The UK economy shrank between July and September 2022 and is heading into what the Bank of England warns will be a shallow, but long-lasting, recession. It is widely understood that this will impact the UK property market because inflation and interest rates affect overall affordability and consumer confidence.
While past trends are not an indicator of future performance, it is possible to look at data from previous UK recessions to understand what the challenges and opportunities for homeowners might be.
What has happened in previous recessions?
There have been dominant features of previous housing market cycles.
1990-1992: Rising interest rates coincided with a fall in house prices
During the 1980s, the UK average house price more than tripled (+208%), with especially strong growth during the economic boom years.
In Q3 1990, a recession began which lasted for five quarters. Interest rates hikes aimed at squeezing out very high inflation saw Bank rate reach 14.9%. House prices had fallen 12.3% by October 1992.
Graph: UK House Prices over time
2007-2009: Low mortgage availability led to a decline in sales
Between 2005 and 2007, a rise in interest rates was mitigated by an availability of credit, including high-risk mortgage lending, which culminated in widespread sub-prime loans and the financial crisis.
In 2008, the UK entered recession for six quarters. The credit crunch severely reduced the availability of mortgages – approvals fell by more than three quarters within 18 months2.
Mortgage availability was particularly constrained for buyers with low deposits. In Q2 2007, 16.3% of mortgages (purchase and re-mortgage) were at loan-to-value (LTV) ratios of 90% or more. By the end of 2009, this figure stood at 1.5%3. The proportion has remained low ever since – peaking at 6.8% in Q3 2019.
The monthly volume of housing sales halved between 2007 and 2009. And, between their peak in September 2007 and their March 2009, low point, UK house prices fell 18.8%, with relatively little regional variation, particularly in England.
Since the mid-1990s Prime Central London house prices have risen 618%, far faster than the 431% national average.
2020-2021: Tax changes shaped activity
The UK economy contracted by a record 11% in 20205 as the government shut down large sections of society to slow the spread of Covid-19. Within weeks, a huge programme of deficit spending was announced by the UK government.
House prices barely paused for breath at the national level as a result, though monthly transaction volumes plunged by more than two thirds at their low point to 27,868 in April 20206. In addition, a stamp duty holiday coincided with a boom in prices and sales volumes. Volumes peaked at 162,637 in June 2021 and prices peaked at £294,598 in August 2022.
1990-present: Prime London prices may recover faster
Since the mid-1990s Prime Central London house prices have risen 618%, far faster than the 431% national average. The two significant phases of outperformance were 2006-2007 when Prime Central London leapt ahead during the tail end of the boom, and 2009-2015 as QE-driven liquidity and low rates inflated asset prices7.
After the Brexit vote, Prime Central London stagnated. The average house price in January 2020 was slightly lower than in May 2016, even though the national market moved ahead by 10%. Anecdotal evidence suggests Brexit dampened interest among the international buyers who favour Prime property.
Over the last five years, Prime Central London has accounted for 9% of purchase transactions in the capital, well below its 14% share of privately owned homes. During Prime Central London’s rapid post-GFC recovery, its share of London purchases was 12% but activity has made up a smaller share ever since.
Prime Central London also stands out for the high level of cash purchases. Forty per cent of transactions over the last five years have been made in cash. This compares to 29% nationwide.
Graph: Prime Central London House Prices, compared to the UK
Source: ONS, Investec
What has happened in the last 12 months?
On average, UK house prices were up 9.5% year-on-year in September 20228, but they were flat month-on-month.
More recently, Rightmove’s index of asking prices showed a national month-on-month decline of 1.1% in November 2022, while London asking prices fell 1.9%9.
In the Prime Central London market specifically, prices began to decline at the beginning of 2022 and fell 3.5% to an average of £938,283 in September.
Data from the Office for National Statistics showed monthly UK sales volumes were down to 52,042 in June 202210, which is one third below the 79,900 monthly average of the last five years. While part of this decline reflects the high volume of transactions seen during the stamp duty holiday, the stock of unsold property on agents’ books is 50% higher than in 202111.
