Is the UK heading for a housing crash?

Rising interest rates and the cost-of-living crisis threaten to trigger a sharp drop in UK house prices, according to expert forecasts.

The property market has boomed over the past decade, with the price of an average UK home reaching a record £286,079 last month – up by 1.1% from March.

And despite fears of a pandemic-induced property crash back in 2020, prices have “rocketed” by around 20% over the past two years, creating a “fresh affordability crisis in the UK’s property market”, said This is Money. The chasm between house prices and average wages is now comparable to that “seen just before the financial crisis” in 2008.

This continued climb against the backdrop of Covid shows that “Britain’s housing market is completely unhinged from economic reality elsewhere”, said the i news site’s housing correspondent Vicky Spratt. Repeating “a question I have asked repeatedly”, she added: “How long can this go on and how worried should we be?”

‘Negative about market’s prospects’

Although property prices are continuing to rise, the rate of growth is slowing, according to Halifax’s monthly Property Price Index. “With interest rates on the rise and inflation further squeezing household budgets, it remains likely that the rate of house price growth will slow by the end of this year,” said the bank’s managing director, Russell Galley.

Amid mounting concern about rising living costs, Neal Hudson, a housing market analyst at the consultancy BuiltPlace, told The Guardian that he felt “more negative about the prospects for the market than at any time since the start of the pandemic”. 

As banks begin cutting back on lending, reduced availability of mortgages is already beginning to impact the market. “I could see four, five, six weeks ago that the volume of enquiries was down, transactions were taking longer,” a north London-based estate agent told The Telegraph.

‘Not until 2026’

According to The Independent’s Sean O’Grady, a housing slump is “pretty much an inevitability” as living costs soar “against a background of stagnant pay rises”.

But not everyone agrees. British economic commentator Fred Harrison – who accurately predicted the 2008 financial crash – doesn’t think house prices will dip significantly until later this decade.

“It will be in 2026, that is at the end of a 14-year cycle in house prices within a business cycle of 18 years,” Harrison told the MoneyWeek podcast. “They’ll level off for a matter of months and then they start to go down.”

Although experts disagree on when and how severe the next crash may be, “house prices are all but certain to go into reverse eventually”, said The Telegraph’s deputy economics editor Tim Wallace. 

‘Don’t start rejoicing’

Even if house prices do drop in the coming months, cash-strapped first-time buyers should not start “rejoicing any time soon”, said MoneyWeek’s John Stepek.

If you’re looking for a new home, “timing the market is not the thing you should be worrying about; no one has a crystal ball”, he continued. “All you really need to care about is ensuring that you could afford your mortgage if interest rates rose and also that you’re going to be happy in your new home.”