What will the impact of the recession be on the UK housing market?

On 3 August 2022, the Bank of England’s Monetary Policy Committee voted to raise the base rate by a further 0.5% to its current 1.75% in response to the pressure of rising inflation in the UK and Europe. Inflation currently stands at a 40 year high of 10.1% and rising, thanks primarily to the soaring costs of energy prices and the conflict in Ukraine, which has pushed up prices for crude oil and the supply of food staples such as grain.

With the Bank of England predicting a rise in inflation to just over 13% before the end of 2022, the base rate is expected to rise again when it is next reviewed in September 2022 and there are predictions of a further increase to 3% in 2023.

Not only has the Bank of England chosen to raise the base rate again this month in an effort to return the rate of inflation to its preferred level of 2%, it has also warned that the UK will see GDP growth slow and that we will hit a recession in the fourth quarter of 2022, with real household post-tax income expected to fall significantly in both 2022 and 2023.

Given that the Bank of England’s base rate determines the interest rate they pay to commercial banks, it therefore influences the rates of interest that these banks charge their customers to borrow money and pay out against savings.

When it comes to borrowing money from the bank, one of the biggest out-goings for UK homeowners is, of course, our mortgage repayments, where even the smallest increase in interest can add a significant amount to our monthly fees.

So, if we do enter a recession in 2022, what will this mean for the UK housing market?

The UK economy last hit a recession in 2020 when we were in the grips of the covid-19 pandemic, however, despite suggestions of a 10% drop in house prices during the initial lockdown period between March and May 2020, what we actually saw was a real shot in the arm for the housing market. With supply low and demand high, buyers who had been unable to go out and spend money had savings to use and took advantage of the low interest rate of 0.1% between March 2020 and December 2021 and the added incentive of the stamp duty holiday from July 2020 to October 2021. As a result, house prices soared across the UK as the widespread switch to home-working and a preference for larger homes in more rural locations widened traditional search areas.

Despite the end of the stamp duty holiday and other incentives like the furlough scheme, limited supply versus continued demand from homebuyers has kept house prices high across the UK in 2022, with Halifax noting an increase of 11.8% in house prices from July 2021 to July 2022.  However, whilst this is still an increase, the market is beginning to slow slightly, seeing a 0.1% dip in growth for the first time in 12 months, even before the announcement of the latest base rate increase. This decrease may be marginal, but there have been predictions of a slow-down in house price growth for some time as affordability becomes a major issue for homebuyers.

With around 47% of homeowners still paying off a mortgage for their property, higher rates of interest for those who are not on a fixed rate mortgage (which is approximately two million homeowners in the UK) will mean higher monthly repayments and a larger repayment overall.

Consequently, homeowners are needing to tighten their belts and stay put rather than overextend themselves financially with a larger mortgage on a more expensive property. In the worst-case scenario, a recession can also mean that some homeowners fail to keep up with their mortgage repayments either by losing their jobs or because of the increased costs of living. Sadly, defaulting on your mortgage can then lead to losing your home. Both situations ultimately have an impact on the main catalyst for increasing house prices, which is the lack of supply, meaning that there are less buyers out there and more affordable housing stock is coming onto the market as homes are repossessed and a quick sale is needed.

As the cost of living crisis has deepened, mortgage providers are also becoming more cautious in their lending and are even less likely to offer buyers high loan to value (LTV) mortgages of over 90% once the government’s mortgage guarantee scheme ends in December 2022, despite a relaxation of some affordability assessments as of June 2022.

For the third of the population who do not currently own their own home, a recession can of course make taking that first step or getting back on the property ladder more achievable as property prices fall.

Of course, saving for that new home in the first place is also made more difficult during a cost of living crisis when covering the costs of your monthly outgoings takes priority over saving for a house deposit. Given the most recent increase to the Bank of England’s base rate, property experts Rightmove have suggested that first-time buyers would need to use 40% of their total monthly salary for mortgage repayments, the highest percentage in 10 years.  

What will the longer-term impact of the recession be?

Whilst a fall in house prices may be welcome news for prospective homebuyers, it does mean that homeowners who have purchased their property with a high loan to value mortgage are at risk of falling into negative equity, whereby they are stuck paying back more than the house is now worth.

Sadly this was the case for around 15% of UK homeowners in the aftermath of the 2008 financial crisis, when year on year house price growth dropped to -15.6% in February 2009 according to the Office for National Statistics. However, average house prices had recovered to a point where year on year growth hit 8% in February 2010 and the experts agree that the best thing to do to avoid the fallout from negativity equity, particularly when the amount you are losing out on is fairly small, is to sit tight, keep chipping away at your loan by as much as you can afford (over-paying if possible) and wait for the housing market to recalibrate again before you sell if at all possible. Fortunately, due to the more rigorous lending requirements that have been in place since the 2008 financial crisis, there is less risk of finding yourself in negativity equity this time around.

For homeowners who are at risk of defaulting on their mortgages, speaking to your mortgage provider as soon as possible is always the best course of action, since they prefer to help you keep on top of your repayments rather than deal with the added administrative and financial burden of repossession.

There are options available to assist you if you are at risk of being unable to meet your mortgage repayments. Namely:

·        A claim on your mortgage protection insurance if you have a policy in place.

·        Increasing the term of the mortgage overall to decrease the amount you are repaying each month.

·        Support for mortgage interest payments.

·        A mortgage payment holiday.

·        Switching to an interest only mortgage.

Ideally, you should only really consider increasing the term of your mortgage, a payment holiday, or an interest only mortgage as a short-term solution while you get back on your feet financially, since you will end up paying more overall with these options. In most cases, you will also need to repay the support for mortgage interest loan when you sell your home, so you should factor this in when it comes time to sell. The loan also needs to be repaid with interest.