Will there be a housing market crash?

With the long-anticipated Bank of England base rate change from 2.25% to 3% today, you only need to glance at the news to feel worried about the future. “The biggest hike in decades!”, “The longest recession in history is comings for us”, “housing market crash looms” etc etc.

Goodness me! Can we all take a breath and put on our ‘perspective’ glasses for a moment please? I know it’s the newspapers’ job to sell their papers / get clicks on their headlines, but for the last two years especially, we are being bombarded with catastrophe on an almost daily basis. It’s exhausting, and the constant alarmism is not good for people’s mental health.

So let’s take a look at some of the messages out there at the moment and try to work out what they really mean in context.

Headline #1: Today is the biggest interest hike in decades

Today, we saw a 0.75% increase in the base rate to 3%. This is indeed the largest single rise that we have seen in one go, and shows that the Bank of England is serious about getting a grip on inflation, which is still hovering around the 10% mark.

However, in the context of the last 30 or 40 years, the interest rate is still pretty low. We have all been accustomed to borrowing money at very low rates, which is why this rate increase feels dramatic, but before the ‘credit crunch’ in the late 2000’s, interest rates were always around 5%. So what we are seeing here is a return to historical norms with regard to interest rates, after a period of cheap money which probably shouldn’t have lasted this long anyway.

Headline #2: Mortgage rates will rise

This remains to be seen, since this rise has been anticipated since before the failed mini-budget (remember that?) and so has been priced into a lot of mortgage deals already. Plenty of forecasters are expecting a stabilization of mortgage rates to around 5% in 2023, some are even expecting rates to fall, but this depends on what the Bank of England decides to do next.

The next interest rate review is due on Thursday 15th December, so if your mortgage is due for renewal in the next 6 months, or if you are looking to move home soon, speak to your mortgage advisor now to see what your best options are. I always think it’s better to be overprepared for any situation, and use the services of a professional to guide your decision.

Also, while the focus has mainly been on mortgage rates, it’s important to note that the labour market remains buoyant and on average, wages increased by 5.4% in the year leading up to August.

Plus the proposed cuts to National Insurance and the government’s support for energy bills will also help to offset some of the financial pressures homeowners are currently experiencing.

Headline #3: The housing market will crash

There are plenty of people speculating on what will happen to house prices over the next year or so, but I prefer to stick to the facts as I see them today.

The first fact is that the housing market is fuelled mainly by supply and demand, e.g. how many people choose to sell their homes (or how many new homes are being built), vs how many people are actively looking to buy.

One potential scenario is that more people decide to stay put or delay an upcoming move, which would cause a supply problem which may then keep house prices high.

However, if a lot of people decide in the New Year that now is the time to move, this will create more supply than demand, and cause some homeowners who really need to move to lower the price of their home to remain competitive.

No one know which of these will happen, however, in my area of Horsham, West Sussex, the average home gained £78 per day in value between February 2020 and April 2022, more than the national average of £48 per day (which is still enormous). Anyone can see that this kind of growth is unsustainable in the long term.

So will there be a crash? Well, the last housing ‘crash’ in 2008 was caused by frivolous banks who lent up to 100% of a home’s value, with the assumption that prices would continue to rise. When prices fell, this left people with a home that was worth less than the loan they had against it (also known as ‘negative equity’), and banks started to restrict their lending further, causing a downward spiral.

Since then, banks have had to be stricter with their lending criteria, with most loans only being offered up to 90% of the property’s value. This 10% equity buffer is designed to protect homeowners against this happening again, and allows banks to feel more confident about lending too.

The current forecasts predict a 5% adjustment in house prices across 2023 – nothing like the 25% drop seen in 2008, however no-one has a crystal ball, and any price changes will very across the country and will always be driven by supply, demand, and affordability.

Hayley Georgiou is an independent real estate agent based in Horsham, West Sussex. She has over 15 years’ experience in sales & marketing, and offers property sales, lettings, and a home buying service. Her agency is built on the values of honesty, transparency and excellent communication every step of the way.