Economists predict that rising interest rates and falling prices will mark the end of the UK’s 13-year property market boom, which could lead to a fall in house prices.
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LONDON – The UK property market may be on the brink of a major recession, with some market watchers warning of a price collapse of as much as 30% as data points to the biggest drop in demand since the crisis world financial.
Inquiries from new homebuyers plunged in October to their lowest level since the 2008 financial crisis, excluding the period during the first Covid-19 shutdown, the last RICS Home Surveyors Report showed last week.
Meanwhile, the MSCI UK Quarterly Property Index, which tracks retail, office, industrial and residential property, fell 4.3% in the three months to Septembermarking the worst performance in the sector since 2009.
The market slowdown marks a respite from a two-year pandemic-induced home-buying frenzy, with real estate transactions in September 32% less annually from a 2021 peak.
But as the era of cheap money fades and the Bank of England doubles down on rate hikes to combat inflation to counter the chaotic mini-budgeteconomists say the recession could be sharper than previously thought.
“While a house price correction is widely expected as part of the ongoing recession, it appears to be happening faster than anticipated,” Kallum Pickering, a senior economist at Berenberg, wrote of the UK market on Thursday.
The investment bank now sees UK property prices falling by around 10% by the second quarter of 2023. But some lenders are less optimistic.
Nationwide, one of the UK’s largest mortgage providers, said earlier this month that house prices could collapse by as much as 30% in the worst case. Meanwhile, the most pessimistic estimates for 2023 from Lloyds and Barclays banks point to falls of almost 18% to more than 22%, respectively.
In fact, prices have already begun to fall in some places, according to property search site Rightmove, which said on Monday that sellers Cut prices by 1.1% in Octoberbringing the median price of a newly marketed home to £366,999 ($431,000).
The UK is not alone. Rising interest rates, rising inflation and the economic impact of Russia’s war in Ukraine have weighed heavily on the global real estate market.
A recent analysis by Oxford Economics showed that 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 falls 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 declines,” Adam Slater, chief economist at Oxford Economics, wrote last month.
Housing surveyors reported the biggest drop in inquiries from new buyers in October since the financial crisis, excluding the period during the Covid-19 lockdowns.
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But the UK’s unique economic landscape puts it at higher risk of mortgage defaults, according to Goldman Sachs. Factors at play include Britain’s worsening economic outlook, the sensitivity of default rates to recessions and the shorter duration of UK mortgages relative to Eurozone and US peers.
“Looking across countries, we see a relatively higher risk of a significant increase 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 historical barometer of crime rates, are adding to the pressure on the UK, which Goldman Sachs says is “already in recession”.
the The UK economy contracted by 0.2% in the third quarter of 2022, the latest GDP figures showed on Friday. Another 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 the UK now faces its longest recession since records began a century ago, and the recession is expected to last well into 2024.
Describing the outlook as “very challenging”, the central bank said unemployment was likely to double to 6.5% during the two-year slump, affecting some 500,000 jobs.
Such a rise in unemployment could “substantially” increase risks to the housing market by potentially creating a wave of forced sales and foreclosures, Oxford Economics warned in its report. In fact, according to Goldman Sachs analysis, for every one percentage point increase in the UK unemployment rate, mortgage delinquencies tend to rise by more than 20 basis points after one year.
“If unemployment were to rise sharply, the dangers to housing markets would be greatly amplified,” Slater said.
Still, much of the outlook will depend on the government’s next tax statement on Thursday, when Chancellor of Finance Jeremy Hunt is expected to unveil £60bn ($69bn) of tax increases and tax cuts. expenses that will weigh heavily on growth.
Some strategists have said that Hunt could delay much of the savings until after the next election, no later than January 2025, in an attempt to protect the economy during the height of the recession. However, Hunt has been candid in warning of “mind-boggling” decisions to come.
The Bank of England, for its part, has insisted that it will continue to raise rates, albeit to a potentially lower maximum.
However, even with a small easing expected for the housing market in the near term, economists say the risks of a shock spilling over into the entire financial market are minimal.
Greater regulation and adequate capitalization of the banking sector after the financial crisis have limited exposure to risky mortgages. Meanwhile, most housing debt is borne by households with reasonable savings reserves, Berenberg’s Pickering said.
“We see limited risk of the unfolding housing market correction turning into another financial crisis,” he added.