Britain’s house price crash ‘will be the worst in the world’
Alexa Phillips
Sun, 25 June 2023 at 1:00 pm SGT·4-min read
estate agent window
The UK is expected to have the longest house price downturn in the Western world as a shock rise in official interest rates hammers the mortgage market.
Property values across Britain will keep falling until the second half of 2025, Oxford Economics predicted.
Prices are forecast to plunge by 11pc compared with their peak in 2022, the consultancy said.
By contrast, in other Western countries – including America, France, Germany and Italy – prices are expected to start rising again this year and throughout 2024.
Liam Bailey, global head of research at Knight Frank estate agents, said a gloomier outlook for interest rates is leading to increasing “forecasts for decline”.
British house prices had been previously expected to recover early next year, but this was before interest rates were projected to hit 6pc by the end of 2023.
The Bank Rate jumped from 4.5pc to 5pc earlier this week following worse-than-expected inflation data over the past five weeks.
Inflation remained flat at 8.7pc in May, confounding predictions of a drop to 8.4pc. The headline figure was pushed up by rising core inflation, which strips out volatile measures like food and energy prices. It climbed from 6.8pc to 7.1pc.
Wage increases have also fuelled higher forecasts for interest rates. Pay increased by 7.2pc in the past year, according to the Office for National Statistics, which is feeding into price rises by giving consumers more money to spend.
Markets are now forecasting the Bank Rate peaks at a higher level and stays elevated for longer. As a result, the rate on both variable and fixed-term mortgages have shot up as a consequence.
Mr Bailey said: “This is going to be a longer term issue for the UK housing market.”
In the US, where house prices are only expected to drop by 5pc, according to Oxford Economics, inflation has dropped at a much faster rate and now sits at 4pc.
Interest rates will be able to come down sooner there than in the UK. Britain has the highest inflation rate among the G7 group of economies and inflation is set to remain above the Bank’s 2pc target for three years, according to forecasts from Goldman Sachs.
Max Mosley, an economist at the National Institute of Economic and Social Research, said prolonged inflation will also eat into the amount of money households will have to spend on properties, applying downward pressure on house prices for longer.
Higher mortgage rates are also taking longer to feed through to house prices because most British homeowners typically have two and five-year fixed mortgages and so are shielded from higher costs until their deals expire.
Over a million households have yet to experience the full impact of mortgage rate increases, according to the Centre for Economics and Business Research.
Benjamin Trevis, an economist at the CEBR, said: “As more fixed rate deals come to an end these households will see significantly higher mortgage payments, and this delayed impact of higher rates is expected to prolong the housing market downturn.”
Mr Bailey said the US and European markets like France and Germany also benefit from households that have very long fixed-rate mortgages, which insulates them from mortgage rate shocks and therefore protects house prices.
Alternative funding models allow lenders in these other countries to offer cheaper fixed-rate deals.
Most Americans have 30-year fixed-rate mortgages because of federal support through lenders Fannie Mae and Freddie Mac.
In France, where house prices are expected to drop just 3pc this year before rising again in 2024, fixed-rate deals tend to be available for the whole mortgage term.
In Germany, 10-year fixed rates are often the cheapest available, which makes them very popular compared with Britain. House prices there will only fall 5pc and will start to recover by the end of this year, according to Oxford Economics.
Short, shallow downturns are also more prevalent in countries where house prices did not rise as steeply in the last several years. British house prices boomed during the pandemic, when interest rates dropped to record lows of 0.1pc, allowing buyers to take out bigger mortgages. A holiday from stamp duty also fueled price rises.
Mr Bailey said this followed years of substantial house price growth underpinned by cheap money.
In countries like Spain, where Oxford Economics said prices will only drop 1pc before recovering in the third quarter of next year, property values have not had the same boom.
Stagnant wages in Britain are expected to take an additional toll on house prices.
Although pay has increased in the past year, Mr Mosley said this has not been the case for a long time.
He said: “We have seen poor income growth since 2008 and over the past decade.”
Richard Donnell, executive director at property website Zoopla, said low interest rates compensated for this by allowing people to stretch their purchasing power, but this is now changing.
He said: “Each generation is not as well off as the one before. There’s an income compression happening where kids aren’t getting much richer than their parents.
“If the income distribution is not continuing to widen, like it has done in previous generations, that will act as a drag on house price growth.”
