UK property market at risk of major recession as recession fears emerge

LONDON – The UK property market could be on the verge of a major downturn, with some market watchers warning of a price drop of up to 30% as data points to a massive drop in demand. since the Global Financial Crisis.

New homebuyer requests fell in October to their lowest level since the 2008 financial crisis, excluding the period during the first Covid-19 lockdown, the latest RICS housing survey report displayed last week.

Meanwhile, the MSCI UK Quarterly Real Estate Index, which tracks retail, office, industrial and residential property, down 4.3% in the three months to Septembermarks the industry’s worst performance since 2009.

The market slowdown marks a rebound from two years of pandemic-induced home buying frenzy, with real estate transactions in September 32% annual reduction from the 2021 high.

But when the era of cheap money ended, and the Bank of England doubled increase the rate of inflation to fight chaotic small budgetEconomists say the recession could be more serious than initially thought.

Kallum Pickering, senior economist at Berenberg, wrote of the UK market on Thursday: “Although many are predicting that the house price correction is part of the ongoing recession, it appears to be on the way. happened faster than expected.”

The investment bank now sees property prices in the UK falling by around 10% by the second quarter of 2023. But some lenders are less optimistic.

Nationwide, one of the UK’s largest mortgage providers, says in the first day of this month that house prices can drop by as much as 30% in the worst case scenario. Meanwhile, the top estimates for 2023 from banks Lloyds and Barclays point to declines of nearly 18% to more than 22%, respectively.

Indeed, prices have already begun to fall in some places, according to property search website Rightmove, which said on Monday that sellers 1.1% discount in Octoberputs the average market price of a new home on the market at £366,999 ($431,000).

Recent analysis by Oxford Economics shows property prices look set to fall nine out of 18 advanced economiesin which Australia, Canada, the Netherlands and New Zealand are among the markets with the highest risk of a decline of up to 15%-20%.

“This is the most worrisome housing market outlook since 2007-2008, with markets in the balance between moderate decline and much higher probability,” said Adam Slater, chief economist. at Oxford Economics, wrote last month.

But the UK’s unique economic landscape puts it at a higher risk of mortgage debt, according to Goldman Sachs. Ongoing factors include the UK’s worsening economic picture, the sensitivity of default rates to recession and the UK’s shorter mortgage duration relative to the eurozone and other countries. American counterpart.

Yulia Zhestkova, an economist at the bank, wrote in a report last week that: “Looking across countries, we see a relatively greater risk of a meaningful increase in over-indebtedness. mortgages in the UK.

Meanwhile, rising unemployment risks – a historical measure of delinquency rates – put further pressure on the UK, which Goldman Sachs says is “in recession”.

The UK economy shrinks by 0.2% for the third quarter of 2022, the latest GDP figures are released on Friday. Another consecutive quarter of decline in the three months to December would suggest the UK is in a technical recession.

The Bank of England earlier this month warned that the UK now faces longest recession since records began a century ago, with the recession expected to last through 2024.

Describing the outlook as “very challenging”, the central bank said the unemployment rate would likely double to 6.5% during the two-year slump, affecting around 500,000 jobs.

Such a spike in unemployment could “significantly increase” the risk to the housing market by potentially creating a wave of forced sales and foreclosures, Oxford Economics warned in its report. me. Indeed, according to analysis by Goldman Sachs, for every one percentage point increase in the UK unemployment rate, mortgage delinquency tends to increase by more than 20 basis points after a year.

“If the unemployment rate rises sharply, the danger to the housing market will increase dramatically,” Slater said.

Some strategists have said that Hunt can defer a lot of savings until after the next election – by January 2025 at the latest – in an effort to protect the economy during a peak recession. However, Hunt has been outspoken about the “tearful” decisions ahead.

For its part, the Bank of England insists that it will continue to raise interest rates, albeit with the potential for a lower peak.

However, even if the housing market is expected to see little easing in the near term, economists say the risk of a shock impacting broader financial markets is minimal. .

Tighter regulation and full capitalization of the banking sector after the financial crisis limited exposure to risky mortgages. Meanwhile, the majority of housing debt goes to households with a reasonable savings buffer, Berenberg’s Pickering said.

“We see limited risk that the ongoing housing market correction will turn into another financial crisis,” he added.