Stable home prices forecast for the end of the current economic cycle

Created: 21 Jul 2022

With the prospect of a global recession, rising costs, and slowing consumer demand on account of growing inflation, the residential property sector in the UK is set to demonstrate significant stability because of key institutional and behavioural outcomes from the last great recession. 


The financial crisis of 2008, precipitated by the collapse of highly leveraged mortgage backed securities, led to a decline in housing prices and marked the end of the previous economic cycle; thereby the start of the current one. 


As a result, UK lenders instituted tighter lending standards whilst financial institutions strengthened risk management practices. Moreover, government legislation mandated regulatory compliance in ensuring sufficient capital buffers to protect against unexpected exposures and economic shocks. 


The UK economy is on surer footing heading into this recessionary period on account of robust household savings, induced by the Covid-19 pandemic, plus a solid labour market. 


With respect to Britain’s property sector, rising interest rates and slowing demand indicate a change of pace from the record high growth figures exhibited recently. The Royal Institution of Chartered Surveyors’ latest survey for instance revealed that buyer enquiries fell for the first time in May, after eight months of growth. 


The UK was less affected by the last financial crash, dropping 20 per cent to approximately six times average worker earnings in London, and five times the UK average wage in 2009, according to Nationwide Building Society data. This had previously fallen to three times earnings in 1990, and now sits at approximately ten times average earnings in London. 


A weaker sterling is attracting foreign capital into residential markets, whilst the Bank of England’s Financial Policy Committee is due to rescind affordability tests from 1 August 2022, as interest rates rise – to moderate demand and ensure continued access to mortgages. 


“Based on a model of average household incomes and mortgage rates, UK house prices don’t look overvalued to the extent they were before the financial crisis or 1990s recession, although mortgage rates above 4% could see flat to slightly falling prices, says Richard Donnell, executive director at property website Zoopla. An era of lower gains lies ahead, with nominal house prices tracking earnings growth.”