomes limited.
Against this background, JLL predicts that UK house prices will fall in value by 6% by 2023, representing an average discount of £17,500 from the average UK house price of around £290,000.
Of course, as in any market, there will be winners and losers. Not all types of homes, cities or regions will be affected to the same extent.
Dixon continued: “At a regional level, JLL’s forecasts fall from around 4% across Greater London to around 8% in Wales, the North East and Yorkshire & the Humber.
“However, in many of the housing supply-constrained UK city centres, where there is a greater concentration of equity-rich buyers, price growth is still expected.
“Ultimately, new housing supply is expected to fall even further behind target as a result of the tightening market conditions.”
JLL predicts there will be a national shortfall of 610,000 homes over the next five years alone – up from JLL’s previous expectation of an already strong shortfall of 500,000 homes.
In London, the number of new private homes is estimated to average around 16,000 per year – well below the Greater London Authority target of 52,000 new homes per year.
Turning to the rental market, the current supply-demand imbalance across the UK rental market looks set to persist as fewer households move into ownership and demand for rental properties increases further.
Dixon concluded: We expect that potential buyers, as well as those who would normally have transacted under Help to Buy, will remain in the rental market. This adds further fuel to an already constrained rental market and will, we expect, mean the supply demand imbalance and resulting rental growth will continue.
“Rent growth is expected to be particularly strong at the end of the five-year period before falling back in line with historical norms of around 2% – 3% as inflation comes back under control.
The outlook for investors is mixed. Demand for rental property looks set to continue, and forecasts of rising rents and falling prices suggest we could see an increase in yields across the board. But the cost of servicing debt will remain a key issue for more heavily indebted landlords.
“The purpose-built UK BTR sector is expected to outperform the wider UK rental market in terms of rental value growth.”
House price growth is slowing sharply, new data show
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