Will there be a housing crash in the UK?

Will there be a housing crash in the UK

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As concerns grow amongst homeowners, many are now asking if there will be a housing crash in the UK in the next couple of years. Historically, the UK government has stepped in on numerous occasions to support the housing market, but finances are stretched. The current financial crisis can be traced back to the 2008 US subprime mortgage collapse. As we know, this led to a worldwide depression. If we fast forward to June 2016 and the Brexit referendum, this created massive confusion about prospects for the UK. Then we had the Covid pandemic, the cost of living crisis and, more recently, the currency collapse. So it is safe to say that the UK economy has not been short of challenges of late!

Refreshingly, amid all this financial doom and gloom, the UK housing market has remained relatively buoyant. Talk of an immediate 20% reduction in house prices after the Brexit referendum vote proved wide of the mark. While there was an initial reaction in light of the Covid pandemic, many regional housing markets have recovered lost ground. Indeed, a number have moved towards record highs. So, what do we need to consider when asking if there will be a housing crash in the UK?

Will there be a housing crash in the UK: Economy

As Liz Truss has stated many times, it is crucial that the UK economy is supported in these challenging times. However, when it comes to the economy, there are many issues to take into consideration, such as:-

Economic growth

There are so many fast-moving economic variables that it is difficult to say how the economy will perform. We have the S&P forecasting UK GDP growth of 3.3% in 2022 and a contraction of 0.4% in 2023. Compare this against the OECD, forecasting growth of 3.4% to 2022 and a flat economy in 2023. We then have the British Chambers of Commerce (BCC) forecasting growth of 3.3% in 2022, 0.2% in 2023 and 1% in 2024. Who do you believe?

Ironically, the Office for National Statistics was recently forced into an embarrassing U-turn, after suggesting that the UK economy had fallen into recession in the second quarter of 2022. However, figures showing a reduction in GDP in the second quarter were revised to show moderate growth. So, the UK is not yet in recession, but it may not be too far away.


As the UK employment market continues to recover from the pandemic, there are growing concerns about the short-term outlook in the UK. The initial bounce after the pandemic is undoubtedly coming to a halt, although the figures will lag somewhat. There was a recent surprise drop in unemployment from 3.8% down to 3.6%, having peaked at more than 5% during the pandemic. However, the short-term outlook is not as encouraging.

The BCC expects UK unemployment to return to 3.8% by the end of 2022, rising to 4.1% in 2023/2024. Future figures will depend heavily on the success/failure of the UK government’s growth initiative. At this moment, it looks more likely we will see an upward revision of the unemployment figure. This has the potential to push many families into mortgage arrears and could have a significant impact on UK property prices.


Even though the most recent inflation figures showed a fall from 10.1% to 9.9%, this is only a short-term respite. The latest figure was surprising, with economists expecting a consensus 10.2% inflation figure, but it appears that a significant fall in fuel prices was behind the reduction. The Bank of England forecasts that UK inflation will peak at 13.3% by the end of 2022. While other economists are a little more sceptical, with some forecasting a figure of 14% and higher, there is some confusion about how the UK government’s energy cap will impact inflation in the short term.

The BCC currently forecasts UK inflation to fall to 5% by the end of 2023. Then back to the Bank of England’s target rate of 2% by the end of 2024. At the moment, these figures seem optimistic, but there are a lot of moving variables, such as the price of energy and government assistance. If the energy market can be brought back under control, a slowing of the UK economy, an increase in unemployment and rising interest rates will naturally slow consumer demand. In time, this will impact the UK housing market as household budgets fall by the highest real terms rate for many years. As you can see, if there will be a housing crash in the UK, then many factors will have contributed.

Will there be a housing crash in the UK: Monetary policy

While Liz Truss said from day one that she was prepared to “take the unpopular decisions”, many are worried about her short to medium-term monetary policy. The heavily publicised collapse in the value of sterling against the dollar caused a split within the Tory party. Even after a partial recovery, serious concerns exist that the UK could move to parity against the dollar. There are many issues to consider when it comes to monetary policy, including:-

Interest rates

On 22 September 2022, the Bank of England increased the UK base rate by 0.5%, which now stand at 2.25%. Since then, there has been massive turmoil in the currency markets. This prompted the Bank of England to confirm it would do “whatever is required” to protect sterling. As a result, after announcing a multibillion-pound intervention package, which has already been partially used, we saw a significant reduction in long-dated gilt yields.

