The UK housing market is closely linked to the performance of the economy. A strong outlook drives consumer spending, as well as spurring housebuilding and development. Reciprocally, the services and taxes associated with transactions boost the economy and Exchequer. In contrast, a falling market puts highly-leveraged owners at risk of negative equity, undermines consumer confidence, and is usually contractionary.

House prices themselves, like other asset values, are strongly influenced by the level of interest rates. The boom of the last 13 years was caused primarily by the ultra-low market rates that accompanied quantitative easing after the Global Financial Crisis (GFC) of 2008. In times of high inflation, interest rates have risen sharply. As well as exerting an inescapable mechanical influence on all asset prices, these higher interest rates affect the affordability of mortgages, which inhibits activity in the housing market.

So, what do previous housing market cycles tell us about where we are today and what we might see in future?


Entrances to terraced houses in London
House prices are expected to fall, UK

The Office for Budget Responsibility expects property prices to drop 9% over the next two years driven by higher mortgage rates as well as the wider economic downturn.

The impact of previous recessions

The early 1990s market decline was caused by dramatic interest rate hikes aimed at squeezing out very high inflation, sparking a deep recession which lasted for five quarters from Q3 1990. House prices had fallen 12.3% by the time they bottomed out in October 19921.

In contrast, the Global Financial Crisis (GFC) caused a credit crunch that severely reduced the availability of mortgages. Approvals fell by more than three quarters peak-to-trough2. Mortgage availability was especially constrained at the riskier end of the market, leading to a sharp decline in the proportion of mortgages granted on high loan-to-value ratios.

Understandably, the volume of housing sales naturally fell sharply too, and halved between 2007 and 2009. Between their peak in September 2007 and their March 2009 low point, UK house prices duly fell 18.8%, with relatively little regional variation3.

The pandemic, in contrast, barely touched the sides. It caused a temporary delay in moves due to restrictions on viewings, but prices quickly motored higher on the back of monetary and fiscal stimulus. Some localised areas, like Prime Central London saw falls in prices on average [-8%]4, as city dwellers moved to the suburbs and beyond.

The situation today has elements of both 1990 and 2007. High inflation (CPI: 11.1%) and interest rates (Bank Rate: 3%) are reminiscent of 1990, while the recent boom in house prices has been partly caused by freely available credit as in 2007. In both previous cycles, housing market declines accompanied a recession.

However, as the 2020 recession was not caused by economic imbalances, for many, household incomes were insulated, savings boomed, and policy was ultra-supportive, so the market kept moving.

What do previous housing market cycles tell us about where we are today table

What is the current state of the property market?

Today’s situation also has twists of its own. Tax rises, the energy crisis and inflation are adding to pressures on household budgets.

Mortgage affordability will reduce dramatically

As recently as January 2022, a UK buyer taking out a 2-year fixed rate 75% LTV mortgage would have seen 25% of their gross income5 consumed by mortgage payments. This is well below the 35% seen in mid-2007.

Moreover only 1 in 13 purchases was financed at a loan-to-value above 90%6. In London, despite high house prices, just one in 26 purchases was financed at a LTV above 90% and one third were below 50%, reflecting high levels of equity among London homeowners as well as prudent credit scoring by lenders.

But by September 2022, the inflation-related surge in mortgage rates pushed the ratio of mortgage payments to income to 43% nationwide for a new 75% LTV mortgage, up by 18 percentage points in just nine months.

This is likely to deter new buyers. In addition, it is estimated that 1.8m borrowers will move onto a new fixed in 20237. They will face significant increases in the burden of mortgage payments on their income.


Seating area with wooden flooring
The Prime Central London market is often ahead of the curve, UK

The recovery of the prime market could be faster and greater than for the UK as a whole.

House prices will fall

With the UK likely in recession, incomes under pressure and interest rates already sharply higher, house prices are almost certain to fall. The range of estimates in the market ranges from -5% to -18% highlighting just how uncertain the picture is. The Office for Budget Responsibility expects prices to drop 9% over the next two years driven by higher mortgage rates as well as the wider economic downturn.

On the plus side, households are not overleveraged – household debt to GDP is 85%8, in line with its level between 2013 and 2020 and well below its level between 2006 and 2012. Cash savings are at record highs of £1.9 trillion9. Homeowners also have very high levels of equity in their homes – 49% on average10, but much higher still in areas such as Prime Central London.

Moreover, financial institutions have greater stability than during the GFC so a credit crunch is very unlikely. Our analysis also suggests that mortgage interest rates do not need to rise as far as some have suggested to cool the economy and may have already overshot.

Prime London prices may recover more quickly

Prime Central London is ahead of the curve compared to the wider housing market. Average property prices have already fallen year-on-year by 3.6%11 and declines are likely to continue in the short term. Yet, the high level of non-mortgaged homeowners means many are insulated from the effect of rate rises on household budgets. The relatively low level of the pound makes London property attractive for foreign investors, who will also welcome the new government’s commitment to macroeconomic stability. Therefore, the recovery of the Prime market could be faster and greater than for the UK as a whole.

Average rents are likely to increase

For the buy-to-let market, the downturn is good for tenant demand, as prospective first-time buyers accumulate in the rental market. Rental inflation is currently very high, pushing yields up nationwide for the first time since their April 2009 peak, and lower house prices could send them higher still. Average yields could rise to around 4.6% over the next 18 months nationwide and 3.6% in Prime Central London12. This could mean landlords are able to lock into very attractive prospective returns.


Open plan living and working space in a loft conversation
The potential outlook for buy-to-let, UK

Rental inflation is currently very high, pushing yields up nationwide for the first time since their April 2009 peak, and lower house prices could send them higher still.

Supply and demand mean capital growth potential for housing remains

Longer term, supply of property in the UK shows no sign of keeping pace with rising demand. So, the housing market cycle should pass through its down phase over the next 12 and 18 months, depending on the severity of the recession. Thereafter, assuming market interest rates have subsided – and bond yields are already back to pre-mini budget levels – the supply/demand mismatch suggests prices will begin to grow.

Private banking could help you with your property decisions

If you are looking to move home within the next 12 months, it could be beneficial to work with a mortgage provider that can look at affordability holistically, and consider complex income streams such as bonuses.  This may enable you to benefit from bespoke solutions such as tailored repayment plans, which could help you achieve a higher LTV and manage your cash flow in the current climate.

In addition, some lenders – including Investec – are able to support property investment by lending to trusts and Special Purpose Vehicles. This can enable buy-to-let investors to off-set more of their costs. As always, it is important to seek independent financial advice on your plans.


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Important information:

Article produced by 5iresearch for Investec in November 2022.

The information in this article is believed to be correct but cannot be guaranteed. Opinions featured are not to be considered as the opinions of Investec Bank plc. Your use of and reliance on any of this content is entirely at your own risk.

This article is for general information purposes only and should not be used or relied upon as professional advice. Past performance is not an indicator of future performance. The value of investments and the income derived from them may go down as well as up and you may not necessarily get back the amount you invested. It is advisable to contact a professional advisor if you need financial advice.


2 UK Finance
4 ONS / Investec
5 ONS - Full-time worker's pay, gross
6 FCA PDS, Q4 2021
7 UK Finance
8 Bank of International Settlements, Q1 2022
9 Bank of England
10 Bank of England, ONS, Investec
11 ONS
12 Investec / ONS / OBR
13 Range of published estimates in the market; OBR -9%