Is the UK heading for its ‘biggest ever’ house price crash?

Increasingly 'weak' housing market has already been hit by largest drop since 2009 financial crisis

House price crash illustration
The debate on the direction of house prices is divided
(Image credit: Illustrated / Getty Images)

The UK property market is teetering on the brink of a historic crash as a result of the ongoing mortgage crisis, experts are warning.

According to latest data from Nationwide, average UK house prices fell by 5.3% in the year to September, matching the decline recorded in August, which was the biggest annual drop since 2009.

The market has been hit by soaring mortgage rates following 14 consecutive hikes to the Bank of England's base rate. And despite the central bank's recent decision to hold its rate at 5.25%, the cost of borrowing will "probably stay elevated for the foreseeable future", wrote economist Jeffrey Frankel in an article for The Guardian.

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What's happened?

Between the start of 2020 until autumn 2022, house prices across most of the UK "rose steeply", said the BBC, by about 25%. But a subsequent drop has affected millions of homeowners.

Climbing interest rates have made mortgages increasingly expensive, preventing many would-be buyers from getting onto the property ladder despite the recent declines in asking prices.

The cost-of-living crisis has also "hit people's spending power", the broadcaster added, and has forced some homeowners to sell up, further destabilising the market.

Could history repeat itself?

The year-on-year price drops in August and September are the "most substantial" since the 2009 financial crisis, said The Times Money Mentor, and have triggered fears of a repeat occurrence.

During the credit crunch, many lost their homes or became mortgage prisoners struggling to cope with unaffordable deals.

Although current UK house prices "haven't gone into full meltdown", said Harvey Jones in The Express, "it's going to be a close run thing". The situation is "unlikely to get better over the rest of this year, and may get a lot worse". 

The market has been "roiled" by the hefty increases in borrowing costs, said The Times. Bank of England data showed that the number of new mortgages approved in August dropped from 49,500 to 45,000 – significantly "worse than the 48,000 forecast by economists", the newspaper added. 

How has the UK been impacted?

Over the past year, "all UK nations and the nine English regions" recorded house price declines, said the FT Adviser, although northern locations proved to be "more resilient" than those in the South. 

According to Halifax, average house prices in the South East have fallen by 5% to £379,565, by 4.7% in Wales to £212,967, and by 4.4% in the South West to £298,496.

By comparison, average prices in Northern Ireland and Scotland dropped by 1.5% and 0.6% respectively.

London "remained the most expensive place within the UK to purchase a home", FT Adviser added, at £529,814 despite a 4.1% annual drop.

What happens next?

"Leading indicators of house prices remain downbeat, so we suspect price falls will resume in the coming months," Andrew Wishart, analyst at Capital Economics, told This is Money.

Rishi Sunak has refused to offer extra help to homeowners struggling with mortgage payments, instead urging banks to offer "bespoke support", said The Independent. The prime minister has promised to stick to his plan to halve inflation.

Opinion is still split on whether there will be a full-blown house price crash, however. 

Earlier this year, the Office for Budget Responsibility predicted a 10% drop in house prices over the next two years. But the predictions are "very uncertain", said the BBC.

Some observers have said there may be a "soft landing", the broadcaster added, with "small price falls" throughout the rest of the year, and then "little, if any, growth next year".

However, an expert from Zoopla predicted house prices would fall by 22% by 2026.

Ultimately, because the market is "complex" it is "difficult to predict with certainty what will happen in the future", said Purplebricks

Some hope that the Bank of England's decision to hold the base rate at 5.25% may provide some relief to the mortgage market, as lenders pass on the revised cost of borrowing. If buyers face lower housing costs, mortgage approvals are likely to increase and house prices could stabilise. 

All eyes are on the next UK inflation report and Bank of England rates decision. The Consumer Prices Index will be released by the Office for National Statistics on 18 October, with inflation expected to have decreased. The central bank will next meet on 2 November, when the Monetary Policy Committee (MPC) will discuss the base rate. 

Their decision could have major implications for affordability, rates and prices going forward.

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