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Given where the UK economy currently finds itself, it’s easy to see how the prospect of a house price crash might have quietly crept into more housing market conversations of late.
Having recorded the largest month-on-month decrease in UK house prices since the 2008 financial crisis in November, the latest figures from Halifax show values fell by a further 1.5% in December – the fourth consecutive monthly drop. Nationwide also suggests prices have been falling for the past four months.
Perhaps a little ominously, Karen Noye, mortgage expert at advice network and investment platform Quilter, says: “There is a correction already taking place in the property market and this is likely to bleed through to 2023 too.”
Will there be a house price crash?
At the time of writing, few, if any, are suggesting a full-blown collapse in property values is imminent. The latest Office for Budget Responsibility (OBR) forecasts published in November predict a 1.2% drop in property prices in 2023, followed by a more substantial fall of 5.7% in 2024.
For context, the last time property prices in the UK crashed, between 2008 and 2009 during the financial crisis, values slumped by more than 15%.
Stuart Cheetham, CEO of lending platform MPowered Mortgages, is expecting house prices to fall by somewhere between 5% and 10% in 2023, due to a combination of higher interest rates leading to higher mortgage repayments, lenders offering reduced loan amounts, and prospective buyers stepping back to see if prices will fall. Crucially, however, he adds: “It is highly unlikely that we will see a crash in house prices.”
What could happen if house prices fall?
Even though a crash on the scale of what was seen 14 years ago might not be on the cards, any kind of correction in property values can have knock-on repercussions.
This is likely to be particularly true for those who are contemplating a house move, with a drop in prices meaning they could have a smaller amount to spend on their next home than they had anticipated.
“Homeowners will still need to readjust to a new price environment and accept a lower valuation for their property,” explains Cheetham, although he also notes this impact will be softened if they go on to buy another property which has also fallen in price.
Given the wider economic challenges, Noye sees the potential for a number of scenarios to play out, depending on people’s financial circumstances. One is where a further dip in property prices or a crash may make those who have been holding out on their house purchase, but are financially stable, more likely to make the leap next year.
On the other hand, for those where their finances are more uncertain, the suggestion is some may have to put their home-buying plans on hold indefinitely, while others may look to sell out of financial necessity – although both have the potential to deflate prices even further.
“The cost of living crisis is causing a lot of strain on people’s finances and this is only set to get worse,” explains Noye. “Buying a house is an expensive process so some people may choose to wait even longer until their finances have recovered, causing there to be a longer period of declining house prices.
“At the same time there may be some people struggling to pay their bills and they will choose to put their property on the market to try to downsize. More stock, and a lack of demand, puts downward pressure on prices.”
What about first-time buyers?
For those hoping to take their first step on the property ladder, the immediate assumption might be that falling house prices can only help their cause – a lower valuation should in turn help make buying a home more affordable.
However, right now, the main problem facing many first-time buyers is more likely to be finding a mortgage that they can afford. Mortgage rates may have dropped back slightly from the 14-year highs recorded in the more immediate fall-out from September’s mini-budget, but they remain notably higher than before.
“A reduction in house prices would work in favour of first-time buyers but this must be balanced by the fact they are now suffering with much higher mortgage payments,” says Noye. “This may put them in much the same position financially as the high mortgage payments might mean they can borrow less.”
Cheetham agrees that getting on the property ladder will continue to be a struggle for first-time buyers, but also suggests some opportunities could arise in urban areas, where higher interest rates could mean an increase in landlords selling.
“Buy-to-let properties are typically similar in nature (two-bedroom flats), and in similar urban locations – both of which are attractive to first-time buyers,” he explains. “If we see a move by landlords to sell up, this may cause oversupply in specific localised areas, which could depress house prices further. This could be a huge opportunity for first-time buyers.”
The threat of negative equity
Falling house prices have the potential to affect existing homeowners too. In particular, problems can arise if the value of a property drops below the value of the mortgage outstanding on it – leaving the borrower in negative equity.
As the amount raised from selling the property won’t be enough to cover the mortgage, this can make it difficult to move, unless other funds can be found to make up the shortfall. Even when moving isn’t on the cards, being in negative equity can make it difficult to remortgage to a new mortgage deal when a current one ends.
As most lenders won’t offer mortgages for more than a property is worth, affected borrowers will usually have little choice but to move on to their current lender’s standard variable rate, which is normally higher than the rates on other mortgages. If you’re not able to escape an unaffordable interest rate because you can’t switch, you’re effectively a mortgage prisoner.
The big fear is that people struggle to make these higher payments, and could potentially lose their house to repossession as a result.
However, it’s also important to remember that negative equity needn’t necessarily be too much to worry about if there is no need to sell and mortgage payments can be met.
Who could benefit from a fall in property prices?
Inevitably, there will also be some who might find a drop in house prices works to their advantage.
Noting a situation where sellers are keen to move because of the fear that prices could crash, or because they don’t have time to wait for a better offer, Cheetham says opportunities will arise for certain buyers to try to capitalise on.
“Buyers who have the flexibility and can move fast are in prime position to benefit,” he says. “These include buyers with no chain, including renters, first-timer buyers, and cash buyers.”
While acknowledging buyers need to be aware of the wider picture and the challenges in pin-pointing when to make a move, Noye points out that if it’s possible to buy when prices have reached the bottom of the decline, it will ultimately provide the chance to build up more equity when prices increase again.
“This also avoids the problems associated with negative equity, which is a very real problem for first-time buyers. They typically have to take out high loan-to-value mortgages, so a small change in house prices means they have less equity to play with,” she adds.
“But naturally, timing the market is a difficult thing to do and it is always better to make big decisions like buying a house on your own personal circumstances rather than the wider economic picture.”
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