Are property prices about to crash?

5 min | 24 October 2022

The Chase team

Property experts have been warning about a potential price crash for years. With soaring inflation and rising interest rates, there are fears we could be about to see a market correction.

After a decade of steadily increasing property prices, things are beginning to look a little less predictable. The cost of living crisis, climbing inflation and rising interest rates have left homeowners concerned that prices are about to plummet.

Buying a property is usually the biggest investment you'll make in your life, so it’s easy to understand why people are worried – but are we about to see the housing market crash?

What is the current state of the housing market?

Property sales have boomed since the government lifted lockdown restrictions in the summer of 2020, as the stamp duty holiday helped to drive demand and prices.

Figures from the Office for National Statistics show that house price growth increased to 13.6% over the year to August 2022, down from 16% in July.

Mortgage approvals for home purchases in August increased to 74,300, from 63,700 in July, according to the Bank of England, which is a notable rise.

A looming recession?

Inflation in the UK is at a 40-year high, hitting 10.1% in September. So to help curb inflation, the Bank of England has raised interest rates, which have increased at the highest rate seen in almost 30 years.

There are fears that rising costs, especially energy bills, could cause people to struggle with their mortgage payments and have to sell their homes.

The increase in the cost of living is hitting households hard, and economists have warned that we could enter a recession. With further interest rate rises inevitable, households are set to feel even more strain on their finances.

The 2008 recession was sparked by the global financial crisis and led to house prices plummeting by 15%, with the market not recovering to pre-crash levels until 2012. This left more than a million homeowners in ‘negative equity’ – which is when property prices fall, and you owe more money than your home is worth.

While property prices in recent years have benefited from low mortgage rates, the hit to incomes from rising rates and living costs could end up hurting demand, in turn slowing price growth.

Will house prices crash?

Whilst we may well see a slowdown in the rate of house price growth, experts believe it’s doubtful there will end up being a full-blown crash.

Here are some of the reasons why:

  • Today’s homeowners are more financially secure than they were in the last recession, so we are unlikely to see a surge in repossessions and forced sellers
  • The rising cost of living – while still a challenge – should be more affordable for homeowners this time around as unemployment remains low and the labour market is strong, with firms still hiring
  • Despite years of rising prices, households have not been allowed to take out excessive home loans like they did during the early 2000s
  • While average UK house prices have reached record highs, affordability testing and limits on high loan-to-income mortgages following the financial crisis have stopped the market getting completely out of control

Stricter rules for mortgage lending were brought in following the financial crisis in 2008. Because of the new regulations, borrowers had to give a detailed account of all their earnings and outgoings to lenders. The rules have been relaxed a little since August 2022, but lenders are likely to retain checks on borrowers to ensure they are able to keep up with their mortgage payments.

The property market could still end up stagnating if homeowners decide to sit tight and not spend on a new home. The UK’s chronic housing shortage is also likely to put pressure on prices. The failure to build new homes and lack of supply means that demand is strong enough to keep prices from falling too much.

The big question now is how long the housing market remains protected from the cost of living crisis.

Experts believe the likely scenario is that the market will begin to cool – and there are already tentative signs it is slowing. But while higher interest rates and inflation mean things could still get a bit rocky, most experts agree that if there is a decline in prices, it will be a gradual one.

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