UK house prices have suffered the biggest fall since 2009. Since the start of 2020, house prices have risen steeply by some 25%. However, they began to fall last Autumn, and since then, according to figures from the Nationwide Building Society at the end of March, they have fallen by 4.6% from their peak just before Autumn 2022, and by 3.1% year-on-year to the end of March 2023.
House Prices Could Drop By 10% In the Next 2 Years
The fall in house prices we’ve seen to date is probably only the beginning. Lloyds, the largest lender in the UK, is forecasting a 7% drop across 2023 as a whole. In the meantime, the OBR (Office for Budget Responsibility), the agency that has the responsibility for advising the government on the health of the UK economy, forecast that over the next two years, house prices could drop by 10%.
Indeed, the drop appears to be accelerating. Throughout March, prices fell by 0.8% – significantly more than the drop in the previous month, which was only 0.5%.
What Is Contributing to the Fall in Houses?
There are a number of issues that affect house prices in the UK, and they have come together in an almost perfect storm to cause a significant downturn.
The reintroduction of stamp duty
While the COVID pandemic had a big effect during the lockdown, which started in March 2020, with house prices tumbling to their lowest since 2011, as lockdown was lifted, prices began to bounce back, and by September 2021, thanks in part to thanks to initiatives such as the stamp duty holiday, the property market was once again booming.
But the tapered reintroduction of stamp duty on purchases completed by the 30th of June 2021 was to pave the way for a slowdown and eventual reversal.
Brexit, Ukraine, Rampant Inflation, and House Price Affordability
The economic uncertainty that Brexit caused and that is yet to go away, and the Russian invasion of Ukraine which has resulted in energy shortages and huge price rises are largely to blame. However, they were further exacerbated by the mini-budget during Liz Truss’s short innings as Prime Minister, resulting in record inflation – the highest in 41 years.
This all led to big increases in mortgage interest rates, which has deterred people from buying houses, applying another impetus to falling house prices.
But some property investors who are willing to brave more expensive buy-to-let mortgages, which could be partly offset by falling house prices, are hoping to generate monthly income to cover the increased repayments. They are looking to the long term, when inflation falls back to more “normal” levels, and interest rates are lowered.
Potential Damage to the UK Economy
When the prices of houses in the UK fall, it creates a negative wealth effect. Because consumers experience a fall in the value of their prime asset, this perceived decline in wealth leads them to spend less and save more.
For anyone fearing they are approaching a financial crisis, there are several ways this can be averted by taking certain courses of action.
Some homeowners get trapped in what is referred to as negative equity, whereby the value of their property is less than it was when they bought it. The effect of negative equity discourages the owner of the property from borrowing, and instead urges them to save. This rise in what is referred to as the “saving ratio” results in a lowering of consumer spending, and as consumer spending is vital to the economy, this lowering slows the economy down.
As well as affecting homeowners, falling prices also have a negative impact on the banking and financial sectors. Banks will lose money if people default on their mortgage payments – something that is made more likely by rising mortgage interest rates. When banks lose money, it lowers lending, which in turn lowers investment.
Is a House Pricing Correction Underway?
Interest rates are at their highest since 2008, with homeowners facing an average £3,000 increase to their mortgage repayments. Andrew Goodwin, the Director of Applied Economics, Europe & Middle East at Oxford Economics, said that house prices are 30% overvalued according to affordability metrics, after 10 years of price growth. Some economists maintain that the drop in house prices is a sign of a much-needed correction to overvalued house prices.
