There’s a lot of noise about a potential crash in the UK housing market with some commentators throwing out predictions of a fall in house prices of up to 35%!

With so many UK residents owning their own property and the housing market effectively being the jewel in our economic crown, scaremongering on this scale is bound to strike fear into the bravest of hearts. So, just how likely is this scenario?

Let’s look at the facts to date.

  • According to data released by the Nationwide Building Society, prices were broadly flat in June, but down 3.5% compared with June 202.
  • All regions except Northern Ireland recorded annual price falls in Q2 with East Anglia being the most affected region with prices down 4.7% year-on-year.

What drives fluctuations in the housing market?
House prices are influenced by a lot of factors: the state of the economy, interest rates, real income, and changes in the size of the population. House prices are also determined by available supply; when demand peaks and there’s limited supply, house prices and rents will rise.

Underlying inflation in the UK economy isn’t moderating as quickly as expected and the Bank of England, in the short term at least, is likely to continue with its policy of raising interest rates.

How big a part does the rise in interest rates play in the house price story?Looking at the historical angle, when there is a sustained and significant rise in interest rates, it’s highly likely that house prices will fall. Case in point; the 1981 and 1991 house price crashes were both preceded by significant interest rate increases and the rise in interest rates from 1990 to 1992 led to fall in house prices from 1990 to 1996.

Why does this happen?
When interest rates are very low, it encourages buy to let investors to purchase houses and rent them out – low interest rates mean that the cost of mortgage payments on a house is less than rental income, forming a strong case for investors to buy housing.

When interest rates rise, this starts to shift, and there comes a tipping point where the monthly mortgage repayments are higher than the rental income, driving an incentive for buy to let investors to sell, forcing house prices down and creating negative sentiment across the sector.

Read why is the Bank of England raising interest rates

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How is the typical homeowner affected by a rise in interest rates?
If interest rates rise to very high levels, and mortgage repayments can’t be met, homeowners may be forced to sell, and first-time buyers may defer purchasing a property in favour of renting.

There’s generally a delay of up to 18 months before an interest rate change affects house prices due to most mortgages being fixed for 2 to 5 years and so the impact is not immediately felt.

Last year, many mortgage holders would have been immune to the interest rate rise but with 400,000 to 500,000 people now looking to remortgage each quarter and interest rates for fixed mortgages having doubled over the last year, reality really is biting.

A year ago, a mortgage holder would have been paying around 3 to 3.35% interest on their mortgage, now the figure is closer to 6 or 7%, which could translate to a potential increase of £400 to £500 in monthly outgoings for some borrowers.

There’s also been a reduction in the availability of products on the market as a direct result of the interest rate rises with products being withdrawn as affordability calculations have taken on an entirely different dimension.

What keeps the housing market in the UK buoyant?
When it comes to the supply of housing, we’re falling short in the UK and this predicament has built up over decades.

The population is growing due to increasing numbers of people living longer, an increase in the fertility rate, increasing urbanisation, and accelerating migration. The divorce rate in the UK is estimated at 42% which also contributes to the increase in demand for housing, and there’s a backlog of need among people currently living in unsuitable accommodation.

According to one estimate commissioned by the National Housing Federation (NHF) and Crisis from Heriot-Watt University, around 340,000 new homes need to be supplied in England each year, of which 145,000 should be affordable.

The Government’s ambition is to supply 300,000 new homes per year and the supply has increased year-on-year from a low point of 125,000 in 2012/13 to an all-time high of 243,000 in 2019/20 and plateauing at 233,000 in 2021/2022 but clearly is still falling short of the required demand.

The consistent demand for housing is pushing back against the damning effect of rising interest rates and keeping the housing market relatively stable, but with interest rates potentially still on the increase, are we going to come out of this unscathed?

After 13 consecutive interest rate rises, house prices have fallen around 3 to 3.5% over the last year, a much more favourable picture than was predicted 12 months ago.

Prices are likely to fall in the short-term but there’s an argument to say it simply won’t come to the feared prediction of an all-out crash.

Estate agents are reporting that there’s been an increase in house price reductions, but housing remains relatively affordable in most areas.

Over the next year, there may be some bumps in the road when it comes to house prices, but when interest rates start to fall back, there’ll be pent up demand from buyers who’ve sat it out and are looking to come back into the market, pushing the prices back up.

Providing the broader economy performs as most forecasters expect and the unemployment rate remains low with income growth solid, affordability should gradually improve over the longer term, restoring the jewel in our crown back to its former shining glory.


Thanks to Robin Ghosh, Senior Investment & Research Manager at RSMR