Housing market heading for a downturn

The Office of Budget Responsibility (OBR) has forecast that UK house prices will decrease by 9% between the end of 2022 and September 2024. The OBR also predicted that house prices will begin to bounce back with 2.1% growth in 2025. So, how did we get here and why is the UK property market heading for a record slump?

Record house price boom

The global housing market was experiencing record price increases at the end of 2021. In fact, house price growth was at its fastest rate across the 38 OCED countries since records began around 50 years ago.

There are several (related) reasons why house prices were growing so quickly. Mortgage interest rates remained low which meant borrowing was cheaper and borrowing power was high. Pandemic lockdowns also revitalised the “race for space” and caused some professionals to bolster their savings, giving them a bigger deposit than they expected.

In summary, there had never been a better time for some people to buy property. For these reasons and possibly others, the competition in the market was fierce, which drove prices higher at a rate never seen before.

Bursting the bubble

Fast-forward around one year and the housing market looks a lot different. Inflation rates are soaring due to the fallout from the pandemic and economic instability caused by Russia’s invasion of Ukraine and in part China’s Zero-COVID policy. These events have contributed to a growing cost of living crisis and many households are struggling to cover their bills and essentials.

To get inflation under control, central banks have increased base rates, which causes mortgage interest rates to increase. This move increases the cost of repaying a mortgage while simultaneously reducing potential property buyers’ borrowing power. If people cannot borrow as much from banks and the cost of repaying mortgages is more expensive, the competition in the housing market cools down and so do prices.

Those that bought a property at an overinflated price during the boom may now find themselves struggling to cover their growing mortgage repayments and unable to switch to a better deal due to shrinking equity. If you’re in this situation, it’s best to speak with a professional mortgage broker for support.

The UK’s pending downturn

Not all countries will experience the same steep downturn, but the UK is projected to see a downturn of around 9%. The US, France and Germany are all expecting a similar level of downturn, as reported by data published in the Financial Times. The decrease in house prices is comparable to house price decreases last seen in 2009 after the financial crisis.

The demand for property has already seen a sharp decrease. Rightmove published data indicating that overall buyer demand in October 2022 decreased by 20% and first-home-buyer demand decreased by 26%, in comparison to October 2021.

However, it might still be a good time to enter the property market for some buyers. Those that managed to increase their savings during the pandemic but didn’t make any moves may be able to capitalise on less competition and falling prices, which could somewhat offset any increases to the cost of borrowing.

January 2023