Will the housing market crash? What could happen to house prices as UK interest rates set to push up mortgages

In a bid to tackle the cost of living crisis and a forecasted UK recession, the Chancellor Kwasi Kwarteng announced a swathe of tax cuts and deregulation in his mini budget.

But despite the Liz Trussgovernment’s hope that the announcements would put the UK on course for a new era of economic growth, the immediate reaction has been a tumbling pound and an unprecedented warning from the International Monetary Fund (IMF) that inflation could get worse.

In a bid to ease market panic, the Bank of England has announced a government bond buying spree and says further interest rates rises are coming.

One of the key policies announced by the Chancellor in his fiscal event was a stamp duty cut. Mr Kwarteng said he hoped the move would prompt more first time buyers to get onto the housing ladder, whilst also growing the housing market.

But with interest rates already at a 14-year high and set to go even higher, as well as numerous other challenges, could a housing market crash be on the way?

What is the housing market doing?

At the moment, the housing market is still growing - although there was a slight slowdown in growth in August according to the house price indexes (HPIs) of lender Halifax and property site Rightmove.

Rightmove’s latest HPI, published on Monday (26 September), showed the average house price went up £2,587 (0.7%) month-on-month - a rise in line with previous years.

The index - which is based on asking prices rather than agreed prices, but captures existing market sentiment - said growth was being driven in the mid-to-high tiers of the market. With the cut to stamp duty, Rightmove said “unseasonal price rises” could be recorded in the coming months.

Why could the housing market crash?

A housing market crash is when house prices drop significantly as a result of low demand. In an interview with BBC Radio 4 on Wednesday (28 September), Ray Boulger - senior mortgage technical manager at John Charcol - warned the UK could see prices tumble 10% in 2023.

There are several factors that can cause this kind of scenario that we are already seeing evidence of, including:

• High interest rates

The higher interest rates are, the more expensive it becomes to borrow money - including in the form of a mortgage. Not only do high rates price prospective buyers out of the market, they also make it harder for current homeowners to save and spend.

Fears about interest rates have already led to hundreds of mortgage products being removed from the market.

Given most housing market activity involves existing homeowners - many of whom will be paying a mortgage - the increase in interest rates is likely to be a major concern.

According to UK Finance, 1.8 million households will see their fixed-rate mortgages expire in the next 12 months. These households are likely to be exposed to the Bank of England’s anticipated hike to interest rates to 6% next spring.

Think tank the Resolution Foundation says a homeowner on a £140,000 mortgage and residual maturity of 17 years could find themselves paying another £270 a month. Mortgages have already risen by at least £100 since the Bank of England began raising interest rates in December 2021.

• Cost of living

People have less purchasing power when inflation is high. It makes it harder to save money for a deposit, and puts people off making major purchases.

• Recession fears

Demand from buyers tends to fall in recessions as lenders become less-inclined to approve mortgages. The increased likelihood of unemployment also means people are more inclined to save than spend.

• Low housing stock levels

While, in one sense, low housing stock could keep prices high, it can also crash prices if supply drops too low and demand evaporates.

The Royal Institution of Chartered Surveyors said average housing stock levels were at a record low of 34 homes per estate agent branch in early September.

The government has said it will reveal more about plans to increase housing stock in the coming weeks - although any policies are likely to take several years to come to fruition.

Will the housing market crash?

Given we all have less purchasing power than we did a year ago, with mortgage payers set to be squeezed even more, there is some concern a housing market crash could be on the cards.

Equally, there is some optimism house prices could continue to grow as a result of the stamp duty cut. But, while it could fuel the market, there is a danger it may increase house prices so much that demand could decline.

Several experts NationalWorld has spoken to believe some form of pain is on the way for the market. But they have cast doubt on whether there will be a full-blown crash.

“We’re unlikely to see the property market come to a complete halt in the form of a crash, but there will undoubtedly be some turbulent times ahead, driven by a cooling in the huge rates of homebuyer demand that have been fuelling the upward growth rates of recent years,” said Chris Hodgkinson, managing director of housing chain firm HBB Solutions.

“This threat has been looming of late, with the cost of living crisis and the increasing cost of mortgage repayments starting to dampen buyer appetites ever so slightly.

“However, with many lenders now pulling the rug from beneath would-be homebuyers and the cost of borrowing set to soar as a result, we can expect demand to stutter to a far greater extent, reducing house price growth as it does.

“The recent changes to stamp duty will do little to help negate this drop in demand, as it’s far too marginal a saving to offset the hundreds of pounds more in mortgage payments that a property will now cost each and every month.”

Hodgkinson was echoed by Almas Uddin, the founder of mortgage broker Revolution Brokers.

“We’ve been seeing signs that the market is starting to strain for some months now, but the supply and demand imbalance has ensured house price growth has remained robust,” he said.

“However, while buyer demand may remain unwavered, their ability to buy is very much dependent on mortgage lenders. If they no longer have the appetite to take on the debt on their behalf, this will stifle the number of buyers able to purchase and cause the market to stagnate.

“This will undoubtedly cause house prices to decline until the market stabilises and just how long it takes to do so will dictate whether we see a drop in property prices, or a property market crash.”

Uddin said he felt a crash was “unlikely” and that he believed the decision by lenders to remove mortgage products from the market was “preemptive”, rather than a sign of a “crisis mode” engulfing the market.

For Paula Higgins, CEO of homeownership campaign group the HomeOwners Alliance, it could come down to how prospective property buyers view the UK’s economic picture.

“A real threat to the housing market over the next few weeks will be buyer confidence. If people think house prices could fall, coupled with less mortgage choices and a lack of confidence in the economy as a whole, it may put people off moving. People also become more cautious where there is less choice and more uncertainty,” she said.

Ms Higgins said it was “too soon” to say whether there would be a crash of any sort.