World Construction Today – The U.K. real estate market may be on the verge of a serious decline, according to some market observers, who predict a 30% drop in prices as a result of the largest reduction in demand since the Global Financial Crisis.
With the exception of the time of the initial COVID-19 lockdown, new homebuyer enquiries fell to their lowest level in October since the 2008 financial crisis, the most recent RICS housing surveyors report revealed last week.
The retail, commercial, industrial, and residential property sectors all experienced declines in the three months to September, according to the MSCI UK Quarterly Property Index, marking the sector’s worst performance since 2009. Property transactions in September were down 32% annually from a 2021 peak, signalling a halt to a two-year home-purchasing spree brought on by the pandemic.
However, as the period of low interest rates ends and the Bank of England intensifies its rate hikes to fight the shoddy mini-budget, economists fear the recession may be more severe than initially anticipated. According to senior economist at Berenberg, Kallum Pickering, the U.K. market is changing more quickly than anticipated, even though a housing price adjustment is widely expected as a result of the protracted recession.
The investment bank now anticipates a 10% decline in U.K. home prices by the second quarter of 2023. However, some creditors are less optimistic. One of the biggest mortgage lenders in the UK, Nationwide, predicted earlier this month that, in the worst event, home prices may fall by as much as 30%. The most pessimistic projections for 2023 from the banks Lloyds and Barclays predict declines of nearly 18% and over 22%, respectively.
According to the property search website Rightmove, prices have already started to decline in some areas. In October, sellers reduced their asking prices by 1.1%, lowering the average price of a newly listed home to £366,999 ($431,000).
Fears About Rising Mortgage Default Rates
The UK is not by itself. The worldwide housing market has been severely impacted by rising interest rates, surging inflation, and the economic shock caused by Russia’s conflict in Ukraine.
According to a recent Oxford Economics report, nine out of the 18 advanced nations are expected to see a downturn in housing prices, with Australia, Canada, the Netherlands, and New Zealand among the markets most vulnerable to drops of 15% to 20%. According to Adam Slater, head economist at Oxford Economics, this is the most concerning housing market picture since 2007-2008, with markets perched between the potential of small drops and considerably steeper ones.
However, Goldman Sachs asserts that the U.K. has a higher risk of mortgage default due to its distinct economic environment. The economy of Britain is getting worse, default rates are sensitive to economic downturns, and UK mortgages have shorter terms than their counterparts in the euro zone and the United States.
In research published recently, bank economist Yulia Zhestkova stated that, looking across countries, they see a considerably bigger chance of a major rise in mortgage default rates in the U.K. Meanwhile, the U.K., which Goldman Sachs claimed is already in recession, is under pressure from rising unemployment concerns, a typical indicator of delinquency rates.
Risks Of Unemployment Weigh Heavily
The most recent GDP data released on November 11 showed that the U.K. economy shrank by 0.2% in the third quarter of 2022. The United Kingdom would be in a technical recession if the three months leading up to December saw another straight quarter of contraction. The UK is currently experiencing the longest recession since records have been kept, according to the Bank of England, and the downturn is predicted to stretch well beyond 2024.
The central bank called the outlook extremely tough and predicted that during the two-year downturn, unemployment will probably treble to 6.5%, hurting almost 500,000 jobs.
According to Oxford Economics’ analysis, such a rise in unemployment might considerably increase the risks for the property market by posing the possibility of a wave of foreclosures and forced sales. In fact, according to Goldman Sachs’ data, mortgage delinquency tends to climb by more than 20 basis points after a year for every one percentage point rise in the U.K. unemployment rate. According to Slater, the risks to property markets would be significantly increased” if unemployment rose rapidly.