Home ownership is more than a big deal in the UK and our fascination with the UK property market isn’t showing any signs of abating.

Buying a property is often the biggest investment that most people ever make, and the health of the UK property market and direction of future returns is a major factor in people’s lives. A huge 63% of households in England (14.6 million) were homeowners in 2020.

The housing market has a significant bearing on the UK economy as it’s closely linked to consumer spending – when house prices go up, homeowners feel more confident, driving an increase in spending and borrowing; the ‘wealth effect’ is created by rising property prices and feeds positively into the UK economy.

Property ownership in the UK property market can also be a route to supplementing retirement income, perhaps alongside paying into pension schemes or other long-term investments, either by generating income in a buy to let scenario or by focussing on a property as a key and potentially sole investment.

In this context, homeowners believe that property prices will continue to rise and anticipate being able to comfortably downsize later in life with sufficient funds to supplement their retirement plans.

Residential property is much less correlated to the traditional core asset classes of equities and bonds but has provided solid total returns over the last few years with favourable levels of income and positive capital appreciation.

Bluntly put, if you’ve invested in the UK property market over the last few years, you’re quids in! But what about the future? Can we expect house prices to continue their dramatic upward trajectory, or are we potentially looking at a more sobering market correction?

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UK property price index figures

Like any other asset class, house prices can fall in value and retractions in the market are nothing new.

The Global Financial Crisis resulted in a compelling retraction in UK property prices to the tune of 19% between September 2007 and March 2009.

Such a severe correction is unlikely as the backdrop is very different now, but the world is facing multiple acute challenges and the correction in 2008 demonstrated that anything’s possible, even when it comes to an asset class that is generally considered to be a safe bet.

The end of the 1980s saw a gradual decline with prices falling by around 12% between September 1989 and October 1992 but alarmingly, prices didn’t fully bounce back until April 1997.

One thing to bear in mind is the extent to which house prices have risen in recent times. We’ve seen a radical upward spiral of 22% over the last two years and property is starting to look expensive relative to other asset classes and compared to long-term averages.

Many borrowers are still on fixed rate mortgages and haven’t yet felt the brunt of the increase in interest rates but even if you’ve temporarily dodged a bullet when it comes to your monthly mortgage repayment, many will struggle to meet their financial commitments as other monthly bills such as energy and food soar exponentially.

As fixed-term products come to an end, some people will be switched onto more expensive variable rates or new higher fixed rates.

Aptly named ‘mortgage prisoners’ can’t take advantage of cheaper deals though as they’re unable to switch providers and with monthly costs reaching unsustainable levels, they may have to consider selling their properties and downsizing to make ends meet.

What about people already in the process of buying a home? With a national shortage of lawyers and high levels of bureaucracy, transaction times are exacerbated. Wait times have reached astronomical levels, the longest on record in fact, with some sales protracting beyond mortgage offer expiry dates.

The market hasn’t yet seen the full impact of rising mortgage rates because current transactions are based on mortgage deals agreed several months ago when rates were lower. As these deals expire though, buyers are having to set up new mortgage deals at much higher rates.

On the flip side, as the cost of living becomes more and more of an issue, lenders are adjusting their affordability criteria and buyers may suddenly find themselves in a position where they can’t get a mortgage for the amount they had previously agreed.

The buy to let sector isn’t immune to processing delays and there are other factors making this type of investment currently less appealing.

Changes to tax relief, increasing regulation (including clampdowns by some local authorities on second homes and holiday lets) along with concerns over high valuations, are all starting to weigh on investor sentiment towards the market, potentially placing further downward pressure on house prices.

With all this said and the cost of living and borrowing still on the increase, there will inevitably be some impact on the UK housing market. Supporters of continued house price appreciation argue that despite rising costs, borrowing remains relatively cheap, UK employment numbers are strong, and a shortage of housing will continue to support prices.

Many have previously tried to predict the end of the current bull market in housing only to be proved wrong, but this time the day of reckoning may be upon us.

What does this mean for those invested in property?

Purchasing a property rather than renting will still prove financially advantageous over the longer term but for those who’ve put all their eggs in the domestic property basket, now may be the time to start considering the benefits of a more diversified portfolio of investments.