The UK housing market has been grabbing a lot of investor attention recently. With fears of inflation on the rise, property prices have been climbing. But recently, the sector has started facing its own form of supply issues. In fact, this is why Purplebricks, a technology-driven real-estate firm, just watched its share price crash by around 35% yesterday. So, is this a bubble getting ready to burst? Let’s explore the situation.
Back to the beginning
To understand how the UK housing market got to where it is today, I have to go back to 2013. The United Kingdom’s former Chancellor of the Exchequer, George Osborn, announced the Help-to-Buy government support scheme in his annual budget speech. This programme was designed to improve the affordability of homes by allowing first-time buyers to secure a mortgage with only a 5% deposit. And at first glance, it seems to have worked.
Property sales have been rising ever since, and demand has skyrocketed. What’s more, with homebuilders struggling to keep up, housing prices have climbed to their highest point on record – even higher than before the 2008 crash. According to the Office for National Statistics, the average house price in 2013 stood at £167,716. Today it’s closer to £281,000!
This is obviously fantastic news for homeowners during this period. But nothing lasts forever. And there are growing fears that this support scheme has turned the UK housing market into a ticking time bomb.
Cracks begin to emerge
Combining the tailwinds of this government support scheme with the recent stamp duty tax holiday last year, home builders, real-estate firms, and other property-related businesses have been thriving. The increased prices boosted profit margins, which, in turn, led to more houses being built. And with demand still being unmet, this trend isn’t changing.
However, as shareholders of Purplebricks recently learned, the UK housing market might be starting to weaken. General price inflation is still pushing the value of properties up. But the country is running out of homes to sell. This is actually why the real-estate stock crashed yesterday. Management announced that the number of new buy and sell orders for properties has been chopped in half compared to a year ago. And according to Rightmove, the number of sellers has dropped by 23% compared to 2020.
Typically, a restricted housing supply combined with a high level of demand can be a good sign. And it’s probably a primary reason why forecasts estimate the UK house price index to continue rising by 3.5% annually until 2024. But the situation is a bit more complicated.
A potential UK housing market crash on the horizon
The current supply and demand imbalance is driving UK house prices up, with inflation accelerating this upward momentum. However, where there’s increased inflation, rising interest rates follow. And the Bank of England has already begun increasing interest rates, which, in turn, causes the average mortgage rate to rise.
Combining a bigger price tag with a more expensive mortgage obviously reduces affordability. And if this falls, demand will likely tumble with it. But won’t the government’s Help-to-Buy scheme help keep properties affordable?
No, not for much longer, anyway. Why? Because it’s coming to an end in March 2023. In fact, limitations on this support scheme have already been put into place as of 2021. And as of October 2022, applications are no longer being accepted.
This is why there is uncertainty about a UK housing market crash in the near future. If prices are too high, mortgages too expensive, and government support non-existent, demand will plummet, taking house prices with it. In this worst-case scenario, homeowners could be stuck with a massive pile of debt at an increasing interest rate on a property worth considerably less. For those who suffered through the last financial crisis, this may sound familiar.
The bottom line
This certainly paints a bleak picture of the future. However, it’s worth remembering that this is a worst-case scenario, meaning it may not be as bad as I’ve described. In fact, plenty of analysts remain bullish on the UK housing market even without government support schemes in play.
So, will the UK housing market crash in 2023? It’s impossible to say for certain, but the stage does appear to be set for a bear market in the real estate sector.
Learn more about the UK property market
- What are the best UK stocks for beating inflation?
- 3 UK shares to buy now that could double my money
- 3 reasons why a stock market crash is coming
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Zaven Boyrazian does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned at the time of writing. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.
