Economists predict that rising interest rates and falling prices will mark the end of Britain’s 13-year housing market boom, potentially leading to a crash in house prices.
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LONDON – Britain’s property market looks set to take a big plunge, with some market watchers warning of a price collapse of up to 30% as data points to the biggest slump in demand since the Global Financial Crisis.
New home buyer inquiries rose in October to their lowest level since the 2008 financial crash, excluding the period during the latest Covid-19 pandemic. RICS housing surveyors report show last week.
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 decline marks a reprieve from a two-year, pandemic-induced home buying slump, with property transactions in September. down 32% annually from the peak of 2021.
But as the era of cheap money fades, and the Bank of England double down on inflation-busting rate of increase to fight mini-budget messeconomists say the downturn may be more acute than first thought.
“While a correction in house prices is widely expected as part of the ongoing recession, it is likely to be faster than anticipated,” Kallum Pickering, senior economist at Berenberg, wrote of the UK market Thursday.
Investment banks now see UK property prices declining by around 10% in the second quarter of 2023. But some lenders are less sanguine.
Nationwide, one of the UK’s largest mortgage providers, he said earlier this month that house prices can collapse up to 30% in the worst scenario. Meanwhile, the bleakest estimates of 2023 from Lloyds and Barclays banks point to a decline of almost 18% to more than 22%, respectively.
Indeed, prices have started to fall in some places, according to the property search site Rightmove, which said on Monday that sellers cut prices by 1.1% in Octobertaking the average price of a newly-marketed home to £366,999 ($431,000).
England is not alone. Rising interest rates, soaring inflation and economic shock from Russia’s war in Ukraine have weighed heavily on the global housing market.
Recent analysis by Oxford Economics suggests property prices are likely to fall nine of the 18 developed economieswith Australia, Canada, the Netherlands and New Zealand among the markets most at risk of declines up to 15%-20%.
“This is the most worrying housing market outlook since 2007-2008, with the market poised between the prospect of modest and steeper declines,” Adam Slater, lead economist at Oxford Economics, wrote last month.
Housing surveyors have reported the biggest fall in new buyer inquiries in October since the financial crisis, excluding the period during the Covid-19 pandemic.
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But the UK’s unique economic landscape puts it at high risk of mortgage delinquencies, according to Goldman Sachs. Factors at play include the UK’s deteriorating economic picture, the sensitivity of default rates to declines, and the shorter duration of UK mortgages relative to eurozone and US peers.
“Looking across the country, we see a relatively large risk of a significant 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 – are adding pressure to Britain, which Goldman Sachs says is “already in recession.”
The UK economy contracts 0.2% in the third quarter of 2022, the latest GDP figures showed Friday. A further consecutive quarter of decline in the three months to December would indicate that the UK is in a technical recession.
The Bank of England warned earlier this month that Britain is now facing its longest recession since records began last century, with a decline expected until 2024.
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 “significantly” increase the risk to the housing market by potentially creating a wave of forced sales and foreclosures, Oxford Economics warned in its report. Indeed, according to a Goldman Sachs analysis, for every one percentage point increase in the UK unemployment rate, mortgage delinquency tends to rise by more than 20 basis points after a year.
“If unemployment rises significantly, the danger to the housing market will increase significantly,” Slater said.
Still, many views will hang on the government’s upcoming fiscal statement Thursday, when Chancellor of the Exchequer Jeremy Hunt is expected to unveil £60 billion ($69 billion) of tax hikes and spending cuts set to weigh on growth.
Some strategists say Hunt can delay a lot of savings until after the next election – due no later than January 2025 – in a bid to shield the economy during the height of the recession. However, Hunt has been candid
The Bank of England, for its part, has insisted that it will continue to raise rates, albeit to a potentially lower peak.
Although there is little hope for the housing market in the near term, economists say the risk of a shock in the wider financial market is minimal.
Greater regulation and adequate capitalization of the banking sector after the financial crisis have limited exposure to risky mortgages. Meanwhile, the majority of housing debt sits with households with substantial savings buffers, says Berenberg’s Pickering.
“We see a limited risk that the unfolding housing market correction will morph into another financial crisis,” he added.