LONDON: Britain’s housing market could be on the verge of a first slowdown, with some market watchers warning of a price drop of up to 30 percent, with data pointing to the biggest drop in demand since the global financial crisis.
New housing programs plunged in October to their lowest point since the 2008 financial crash, the era of the first Covid-19 lockdown, the latest report from RICS housing researchers showed last week.
Meanwhile, the MSCI UK Quarterly Property Index, which tracks commercial, office, commercial and residential properties, fell 4. 3% in the three months to September, marking the industry’s worst functionality since 2009.
The market slowdown marks a respite from a homebuying frenzy fueled by a two-year pandemic, with real estate transactions in September down 32% from the peak in 2021.
But as the era of reasonable cash fades and the Bank of England doubles down on its anti-inflationary rate hikes to counter the chaotic mini-budget, economists say the slowdown may be sharper than previously thought.
“While a correction in space costs is expected amid the ongoing recession, it appears to be happening faster than expected,” Kallum Pickering, senior economist at Berenberg, wrote Thursday of the UK market.
The investment bank now sees UK assets fall by around 10% through the current quarter of 2023. But some lenders are less optimistic.
Nationwide, one of the UK’s largest loan providers, said earlier this month that asset costs could fall by as much as 30% in the worst-case scenario. Meanwhile, the gloomiest estimates for 2023 from Lloyds and Barclays banks imply falls of nearly 18% to more than 22%, respectively.
In fact, prices have already started to fall in some places, according to asset search Rightmove, which said Monday that traders cut prices by 1. 1% in October, bringing the average value of a newly advertised home to £366,999 ($431,000).
The UK stands alone. Rising interest rates, rising inflation and the economic surprise of Russia’s war in Ukraine have weighed heavily on the global real estate market.
Recent research through Oxford Economics showed that space costs are expected to fall in nine of the 18 complex economies, with Australia, Canada, the Netherlands and New Zealand among the markets most exposed to declines of up to 15-20%.
“This is the most worrisome outlook for the housing market since 2007-2008, with markets balanced between the prospect of modest declines and much steeper declines,” Adam Slater, lead economist at Oxford Economics, wrote last month.
But the UK’s unique economic outlook puts it at a greater threat of loan defaults, according to Goldman Sachs. The factors at play come with Britain’s deteriorating economic situation, the sensitivity of NPL ratios to recessions and the shorter term of UK loans relative to the eurozone and US peers.
“Looking across countries, we see an increased threat of a significant increase in loan delinquency rates in the UK,” Yulia Zhestkova, an economist at the bank, wrote in a report last week.
Meanwhile, the emerging dangers of unemployment, an old barometer of crime rates, add to the pressure on the UK, which according to Goldman Sachs “is already in recession”.
The British economy rose 0. 2% in the third quarter of 2022, the latest GDP figures revealed on Friday. Another consecutive quarter of decline in the three months to December would imply that the UK is in a technical recession.
The Bank of England warned earlier this month that the UK is now facing its longest recession since records began a century ago, with the slowdown expected to last until 2024.
Describing the outlook as “very difficult,” the central bank said unemployment would most likely double to 6. 5 percent during the two-year crisis, affecting some 500,000 jobs.
Such an increase in unemployment can “considerably” create dangers to the housing market by potentially creating a wave of forced sales and foreclosures, Oxford Economics warned in its report. In fact, according to Goldman Sachs’ analysis, for each and every one percentage point increase in the UK unemployment rate, loan delinquencies tend to accumulate through more than 20 basic problems after a year.
“If unemployment were very pronounced, the risks to housing markets would be magnified dramatically,” Slater said.
However, much of the outlook will depend on the government’s next budget on Thursday, when Finance Minister Jeremy Hunt is expected to reveal 60 billion pounds ($69 billion) in tax increases and spending cuts that are expected to weigh heavily on growth.
Some strategists have said Hunt can retain much of the savings until after the next election, scheduled for January 2025 at the latest, in a bid to protect the economy at the height of the recession. tempting” decisions to come.
The Bank of England, for its part, insisted it would continue to raise rates, but to a declining peak.
However, even with little rest expected for the housing market in the near term, economists say the risks of a surprise to the broader financial market are minimal.
Increased regulation and sufficiently good capitalization of the banking sector after the currency crisis limited exposure to subprime mortgages. Meanwhile, most housing debt falls on families with moderate savings reserves, Berenberg’s Pickering said.
“We see a limited threat that the ongoing correction in the housing market will turn into a currency crisis,” he added.
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