Signs of a Housing Market Bubble

12 Oct 2022

Are the UK house prices set to fall? It’s not that simple. 

Most property markets in the UK have seen double digit percentage growth over the past 24 months, leading many to ask if the market’s overheated. Coupled with rising interest rates and inflation, what could this mean for property investors? Read on to find out. 

What is a recession and how does it correlate to the housing market?


A recession is when there are two consecutive quarters of economic retraction in an economy, measured by Gross Domestic Product (GDP) - which is the measure for the total output of an economy. Recessions are not uncommon but can vary widely in how substantial they can be. The UK last experienced a recession in early 2020 due to the Covid-19 pandemic and despite only lasting two quarters, GDP fell by more than 21%.

A recession can be caused by numerous factors. Before the covid pandemic, the 2008 global financial crash (GFC) caused by the subprime mortgage crisis in the USA led to five quarters of economic decline. Before that was the 1990/91 recession, which was triggered in-part by the increasing of interest rates to combat high inflation. Since the great depression of 1930, a recession has not lasted more than 5 quarters in the UK.

Typical market crashes, where house prices fall in excess of 10%, have generally been in tandem with deeper economic recessions, having only occurred twice in the last 70 years. These crashes accompanied both the early 90s recession as well as the 2008 global financial crash.


Housing Market Crash Trends and Causes


The 1989 Recession and the 2008 Global Financial Crisis have had a very strong influence on the housing market crash trends.

The 1989 Recession

In late 1989, the Bank of England base rate hit its highest level in the last 43 years at a staggering 14.88%. This was one of the main contributing factors for economic downturn. As consumer spending and business confidence fell so did property transactions and hence prices, dropping by some 20% in average between 1989 and 1993. During that period, London was worst hit with the
capital’s prices falling by 32%.

The 2008 Global Financial Crisis (GFC)

The GFC found its epicentre in the U.S mortgage market, as lenders became more and more relaxed allowing high risk mortgages in order to sell profitable mortgage-backed securities to investors. A domino effect amongst global financial institutions meant other countries quickly saw their markets stall.

In the 2006/2007 financial year, the UK registered 141,893 residential transactions per month. This fell sharply in the following two financial years with 2007/2008 seeing a fall of 12% to 124,401 per month before falling by a further 47% to just 66,338 per month in 2008/2009. In the UK, prices fell by 15% on average between January 2008 and May 2009, however large swatches of the
UK had recovered to their pre-crash pricing within just 3 years. Inflation across the year was 3.6% over a 50% increase from the previous year at 2.3%.

An Analysis of the Current Environment for Property Buyers


The current market environment is very different to that of past years where parts of the economy are struggling with growth. The UK is still enjoying low unemployment levels.

The stamp duty holiday offered during the pandemic, whereby a tax break on the first £500,000 of a property was given led to a surge in transactions across the UK as buyers scrambled to take advantage. Between April 2010 and financial year ending April 2020, the average number of property transactions was 92,687 per month. During the stamp duty holiday and the two financial years to April 2022, average monthly transactions leapt to 106,456, 14.9% above the previous 10 years. Due to this surge, it was to be expected that following years would see a quieter market, however, provisional transaction estimates from Zoopla predict that 2022 will still offer a strong number of transactions at 100,000 per month, still well above the 10-year average to April 2020.

Raising interest rates are at the forefront of most buyers’ minds, raising further questions around affordability. Following the GFC in 2008, the UK has enjoyed an era of historically low interest rates which has both positives and negatives. Between 1971 and 2022 the average interest rate (base rate) in the UK has been 7.15% so in context the current rate of 1.75% is still attractive and despite seeing two recent rises over the summer of 2022, the UK’s base rate still sits lower than that of Australia, Canada and the U.S at 1.85%, 2.5% and 2.5% respectively.


Crisis Migitating Factors


1. Having Low Unemployment Reduces The Risk of Distress

The UK unemployment rate released for May to July 2022 is 3.6% the lowest rate since the same period in 1974. With typically anything under 4% considered full employment in economic terms, this is very positive news for the housing market.

2. Highly Leveraged Mortgages Are Rarer Than They Used To Be

In 2006, approximately 40% of UK homes were owned with a mortgage. That proportion has now fallen to 32%, primarily because of an increase in private renting as well as the ageing UK population, meaning the proportion of homes owned outright has also risen and is now the largest tenure in the UK at 33%.

Furthermore, the number of highly leveraged households in the UK is now very low following the mortgage review that was undertaken post-GFC. The cost of debt remains relatively low as well. And while that may be rising as the Bank of England raises interest rates, they still remain low by historical standards as the graph below shows. It is therefore expected that there is still capacity for mortgaged households (compared with pre-GFC) to absorb the cost increase. For every £100,000 borrowed on a standard 25-year mortgage term, a 25 base points rise in the base interest rate equates to an estimated additional £12 per month costs.

3. Low Housing Supply Is Not Keeping Pace With Demand

Since the late 1970s the UK has failed to build the number of homes needed to meet the 300,000 per annum national target, typically falling short by about 100,000 homes per year. Between 2015 and 2019 the UK build an average of just 190,150 new homes per annum, falling short of the target by 549,250 homes across the 5 years.

In conclusion, if taken at face value the UK market appears to be up against significant challenges. However, when digging into the fundamentals that caused previous crashes, it is evident there are intrinsic differences between then and the current market environment. To learn more about how IP Global can help you navigate economic downtowns intelligently, submit your details here and a Wealth Manager in your region will be able to provide more insight. 

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