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The housing market could be facing a serious downturn because of a looming financial crisis. Analysts see two major economic threats on the horizon – the nation’s ever-increasing debt, and an impending stock market crash.
Both scenarios look increasingly plausible and the results could heap misery on Britain’s homeowners and property investors.
Here’s how it could play out.
Government debt crisis could push up mortgage rates
The Government is struggling to get borrowing under control, which could lead to disaster if global investors lose confidence in its ability to manage the nation’s finances.
Gilt rates – the interest rates paid by the Government to borrow money – are high. Ten-year gilts are at 4.4 per cent – up from 3.5 per cent three years ago and 0.26 per cent five years ago.
If investors get more worried about the Government’s ability to manage its debt, they could demand a higher reward to lend it money. That could cause gilt yields to jump, which would lead to higher mortgage rates.
This happened in September 2022 after Liz Truss’s mini-Budget, when unfunded tax cuts spooked bond markets. Prior to this, the lowest two-year fixed-rate mortgage was 3.24 per cent and the lowest five-year fix was 3.14 per cent. A month later, the lowest two-year fix was 5.44 per cent and the lowest five-year fix 5.33 per cent.
A similar gilt market panic is looking plausible under the current Government, which continues to spend more than it is bringing in from tax revenue.
Official figures show public borrowing reached £20.2billion in September, the highest for that month in five years. It brings total borrowing for the first half of the fiscal year to nearly £100billion.
If gilt rates rise, that in turn pushes up mortgage rates, which curbs the amount that aspiring homeowners can afford to pay for properties and so prices can fall.
Peter Stimson, at lender MPowered, warns that the Budget next month could trigger events. ‘The Government has lost a bruising confrontation with Labour MPs over welfare reform, and its fractious relationship with its backbenchers may force the Chancellor into a Budget that spooks the markets,’ he says.
‘At best, a spike in mortgage interest rates would slam the brakes on the property market, at worst it could lead to falling prices and a surge in repossessions.’
Hetal Mehta at wealth manager St James’s Place warns that a protracted fall in house prices could be on the cards if investors start to doubt the Government’s commitment to keeping borrowing under control. It could last longer than following the Truss Budget as that was driven by sudden unfunded tax cuts – all of which were quickly reversed.
Mehta adds: ‘A renewed crisis could stem more from structural drift – slower growth and persistent deficits – which may create a prolonged, grinding squeeze rather than a sharp shock.
‘The housing market implications follow on from this: affordability is already stretched. Higher mortgage rates could further choke off demand among first-time buyers. Activity is already subdued, and this could push it into near-stasis. Landlords, facing refinancing pressures, may offload stock.’
Mehta predicts a subdued market in this instance, rather than a dramatic collapse as seen during the financial crisis in 2008. That is because at that time homeowners had much higher levels of borrowing than today.
What a stock market crash could mean
There are fears we’re on the cusp of a stock market crash, with an AI bubble now seen as the biggest risk to financial markets. The Bank of England added its name to the list of those raising concerns this month as its Financial Policy Committee drew comparisons with the ‘dotcom’ boom 25 years ago that soon turned to bust.
How it would affect the housing market would hinge on the root cause of the crash and how it played out in the wider economy.
Mehta thinks that if it results in huge job losses – as happened in the financial crisis in 2008 – homeowners could be forced to sell, with house prices then falling.
However, she adds that the Bank of England would likely step in to cut interest rates in this instance to stop prices dropping as quickly.
‘But interest rate cuts are unlikely to push house prices higher until economic sentiment improves,’ she adds.
A stock market crash does not always lead to lower house prices.
The last global crash in 2008 did send them lower, but that was a credit crisis – with the banks stopped from lending and the financial system itself frozen.
The FTSE 100 fell 47 per cent between October 2007 and March 2009, while average house prices fell by almost 19 per cent during that time – from £175,000 to £142,000.
However, in the aftermath of the dotcom bubble, the reverse happened. The FTSE 100 fell by more than 50 per cent over a three-year period, dropping from 6,930 points in December 1999 to a low of 3,287 points in March 2003.
But average house prices did the opposite and rose by 52 per cent from £76,000 in December 1999 to £116,000 in March 2003 because there was access to cheap credit, interest rates were falling and unemployment was low.
Stock market investors could even turn to property as a safe haven in the aftermath of a crash, says Babek Ismayil, of homebuying platform OneDome.
‘A crash would cause jitters in the housing market but it wouldn’t necessarily spell disaster,’ he says.
‘When investors lose faith in equities, many turn to property as a safer, more tangible asset – especially in the UK, where bricks and mortar are still seen as a long-term store of value.’