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UK property market at risk of major downturn as recession fears loom

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Economists predict that a sharp rise in interest rates and falling prices could signal the end of the UK’s 13-year housing market boom, leading to a crash in house prices.

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LONDON — The UK property market is nearing a major drop with some market watchers warning of a price collapse of up to 30% as data show the biggest drop in demand since the global financial crisis There is a possibility.

Inquiries from new homebuyers in October fell to their lowest level since the 2008 financial crisis. RICS Residential Investigator Report showed last week.

Meanwhile, the MSCI UK Quarterly Property Index tracks retail, office, industrial and residential properties. Down 4.3% in the three months to SeptemberIt marks the worst performance of the sector since 2009.

Market slowdown shows property deals in September a reprieve from two years of pandemic-induced home-buying frenzy 32% reduction per year From the peak of 2021.

But as the era of cheap money ended and the Bank of England doubled, Raise inflation control rate to oppose chaotic small budgeteconomists say the recession could be deeper than initially thought.

A home price correction is widely expected, but it appears to be unfolding sooner than expected.

Callum Pickering

Berenberg Senior Economist

“A correction in house prices, widely expected as part of the ongoing recession, appears to be unfolding sooner than expected,” Berenberg senior economist Callum Pickering wrote of the UK market on Thursday. rice field.

Investment banks now expect UK property prices to fall by around 10% by the second quarter of 2023. But some lenders aren’t optimistic.

Nationwide, one of the UK’s largest mortgage providers, said: early this month House prices could fall by up to 30% in the worst case scenario. Meanwhile, Lloyds Bank and Barclays Bank’s most pessimistic estimates for 2023 point to declines of around 18% to over 22% respectively.

In fact, prices are already starting to fall in some areas, according to property search site Rightmove. 1.1% price cut in Octoberthe average price of a newly marketed home came to £366,999 ($431,000).

Increased concerns over mortgage delinquency

Not just in the UK. Rising interest rates, soaring inflation and economic shocks from Russia’s war in Ukraine are weighing heavily on the global housing market.

A recent analysis by Oxford Economics showed property prices could fall by 2020 9 out of 18 developed countriesAustralia, Canada, the Netherlands, and New Zealand are the markets with the highest risk of a decline of up to 15%-20%.

Adam Slater, chief economist at Oxford Economics, said last month, “The outlook for the housing market is the most worrisome since 2007-2008, with the market in between a moderate and a sharp decline. pointed out.

Housing investigators report the biggest drop in new buyer inquiries in October since the financial crisis outside of a period during Covid-19 lockdowns.

Isabelle Infantes | Afp | Getty Images

However, according to Goldman Sachs, the UK’s unique economic climate puts the risk of mortgage delinquency high. Factors involved include deteriorating economic conditions in the UK, the sensitivity of default rates to recession and the short duration of UK mortgages relative to their Eurozone and US peers.

“Looking at the country as a whole, we see a relatively high risk of a significant rise in mortgage delinquencies in the UK,” bank economist Yulia Dzhestkova said in a note last week.

Meanwhile, rising unemployment risk has been a historic barometer of delinquency rates, increasing pressure on Britain, which Goldman Sachs said was “already in recession.”

Unemployment risk weighs heavily

of UK economy contracted by 0.2% For the third quarter of 2022, the latest GDP figures showed Friday. Further consecutive quarterly declines in the three months to December would indicate that the UK is in a technological recession.

The Bank of England warned earlier this month that it was facing the problems the UK is currently facing. Longest recession since records began The recession is expected to continue until 2024.

The danger to the housing market is greatly amplified if the unemployment rate rises sharply.

Adam Slater

Chief Economist, Oxford Economics

Describing the outlook as “very bleak”, the central bank said the unemployment rate was likely to double to 6.5% in a two-year recession, affecting about 500,000 jobs.

Oxford Economics warned in a report that such a spike in unemployment could create a wave of forced sales and foreclosures, making the housing market “significantly” riskier. In fact, according to a Goldman Sachs analysis, for every 1 percentage point rise in the UK unemployment rate after him, the mortgage delinquency rate tends to rise by more than 20 basis points a year after him.

“A spike in unemployment would greatly amplify the dangers to the housing market,” Slater said.

Not the financial crisis of 2008

Still, much of the outlook will depend on the government’s upcoming fiscal report, due out on Thursday. Chancellor Jeremy Hunt is expected to announce £60bn ($69bn) of tax increases and spending cuts that will weigh on growth.

Some strategists say Hunt has potential delay much of one’s savings To protect the economy during a recession until the next elections, scheduled by January 2025, are over. But Hunt frankly warned of a “tearful” decision ahead.

The Bank of England has insisted it will continue to raise rates, but it could be even lower at its peak.

Economists say the risk of a shock spillover across financial markets is minimal, even if the housing market sees little easing in the near term.

Tighter post-crisis regulation and proper capitalization of the banking sector have limited exposure to high-risk mortgages. Meanwhile, the majority of mortgages are for households with reasonable savings buffers, Berenberg’s Pickering said.

“The risk of the ongoing housing market correction turning into another financial crisis is limited,” he added.

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