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Is a house price crash coming? Here’s what property investors need to know

Karl Talbot 26th Jun 2023 No Comments

Reading Time: 6 minutes

It’s no secret that the era of cheap money is well and truly over.

Following the Bank of England’s latest 50 basis points hike it’s now a question of how high interest rates will go.

If you’re invested in property – either as a homeowner, buy-to-let investor, or a holder of a Real Estate Investment Trust (REIT) – you may be worried about the impact of higher borrowing costs on house prices.

In this article we’re going to explore that relationship between interest rates and house prices, and take a look at the chances of a house price crash before the end of the year. Keep on reading for all the details or click on a link below to jump straight to a specific section…

What’s happening with mortgage rates?

Following 13 consecutive interest rate rises by the Bank of England, the cost of borrowing money is soaring. Because of this, mortgage rates are also rising.

According to Moneyfacts, the cheapest five-year fixed buy-to-let mortgage on the market right now is 4.78%. This compares to an average rate of just 3.47% a year ago.

It’s a similar story for residential mortgages. The average two-year fixed residential mortgage rate is now 6.23%, while the average five-year fix is 5.86%. These are the highest levels we’ve seen since the mini-budget chaos of November 2022.

Of course, we won’t know when mortgage rates will begin to level out as this will depend on when interest rate rises peak. With inflation still on the rise, however, there’s a fair chance we’ll see the Bank of England’s base rate surpass 6% before things calm down.

What’s happening with house prices?

According to Nationwide’s most recent House Price Index, property prices were down 0.1% between May and April 2023. In terms of annual prices, the average property in the UK is now 3.4% cheaper than a year ago.

Following decades of excessive house price inflation, witnessing house price falls may give you cause to celebrate if you’re a first-time buyer (but only if you’ve a hefty deposit to cancel out the impact of higher mortgage rates).

Of course, if you’re a homeowner or property investor, then you’ll probably see falling house prices in a negative light.

Whatever your position on the UK housing ladder, it’s fair to say that things are looking bearish for the housing market.

What drives house prices?

House prices are driven by a number of variables, including interest rates, price speculation, and Government ‘props’. Let’s take a look at these factors in more detail…

Supply and demand

Arguably the most obvious. When demand for real estate rises, prices will also rise. This is economics at its most basic. For example, if the UK sees extensive population growth but the supply of housing fails to keep up with rising demand, then this will have an upward impact on prices.

Economic conditions

Employment rates, income levels, and economic growth, can all impact house prices. In prosperous times, people are likely to have more disposable income, which can lead to increased demand for housing. However when the economy looks shaky, such as the situation we’re currently in, then this can have a downward pressure on prices.

Price speculation

When property is seen as an investment rather than a place to live, this can encourage an environment where people expect to profit from bricks and mortar. Because the UK very much has a mindset that property is an asset, we’ve seen a explosion of buy-to-let mortgages since the turn of the century, which has led to competition amongst budding buyers.

Planning laws

Despite less than 1% of the UK (2% of England) being built on, our country has very restrictive planning laws. Making it extremely difficult to build new housing artificially constrains supply which can push up prices – especially if the rate at which new houses are being built doesn’t keep up with growing demand.

Government ‘props’

Rightly or wrongly, the Government does not want house prices to fall. History tells us that falling house prices is a vote loser, which is why the state often goes above and beyond to protect the property market. Over the past few years we’ve seen the Government pour millions of pounds of taxpayers’ money into schemes such as ‘Help to Buy’ and ‘Shared Ownership’, which has been shown to simply boost prices. (This is why ‘Help to Buy’ before its closure in 2022, was sometimes referred to as ‘Help to Sell’ by sceptics.)

Aside from these schemes, we also saw the Government fall head over heels in a bid to support the housing market by encouraging the so-called independent Bank of England to pump billions of pounds into the economy during the Covid-19 lockdowns.  Much of this helicopter money found itself boosting the value of assets, including property. This ‘free’ money, combined with Rishi Sunak’s Stamp Duty Holiday, led to a 20% rise in house prices during the pandemic and this ‘Covid froth’ is still embedded in prices we see today.

Interest rates & availability of credit

Interest rates have a massive impact on house prices as many buyers will typically stretch themselves to borrow to the max. So when access to credit is easy to come by – and cheap – the average buyer is able to borrow more, which causes on upward pressure on prices.

Up until the past year or so, ultra-low interest rates were the norm, which is a big reason why the UK has had colossal house price inflation over the past decade and a half.

Yet with interest rates now at their highest in over 15 years, the era of ultra-low rates has ended with a bang. This means that buyers can no longer afford to just look at how much debt they can take on, as they also now have to seriously consider whether they’ll be able to afford the interest.

This is the very reason why we’re already seeing house prices fall, though there’s an argument that this new reality hasn’t yet fully filtered through to sellers.

Will we see a house price crash in 2023?

House prices are falling. Whether we’ll see a house price crash (20%+ falls) in 2023, however, remains to be seen.

If a crash does happen, it will mostly be thanks to higher interest rates alongside a realisation amongst sellers and estate agents that buyers no longer have the ability to take on mountains of debt.

While interest rates have already increased, once we know when rates have peaked, we’ll have a clearer picture as to how much house prices are likely to fall.

Aside from interest rates, the other major factor that is really worth thinking about right now is the lack of ‘Government props’.

While the Government would no doubt love to support the housing market through the current uncertainty, and prevent forced sales, it simply doesn’t have the money to introduce a new Help to Buy scheme or similar measure to support prices and protect existing mortgage holders. We saw what happened when ex-PM Liz Truss proposed extensive energy bills support and tax cuts at the tail end of last year – the markets wouldn’t allow it. This is the reason Government props to support house prices are now very unlikely, at least over the next few months.

Similarly, the Bank of England’s quantitative easing programme has also now ended. And Mr Bailey simply won’t be able to switch his printing press back on without crushing the pound.

This is why we’re at a moment in time where house prices are set to naturally fall, and there’s little the Government can do about it.

Ministers may talk about asking mortgage lenders to protect homeowners, but this is unlikely to have much of an impact. The ‘protections’ recently announced to prevent mortgage holders from losing their homes were already in place so the term ‘hot air’ comes to mind.

How can property investors protect themselves?

In the absence of a crystal ball, we don’t know when interest rates will peak. We also don’t know whether house prices will plummet over the next few months. In fact, it’s entirely possible that prices will simply fall a percent or two every month for the next year or so.

Yet house prices are falling, so if you’re a homeowner, buy-to-let investor, or have a stake in a Real Estate Investment Trust (REIT) you may be a tad worried right now.

If you think prices will continue falling, then the most obvious course of action is to offload some of your property assets. This is obviously far easier to do for REIT holders than owners of multiple properties.

If you do own physical property but don’t want to sell and are worried about mortgage rates rising to unaffordable levels in future, then you may wish to ask your lender to extend your mortgage term to reduce your monthly payments.

Likewise, if your mortgage is about to expire, then you may wish to look at taking out a longer fix than you’d usually consider. While this may backfire if rates reduce over the coming years, it will at least give you price certainty.

If you’re a residential mortgage holder and worried about rising rates then do take a look at our article that explains how to cope with high interest rates affecting your mortgage.

Of course, if you have the financial means to do so, there is also the option of simply sitting out the current volatility. As with any type of investing, assets can rise and fall in value, and property is no exception to this rule.

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When investing, your capital is at risk. Remember, the value of any investment can both rise and fall. Always do your own research. 

MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.

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Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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