The number of new buyer enquiries has also fallen recently. RICS data shows the level of interest fell for the sixth month in a row and now mirrors levels seen in late 2007. The number of enquiries is falling marginally less in London12.
Graph: UK Residential Sales Volumes over time
Mortgage approvals and availability
In 2022, the volume of mortgage approvals for house purchases were slightly below their five-year average, prior to the increase in mainstream mortgage rates that followed the mini-budget. In September 2022, they fell to 66,800, down from 74,400 the month before13.
Graph: Volume of Mortgage Approvals for House Purchases over time
Source: Bank of England
In Prime Central London, 40% of transactions over the last five years have been made in cash. This compares to just 18% in Other London and 29% nationwide. In the first half of 2022, the proportion of Prime Central London cash purchases was 36%, in line with this average, with the latest available data (June 2022) putting this figure at 27%14.
Graph: Level of Prime Central London cash purchases, compared to UK average
Source: ONS, Investec
The affordability of mortgages in the mainstream market has been tested. On average, in January 2022, a UK buyer taking out a two-year fixed rate 75% LTV mortgage would have seen 25% of their gross income15 allocated to mortgage payments. In September 2022, the ratio of mortgage payments to income had increased to 43% for the same LTV.
However, household debt to GDP is 85%16, in line with its level between 2013 and 2020 and well below its level between 2006 and 2012. UK homeowners also have high levels of equity in their homes – 49% on average17, and this is likely to be greater in areas such as Prime Central London. Meanwhile, cash savings are at higher levels than in previous recessions and estimates put this figure at £1.9 trillion18.
Measures of confidence in the economy, confidence in personal finances, consumer confidence, and intentions to make major purchases are at or below levels from 2006, according to global market intelligence provider GfK19.
With a greater supply of credit than in 2008, the property market may not bottom out as low as in previous times.
What might happen next?
With the UK likely in recession, lower incomes and higher interest rates mean house prices are likely to fall. The range of estimates in the market ranges from -5% to -18% and the Office for Budget Responsibility expects prices to drop 9% over the next two years.
In the mainstream market, mortgage costs are likely to rise: As 1.3 million borrowers come off fixed-rate deals in 2023 and more follow in 2024, the average interest rate paid on the stock of outstanding mortgages is estimated to rise to a peak of 5% in the second half of 202420.
However, there are reasons to be hopeful. Analysis suggests that interest rates do not need to rise as far as some have suggested to cool the economy, with inflation predicted to fall from the middle of 2023. With a greater supply of credit than in 2008, the property market may not bottom out as low as in previous times.
Prime Central London is traditionally ahead of the curve compared to the wider housing market and house price declines are likely to continue in the short term. However, the high level of non-mortgaged homeowners21 means many buyers are partly insulated from effect of rate rises on household budgets. The relatively low value of sterling also makes London property attractive for foreign investors, who will also welcome the new government’s commitment to macroeconomic stability. This means transaction volumes and average house prices could recover more quickly in this sector of the market.
In the long-term, demand for UK property continues to exceed supply22 and the housing market cycle could pass through its down phase in the next 12 months. Thereafter, assuming market interest rates have subsided – and bond yields remain at pre-mini budget levels – this supply/demand mismatch suggests prices will begin to grow again.
In summary, while it is expected that the UK will enter the longest recession on record, its effects on the housing market may be shallower than in some previous downturns. In addition, the property market may present opportunities for long-term capital growth on a case-by-case basis.
In volatile times, it is always advisable to seek independent advice when making a move. Working with the right bank or mortgage provider is also critical. Lenders like Investec can look at your position holistically and consider complex income streams such as bonuses and investment portfolios to help you determine affordability and achieve your goals. Having a bespoke mortgage solution may also enable you to tailor your repayment plan to support cash flow and your long-term plan.
For more information about how we can help you with your mortgage or private banking needs, please get in touch today.
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.