Is the UK heading for a housing market crash?

There has been a long-running housing crisis in the UK for decades but falling house prices and an ongoing mortgage crunch has sparked fears of a housing crash.

Interest rates have been rising for 13 consecutive months and the Bank of England’s latest rise saw a 0.5% hike to reach 5%.

That’s bad news for people with mortgages, while the squeeze on consumer spending is also seeing house prices start to fall.

The latest Land Registry house price figures showed the average UK house price was £286,000 in April, down £7,000 on the peak of September last year when prices were hitting record highs. Lenders have also reported falls – Halifax reported its first annual house price fall since 2012 in May 2023, with prices down 1% on the year before.

A lot of money is tied up in housing – research from property firm Savills in February put the total value of housing in the UK up to £8.68 trillion with £425 billion added in 2022 alone. That means a housing crash could have a potentially big impact on the wider economy.  

With prices on the downturn, there have been some suggestions from experts that a housing crash could be on the cards. One estate agent said a crash “seems inevitable” as the Bank of England raised interest rates.

But what is a housing crash? And how would it affect you? Here’s what you should know.

What is defined as a housing crash?

While the terminology may sound scary, a housing crash is simply a period of falling housing prices. It may also be known as a price readjustment. It typically follows a housing bubble much like the one the UK has been experiencing in recent years.

The demand for buying homes falls in a housing crash and that might be because house prices are too high for people to afford them or people cannot afford mortgage repayments or get a mortgage in the first place.

There is no set amount of money lost or percentage of value that defines when a housing market decline can be considered a crash. Independent housing consultant and campaigner Rose Grayston said it depends on affordability and that measure can also change in different parts of the country.

Grayston said: “I would say a crash is defined as when you’ve got homeowners at scale having to sell homes for less than they want to. That’s a distressed housing market and once that reaches a certain level of house price falls then I think we can describe it as a crash.”

Is a housing crash coming to the UK?

It’s looking increasingly likely that a crash might happen.

House prices are predicted to continue falling this year. The Office for Budget Responsibility forecasted a 10% fall in house prices back in March and since then interest rates have increased faster than previously predicted.

However, it should be noted that the fall in house prices comes after a period of huge growth which saw prices surge 9.5% in the year up to September 2022 when prices peaked, according to the Land Registry.

Rising interest rates have left people with mortgages struggling to pay and seen some lenders pull products from the market, making it harder and less appealing for prospective property buyers to get a mortgage.

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Chancellor Jeremy Hunt brokered a deal with banks to allow mortgage-holders to change their terms with lenders without affecting their credit rating and also secured a 12-month grace period before homes are repossessed.

Labour’s shadow chancellor Rachel Reeves said around two million households will miss out on mortgage support.

These conditions point to a potential housing crash.

Grayston said: “I think it’s now very clear that we have entered a period of higher interest rates than we’ve seen for the last few decades and that is going to have a big effect on housing demand and ultimately on house prices.

“I think we desperately need house prices to correct to reflect the economic conditions we now find ourselves in. It’s difficult. There will be pain because we’ve been living in a decadent, unrealistic world in which politicians, economists, people, we’ve all participated in this fantasy that prices can keep growing forever. It’s just not realistic.”

It remains to be seen just how far prices fall but the long-running shortages of affordable housing could see prices propped up.

Anna Clarke, the director of policy and public affairs at The Housing Forum, said: “How much they’ll go down is the question really. Economists are modelling falls of some 25% potentially based on interest rates. That won’t necessarily happen, it depends how people react to it.

“The fact that there is a shortage of housing does cushion the fall a bit because if they do fall there are plenty of people keen to buy.”

What does it mean if the housing market crashes in the UK?

A housing crash is not likely to affect everyone in the same way.

People who bought homes in the last couple of years with a high loan-to-value mortgage could fall into negative equity and are likely to face difficulties.

“It’s actually now a relatively well-off minority that are affected by the situation,” said Grayston. “That doesn’t mean that there aren’t people in that group of mortgage homeowners who really do need help, who are going to face financial risk and potentially the risk of homelessness. 

“I definitely advocate targeted support for those people. But it’s targeted support to save those people, not to save the prices of their homes.”

Clarke agreed: “If they took out a mortgage within the last couple of years at 90 or 95% of the value of their home and their homes fall 10 or 20% in price they could end up in negative equity.

“If you can keep paying your mortgage you might feel worried about it but you’ll be OK. If you can’t keep paying the mortgage for any reason and you need to move house then you’re in a really bad situation where you can’t afford to sell the house and afford to pay the lender back their loan.

“These people end up sort of trapped because they can’t sell or move. Those are the kind of people you’re worried about.”

Housing crashes can open opportunities for a small number of first-time buyers who have saved up cash to swoop in and buy their home at a lower price.

A housing crash also doesn’t impact people who are not looking to move home, although they may have to contend with rising interest rates if they have a mortgage.

However, a housing crash is unequivocally a bad thing for housebuilders. Clarke said it could have a knock-on effect on housing shortages in the future too.

“It has been really quite sudden,” said Clarke. “Nobody expected the war in Ukraine and it really has triggered it. A lot of people expected a gradual rise in interest rates. They didn’t expect such a big hike.

“So things are not working out which means you get developers appealing on viability grounds and saying they have to reduce the amount of affordable housing they’re building because it doesn’t stack up otherwise. The local authority has got to go with it because otherwise you’re not going to get any housing at all.

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“You’ve got housing associations also finding that if they build a lot of housing for market sale to provide cross-subsidy for social housing, that’s not selling for enough money so they’re not getting the subsidy that they need. Generally if house prices are falling, they’re not selling as many houses. 

“We’ll see firms going out of business, the sector downsizing and it can’t quickly recover. In the long term that will exacerbate the housing shortage. There are other reasons why there are not enough houses getting built, difficulties within the planning system being the obvious one, but the capacity of the sector to build houses is a factor.”

Further housing shortages are bad news. The National Housing Federation called for a long-term plan for housing in June, pointing out that 8.5 million people in England already can’t access the housing they need.

Grayston argued that more room for social landlords to purchase existing homes alongside community-led housing groups could be a way of securing more affordable homes in the event of a housing crash.

“We need to create more space for other actors in local housing markets and exactly what that looks like will be different from place to place,” Grayston added.

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