UK house prices slowdown – are we heading for a crash?

The Halifax House Price Index shows house prices fell in September. Is the dip a sign of things to come?

Property for sale signs
The outlook for house prices is far from clear
(Image credit: © Getty Images)

The property market is starting to show signs of a slowdown. UK house prices fell by 0.1% in September compared to a 0.3% increase in August, Halifax’s latest House Price Index showed. Annual growth also fell, to 9.9% from 11.4% last month.

“The events of the last few weeks have led to greater economic uncertainty, however in reality house prices have been largely flat since June, up by around £250. This compares to a rise of more than £10,000 during the previous quarter suggesting the housing market may have already entered a more sustained period of slower growth,” says Kim Kinnaird, director at Halifax Mortgages.

The average price of a home now sits at around £293,835.

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UK house prices to be further affected by rising interest rates

Over the past decade, UK house prices have surged higher, supported by low interest rates and easy credit conditions. However, now the Bank of England has declared war on inflation by raising interest rates to 2.25%, the highest level since 2008. The outlook for property values has become more uncertain, and we can expect that to continue.

Stamp duty cuts, the imbalance of supply and demand and a strong labour market have so far supported house prices. However the Bank of England has said it won’t hesitate to raise rates further to ease the cost of living squeeze. Coupled with the “impact in recent weeks of higher mortgage borrowing costs on affordability”, these factors are “likely to exert more significant downward pressure on house prices in the months ahead”, says Kinnaird.

The slowdown came before Chancellor Kwasi Kwarteng’s mini-Budget, which saw lenders pull hundreds of mortgage products from the market.. Santander, HSBC, Yorkshire Building Society, Virgin Money and Skipton Building Society are among the lenders to have withdrawn or ceased to offer new products.

We have yet to see the full impact rising rates will have on the market. “For the mortgage and property markets, the events of the past fortnight have been like a Freddie Krueger movie,” says Ross Boyd, founder of mortgage comparison platform Dashly. “Double-digit annual price growth could be gone for a number of years given the new level mortgage rates are at and the long and protracted recession we are almost certainly on the cusp of.”

Further rate rises are likely on the cards, which will likely affect demand for property and push down prices.

How prices fared during previous recessions

“During the recession in 2008, according to Nationwide, house prices on average dropped by around 16% while during the recession in the early 90s house prices dropped by as much as 20%”, Karen Noye, mortgage expert at Quilter, tells MoneyWeek.

And according to Kunal Sawhney, chief executive of independent global equities firm Kalkine Group, UK average house prices fell as much as 21% during the recession after the 2008 crisis, with the steepest percentage falls recorded in southern England.

The UK housing market peaked after the pandemic, due to a host of reasons and partly because people had extra disposable incomes and reassessed their housing preferences, with some wanting to move to bigger homes as hybrid working became more common.

“The busts of the late 1980s and 2000s also witnessed price booms like the one recently faced,” Sawhney adds.

A report by Risk Concern, an investment strategy and risk analysis company, analysed how much UK house prices fall in a recession.

The report, which analysed six recessions between 1970 and 2020, found that in a worst case scenario UK house prices crash about 20.4% in real terms, and 7% in nominal terms. The best case scenario saw a 1.92% appreciation in real terms, or a 9.5% increase in house prices in nominal terms.

House price crash or slowdown?

Analysts and industry experts are all saying different things. Mortgage rates are higher, which will put buyers in a tricky position. However the stamp duty cut might encourage more first time buyers to close a deal. The consensus is prices will continue to fall, but whether they’ll sink entirely remains to be seen.

“With interest, and therefore mortgage rates, almost certainly set to rise higher, it is now very possible that house prices will continue to fall,” says Aaron Forster, director of mortgage broker Create Finance. “The slight drop we saw in September could speed up dramatically in the months ahead.” This could even lead to an increase in forced sales as landlords become unable to afford their mortgages.

However Andrew Montlake, managing director of mortgage broker Coreco, thinks we need to get used to house prices falling. “It’s hard to see the market going in any other direction,” he says. House prices are certainly going to come under pressure but the ongoing lack of supply makes a crash unlikely.

Nicole García Mérida

Nic studied for a BA in journalism at Cardiff University, and has an MA in magazine journalism from City University. She joined MoneyWeek in 2019.