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How will recession affect the London property market?

How will the recession affect the London property market?

Manny Sahmbi November 10, 2022

Updated: March 1st, 2024

Many of us have felt the effects of the cost of living crisis in recent months and wondering how the recession will affect the London property market. With energy bills rising and food costs continuing to increase, Brits are fearful for the economy and a potential housing market recession.

The Bank of England has announced that the UK is facing its longest recession since records began. Interest rates have increased from 2.25% to 3% – the biggest interest rate rise since 1989. And UK mortgage rates have been increasing since earlier this year, with several lenders such as Virgin Money, pulling their deals from the market completely.

But how will a recession affect the housing market? During the UK’s last recession, the housing market saw mortgage availability decline and house prices plummet – will the same happen again?

While we can’t help you to financially prepare for a recession, we can support you in your house move. During a cost of living crisis, the last thing you need is the added stress of moving day. Here at Happy2Move, we pride ourselves on our professional and courteous removals service, so you have one less thing to worry about. Here, we cover the upcoming recession and how it will impact the London housing market.

How does entering a recession impact house prices?

The UK’s last recession, often referred to as the Great Recession of 2008-09, was the worst recession since World War II. The property market crashed, with the average house price in England falling from £188,657 to £159,340 – a drop of 15% in one year. While ‘households were faced with falling house prices and rising unemployment’, many homeowners benefited from lower mortgage payments which left them with more disposable income than when there was a growing economy. Of course, this wasn’t the case for everyone – the recession also came with job loss, fewer promotions and increased financial inequality.

The COVID-19 pandemic saw house prices drop to their lowest point since 2011, with lockdown putting house purchases on hold. But once restrictions were lifted, the housing market bounced back quickly. With stamp duty holidays and lower interest rates thrown in, the UK’s property market skyrocketed. But a recession could put a stop to this.

During a recession, property values often decline and houses stay on the market for longer before they’re finally sold. With interest rates rising, the cost of borrowing may cause the UK property market to crash with analysts forecasting house prices to drop by up to 15% next year. House prices in London can fall by 10% over the next two years.

What happens when property prices decline?

If property prices do decline, this could be good news for potential homebuyers, particularly first-time buyers. But existing homeowners face the risk that their house value could become lower than the amount they borrowed on their mortgage, leaving them in what is known as negative equity.

It’s also likely that homeowners may find it more difficult to sell during a recession, and with house prices predicted to fall, you may choose to stay in your current house for longer before you move on. Mortgage lenders often respond to recessions with caution, particularly when issuing new loans. So if you’re a first-time buyer you may need a stronger credit score to qualify for the loan for example, or a larger deposit to secure a mortgage.

But it’s important to remember that the property market won’t go away anytime soon, regardless of whether you choose to enter it or not during a recession. You shouldn’t let the current landscape rush your decision making – after all, your financial situation and the decisions you make are personal to you. So it’s important to take your personal circumstances into account, and what works best for your finances.

How will homeowners, homebuyers and homesellers be impacted?

While we can’t know for sure what will happen to house prices in the coming months, we can look at historical trends and how previous recessions have impacted the housing market. With a recession, it’s common for house prices to fall and banks are often more reluctant to lend. The Office for National Statistics reported that the house market crash of 2008 saw the average house price drop by 15%. London house prices are expected to fall faster than anywhere else in the country, with higher mortgage rates taking effect.

But while the housing market took roughly four years to stabilise following the 2008 financial crash, experts do predict a much faster recovery this time around.

Homeowners

As a homeowner, a recession can leave you fearful of two things. The first being that your property’s value will decrease and become lower than the amount you’ve borrowed on your mortgage, leaving you in negative equity. The second being that if you choose to sell and move elsewhere, you may not get the price you’re hoping for or may not find another home because sellers like yourself don’t want to take any risks.

During the last recession in 2008, the housing market saw a reduction in the demand for property. This, combined with rising unemployment forced the average home price to drop by 12% leading to fewer homeowners moving. However, the market did recover in London between 2010 and 2013. So, if your house’s value was to drop, it is likely that it will increase in value again over time.

You may also be fearful of being unable to keep up with your mortgage payments, particularly with the rising interest rates. Money Saving Expert’s Martin Lewis warned that mortgage holders could face a £500 increase to their bills as a result of the increasing interest rates. If you find yourself unable to make your mortgage payments, your first port of call should be to speak with your mortgage servicer or lender. They may have options available to you to help you manage your repayments. Alternatively, you could consider getting independent financial advice from an organisation such as Citizens Advice which can help to alleviate your anxieties.

Homebuyers

A worry for homebuyers during a recession is losing their employment, particularly if they’re trying to secure a mortgage. However, a recession could help you to enter the housing market since property prices will to drop. Halifax’s House Price Index has seen house prices fall by 0.4% in October 2022, which is a fall of 0.1% on the month before. While this may sound insignificant, it’s the third decrease in four months and the steepest drop in value since February 2021. If house prices continue to drop, you may require a smaller deposit than you initially prepared for and may be able to borrow a smaller amount – making your repayments more affordable.

However, it’s important to take the rising interest rates into account here. According to Rightmove, the average monthly mortgage payment for first-time buyers putting down a 10% deposit has now reached £1,057, which is 40% of an average gross salary for the first time since November 2012. Rising interest rates could make buying a first home feel unachievable.

So, while house prices are expected to fall over the next few months, first-time buyers may find it difficult to borrow money due to the increased mortgage rates. Whether the recession will impact you personally will depend on your individual, financial circumstances. If you’re unsure of where to turn, speaking with a mortgage advisor or specialist could help you on your journey to securing your new home.

Homesellers

With interest rates and inflation on the rise, you may be questioning if now is the right time to sell your home. With house prices predicted to fall by around 10% next year, it may seem sensible to hold off on selling your home until the economy improves.

However, everyone’s circumstances are different and you shouldn’t postpone selling your house if it’s something you deeply want to do. Looking at previous trends, particularly the 2008 crash, the property market does bounce back over time. So if you were conscious of losing money by selling during the recession, this decrease in property value should only be temporary.

What should you do if you are planning to buy or sell in the near future?

While we explore historical trends such as the 2008 financial crash to predict our economic future, we are never be completely prepared. You may be fearful of buying or selling at the wrong time, losing out on money or your property’s value decreasing due to the recession. But if you’ve found your dream home – you shouldn’t hold off on selling or buying if it’s something you truly want. With ongoing uncertainty and changes to the housing market, you may benefit from financial advice from an expert if you’re unsure.

If you are planning to buy or sell in the near future, having a professional and affordable removals team to hand can take some weight off your shoulders. Moving house can be an expensive and stressful process and that’s where we can help. We offer competitive prices on removals, man and van services, storage and packing services to help make your moving journey as straightforward as possible.

Happy2Move has been moving people around London since 2012. We take the utmost time and care to ensure your move goes as smoothly as possible, so you can focus on the most important thing – the excitement of new beginnings.

Need support with your upcoming house move? Contact the Happy2Move team or request a FREE quote today.

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