These figures are used to measure the cost of borrowing for businesses, individuals and the UK government. A recent rise to 5.12% was partially reversed after the Bank of England’s intervention, falling to 3.92%. While part of this recovery has been lost, the worst seems to have been avoided in the short term.

Accompanying the confirmation that there is a considerable intervention package available, as and when required, there has been a new focus on UK interest rates. It now looks like UK base rates could peak at more than 6% in 2023. This is double the consensus forecast of just a few weeks ago. There is no doubt that Liz Truss spooked markets with her controversial growth package. However, it is crucial to look at the broader picture. The US Federal Reserve is in the midst of an extremely aggressive interest rate policy. Determined to tackle inflation, whatever the price, rates have constantly been rising to the current level of 3.25%. Conscious that increasing UK base rates too far too quickly would increase the chances of a recession, the Bank of England has been left lagging.

Will there be a housing crash in the UK: Mortgage rates

Turmoil in the currency markets and concerns that UK base rates could rise much quicker than expected had a significant impact on the mortgage market. Many low interest rate mortgage deals were removed, and standard variable rates increased, leaving many would-be property buyers in limbo. The two-year/5-year fixed-rate moved above 6%, increasing the cost of mortgage finance to the highest level since 2008. With base rates set to hit 6% next year, a reduction in mortgage rates is unlikely any time soon.

Ironically, the Bank of England recently removed the mortgage stress test. This was used as part of the consumer affordability calculation. This involved calculating affordability if mortgage rates increased by three percentage points above the standard variable rate at the time. With rates around 3% at the time, many home owners are now sitting on the edge of a financial precipice. There will also be a natural impact on demand for property as finance costs increase, wage increases remain below inflation, and relative household incomes fall at the fastest rate for decades. These factors increase the likelihood that there will be a housing crash in the UK.


Looking at the broader picture, the idea of abolishing the 45p tax rate would never sit easily with the electorate. This is because the mass media focused on a “tax gift” to the rich. In reality, there were also cuts for basic rate taxpayers. Furthermore, the UK government was hanging its hat on a trickle-down approach to economics. This revolves around the idea that putting more money in the pockets of the rich will encourage economic growth. This policy is undoubtedly controversial, and the massive backlash saw Liz Truss remove this element from her plans.

At a time when the UK government is being forced to provide billions of pounds to support households during the cost of living crisis, funding tax cuts with further debt, as interest rates rise, seems risky. When you also factor in the vast increase in long-dated gilt rates, dictating the cost of borrowing for the UK government, the UK economy needs growth today, not tomorrow. This has led to some credit rating agencies reducing their outlook on the UK. Although not widely covered in the press, a similar economic crisis is emerging within the European Union.

Exchange rates

Serious short term concerns about the state of the UK balance sheet prompted a collapse in the sterling/dollar exchange rate. Over the last few months the exchange rate has fallen by around 20%, although there was a partial recovery when the UK government announced a U-turn on the abolition of the 45p tax band. As we have seen with various developments on the London stock exchange, prime UK corporate assets are now looking extremely attractive to overseas buyers. The current weakness in sterling is also likely to increase overseas demand for UK property. Will we see renewed interest in the London property market, reducing risk of there being a housing crash in the UK?

Many critics are swift to point at Liz Truss and her handling of the government’s growth policy. However, it is vital to take a step back at times. As we touched on above, the US Federal Reserve is currently in the midst of a very aggressive strategy to control inflation. This has seen a vast increase in US base rates, with the Bank of England unwilling to follow suit. So, with US base rates higher than UK rates, this makes the dollar more attractive to investors. Hence this is part of the reason for the weakness in sterling. Of course, that is not the overriding reason for the current weakness, but it is undoubtedly a partial consequence. On the flip side, a weak sterling exchange rate makes imports much more expensive. This not only hits economic activity but also feeds into inflation. So when will this all end?

