What might happen to house prices in a recession l Vesta blog

What might happen to house prices in a recession?

August 26, 2022

The message announced by the Bank of England is that the UK is on the cusp of a recession as they raised interest rates in early August for the fifth consecutive quarter. The increase of 0.50% means interest rates are now at the highest point since 1995 at 1.75%.

Experts are divided on what this might mean to the housing market and prices.

The problem is that you would typically anticipate alongside a recession higher unemployment, fewer mortgage approvals as banks consolidated their risk position, less demand from buyers, often an increase in sellers who cannot manage the financial strain, and the result of lower house prices. Stock availability outweighs demand and prices are forced downward to get the sale. 

However, the UK market is in a very unusual position. Employers are struggling to fill roles so a massive decline in people not working is not very likely in the short to medium term. This might be the result of leaving the European Union or simply a hangover from two years of Covid but regardless, there are still many vacancies and many employers are desperate to find people. Many of these jobs are in key service sectors like the NHS where demand is not going to decrease. 

Whilst a rate increase was anticipated by many, or rather inevitable given inflation, the size of the increase caught some people off guard. It is also clear there will be further rate increases until inflation and its impact on the economy are brought back to an acceptable level.

Those people with mortgages that are not on fixed rates or with fixed rates expiring soon may have left it a little late to get the best deals in town, but many people are locking into 3-to-5-year fixed rates. Those that are not will need to get in fast as these mortgage rates are likely to continue upwards in the foreseeable future.

Oddly with a recession looming, there are still many experts that are predicting that house prices will continue to rise due to significant demand and lack of stock. However, the economic position and the likely BoE rate increases could dampen growth over the coming months.

For those that want to reassess their mortgage position and explore fixed rates, Vesta has partnered with BTL specialist mortgage broker Coreco who has helped many of our clients with both buying and refinancing. To find out more visit www.vestaproperty.com/services and request a quote.

In previous recessions, rental yields often continued upwards as demand for rental property increased. This may already have started with many London landlords seeing increasing demand. A 2-bed flat in Wimbledon that has been rented out for around £1,400 for the last 6 years to various tenants is about to come on the market when the current tenants move out after managing to secure their own home and the local agency has already indicated that the achievable rate is upwards of £1,700 and that there will be excess demand. The start of yields going up or a one-off?

Of course, as always there are 'experts' who are predicting a house price crash and doom and gloom for the rental market. Many of these folk update their rhetoric every few months so that when this does eventually happen they can claim they got it right. Who knows, maybe this year they will get it right.

All the signs indicate there is likely to be some change in prices, however, demand does not seem to be slowing and there is still not enough stock. That could all change if the recession bites very hard and things could change dramatically. But the savvy property investor might want to have a look at property values over the last 25 years and rental yields over the last 25 years. If you are investing for the medium to long-term and have the right investment strategies property almost always provides a steady return.

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