UK property market at risk of major downturn as recession fears loom

Economists are predicting that soaring interest rates and falling prices will mark the end of the UK’s 13-year housing market boom, potentially leading to a house price crash.

Matt Cardy | Getty Images News | Getty Images

LONDON — The UK property market may be verging on a major downturn, with some market watchers warning of a collapse in prices of up to 30% as data points to the biggest slump in demand since the Global Financial Crisis.

New homebuyer inquiries plunged 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 shown last week.

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

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

But as the era of cheap money fades, and the Bank of England doubles down on inflation-busting 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 appears to be unfolding faster than anticipated.

Callum Pickering

senior economist, Berenberg

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

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

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

Indeed, prices have already begun falling in some places, according to property search site Rightmove, which said Monday that sellers cut prices by 1.1% in Octobertaking the average price of a newly-marketed home to £366,999 ($431,000).

Increased mortgage delinquency concerns

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

Recent analysis by Oxford Economics showed property prices look set to fall in nine of 18 advanced economieswith 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 housing market outlook since 2007-2008, with markets poised between the prospect of modest declines and much steeper ones,” Adam Slater, lead economist at Oxford Economics, wrote last month.

Housing surveyors have reported the largest fall in new buyer inquiries in October since the financial crisis, excluding the period during the Covid-19 lockdowns.

Isabel Infantes | Afp | Getty Images

But the UK’s unique economic landscape puts it at higher risk of mortgage delinquencies, according to Goldman Sachs. Factors at play include Britain’s worsening economic picture, the sensitivity of default rates to downturns, and the shorter duration of UK mortgages relative to the euro zone and US peers.

“Looking across countries, we see a relatively greater risk of a meaningful rise in mortgage delinquency 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 delinquency rates — add to pressure on the UK, which Goldman Sachs said is “already in recession.”

Unemployment risks weigh heavily

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

Adam Slater

lead economist, Oxford Economics

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

Such a spike in unemployment could “considerably” raise the risks for 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 delinquency tends to rise by over 20 basis points after one year.

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

Not a 2008 financial crisis

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