Will there be a housing crash in the UK: Housing market

The UK housing market has remained relatively strong despite recent financial challenges. Then we have the ongoing concerns about the UK government’s growth policy. In the past, when headwinds have been visible from some distance, the government has been able to offer a degree of financial support to the housing market. As UK national debt continues to rise and the cost of borrowing increases dramatically, there may be limited scope for the traditional level of support.

Historically, the UK housing market has remained relatively strong even during difficult times. While important not to panic, there are several issues to consider:-


Ironically, in a week when the government announced a new code of practice for builders and an independent ombudsman for the new build sector, demand is starting to weaken. The triple whammy of a forecast economic downturn, strong inflation, and an increase in mortgage costs don’t bode well for the short term. Housing giant Redrow recently confirmed that demand for newbuilds is beginning to “normalise” after a period of phenomenal growth.

Using the stock market as a barometer, housebuilders have seen their share prices fall dramatically on growing concerns. Opinion is undoubtedly split concerning the extent of the slowdown amid suggestions that the market is pricing in a housing crash in the UK. Amidst the doom and gloom, it is essential to recognise that the UK has operated an imbalance in the supply/demand ratio of newbuilds for many years. Supply has always been less than demand which has helped to support prices in recent times. So, even in these challenging times, the lack of genuine supply will offer a degree of support.

It is also rumoured that the UK government is about to extend the current help-to-buy mortgage scheme. This was originally expected to end on 31 October. This scheme offers first-time buyers access to a maximum 20% deposit funded by the government, requiring just a 5% deposit from the buyer with a minimum of 75% in mortgage funding. However, the government may be forced to reduce the level of support historically available in light of escalating national debt.

Demand for property

As mentioned earlier, the growing cost of mortgage finance will significantly impact demand in the short to medium term. This, coupled with the spectre of inflation hitting 14% by the end of 2023 and the most significant cut in real incomes in living history, will see many delaying that dream property purchase. In addition, we also have the issue of analysts predicting a fall in house prices of between 10% and 15% in 2023. Consequently, even those who could afford to acquire property at the moment are likely to withdraw from the market as they should be able to negotiate better deals next year.

There is some encouragement when looking back at the historical performance of the UK property market. Despite substantial financial challenges, a significant housing crash in the UK has been averted. Even when there has been a knee-jerk reaction, as seen in the initial months of the pandemic, the bounce-back has been dramatic and robust. At the moment, it is difficult to see any good news on the horizon. However, there is a strong core of support for the UK property market. The long-term supply/demand imbalance may also prove crucial in these difficult times.

Will there be a housing crash in the UK: Mortgage defaults/negative equity

Unfortunately, many homeowners who took advantage of historic low interest rates in recent times will likely feel growing financial pressure. Even though many were able to arrange low fixed mortgage rates, these will need to be refinanced at some point. This will push mortgage costs, as a percentage of household income, to record levels. This, in turn, will put pressure on consumer spending, company profitability, and employment rates and ultimately lead to an increase in mortgage arrears. As a result, some areas of the UK may even experience short-term instances of negative equity. However, mortgage lenders are likely to be a little more understanding than they were 30 or 40 years ago.

An increase in mortgage providers’ risk/reward ratio, set against the potential fall in UK property prices in the short term, will introduce natural upward pressure on mortgage rates. Then we have the possible increase in base rates up to 6% by the end of 2023. This will place more pressure on mortgage finance costs. It would appear that the historic low rates of recent years will soon be a distant memory. In a breathtaking about turn, mortgage rates are set to remain at levels not seen for over a decade.


Unfortunately, no matter how positive you may be on the UK property market, there isn’t much good news on the horizon. Interest rates are set to rise further, inflation is set to peak at 14%, and we are facing the sharpest reduction in real household incomes in living memory. Many homebuyers who took advantage of historically low mortgage rates may even flirt with negative equity. Ironically, this comes just after the Bank of England removed the mortgage affordability test. This stress-tested mortgage applications on the standard variable rate plus three percentage points.

There are challenging times ahead. However, the UK property market has been through worse, remained strong and bounced back relatively quickly. While the cumulative impact of the 2008 US mortgage crisis, Brexit, the pandemic, and now the cost of living and currency crisis is enormous, there is still a housing shortage in the UK. This leads us to conclude that a housing crash in the UK is unlikely. As they say, it is always darkest just before the dawn!

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