Is the UK in a recession? How will it affect housing market

Plus: Here is what happened to the housing market during the last recession

Is the UK in a recession? How will it affect housing market

According to experts, we are heading toward a recession in the UK. While it is not expected to be as extreme as the global financial crisis in 2008, it will have a definite impact on the housing market. Here is what to know about how the predicted recession will affect you as a homeowner and potential buyer.

Is the UK heading for a recession?

Yes—the UK is heading for a recession. According to the Bank of England, the UK will enter a recession before the end of the year and will remain there for the next year, at least. In fact, financial figures, economists, and money experts predict that the UK will suffer its lengthiest economic downturn since the 2008 financial crisis. According to the BoE’s monetary policy committee, real household post-tax income is expected to plummet in 2022 and 2023. Consumption growth, meanwhile, is expected to turn negative.

While not expected to be as extreme as the 2008 financial crisis, the predicted recession will be the first in the UK since the height of the COVID-19 pandemic in 2020. At that point, property prices increased as the trend toward remote working spurred both buyers and movers to find living situations that offered more space. Since that period, the housing market has heated up due to low interest rates and a stamp duty holiday. A recession, however, is expected to cool the market down.

How the recession will affect the housing market

The biggest risk potential homebuyers face during a recession is losing their employment. If, however, employment remains steady, recessions typically help buyers enter the housing market, since property prices generally drop. If that does happen, as experts predict, then it would lead to smaller deposits being required and lower total amounts borrowed. It should be noted, however, that rising mortgage rates must be taken into account in this scenario.

First-time homebuyers could very well see their monthly mortgage payments rise to an average of 40% of their gross salary, according to property website Rightmove, which noted that would represent the highest level since 2012. That could translate into the average monthly mortgage payment for new homeowners rising from £813 at the beginning of the year to over £1,000. That data assumes the average asking price for first-time homebuyers is £224,943.

The current housing market, coupled with soaring inflation as forecast, will add pressure to potential homebuyers who are saving money to put a deposit on a home while grappling with a cost-of-living crisis.

Another impact the recession will have on the current housing market in the UK is falling property values. While, in isolation, falling prices would be a bonus for potential homebuyers, there is a potential for the value of your property to end up lower than the amount you borrowed for your mortgage, leaving you in negative equity.

If you have owned your home for the longer term, you should be immune from those risks because your property value will outpace your mortgage. If you are a more recent homebuyer, however, and have taken out a 95% mortgage to purchase your property, you could see the value dropping below the purchase price if there is a recession.

What happened to the housing market during the last recession?

During the last recession—the 2008 global financial crisis—the housing market in the UK saw the availability of mortgage finance contract, preventing hopeful buyers from borrowing, therefore reducing the demand for property. This reality, combined with the rising unemployment rate, forced the average home price to drop by 12%, leading to fewer homeowners moving and the eventual recovery of the market in London from 2010 to 2013.

If history is any guide, first-time homebuyers should not wait until home prices drop further.